Corporate Disaster Risk Financing in Japan: Status quo and challenges

Author Name SAWADA Yasuyuki (Faculty Fellow, RIETI) / MASAKI Tatsujiro (Masaki Risk Management Institute) / NAKATA Hiroyuki (Senior Fellow, RIETI) / SEKIGUCHI Kunio (Consulting Fellow, RIETI)
Creation Date/NO. February 2017 17-P-002
Research Project An Empirical Study on Economic Resilience and Maintenance of Economic Strength Against Disasters
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In this paper, we investigate the factors behind the low disaster insurance subscription rate in the Japanese corporate sector using unique firm level datasets on the corporate awareness of disasters, insurance subscriptions, and the determinants of risk financing methods. From the survey, we find that disaster insurance participation rates are 59.5% and 47.0% for large companies and small and small-sized enterprises, respectively. The data outline how Japanese companies specify highly probable natural disasters, formulate business continuity planning/business continuity management (BCP/BCM), subscribe to disaster insurance, and select a risk financing method. Descriptive statistics indicate that the majority of companies identify disasters that would cause the worst damages, but fewer companies have an estimation of the scale of asset damages caused by such disasters. Furthermore, it shows that only about half of the respondent companies observe management's commitment toward disaster risk management and establish specific BCP/BCM, and that disaster insurance in the corporate sector is characterized disproportionately by property insurance for coverage, while the subscription rate for disaster insurance is subject to various restrictions. Regarding the risk finance behavior, irrespective of the firm size, the combinations of either equity capital (self-financing) and bank loans or disaster insurance and equity capital are the most popular financial instruments to cope with damages caused by a natural disaster and the resulting shortage of cash flow. This suggests a problem of "over-reliance" on self-financing against potential disaster damages. On the other hand, lack of knowledge and high insurance premiums are the two major reasons for not subscribing to disaster insurance. Since high exposure to natural disasters is likely to undermine corporate activities and the overall economy, expansion of formal insurance mechanisms will be indispensable. This paper also analyzes companies in the area damaged by the Kumamoto earthquake in 2016. The above mentioned results clearly shows the importance of policy interventions to improve corporate management's awareness of and commitment to disaster risk management and disaster insurance.