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The Japanese government says the cost of the recent earthquake may reach close to $300 billion. As the effects of it unfold day by day, it seems likely that we are now facing the world's most costly natural disaster. It's too early in the game to gauge the 2011 Japan earthquake effects on the economy. Typically, and sadly, the damages tend to rise when the full scale unfolds.

While the markets are carefully watching the consequences, the insurance sector has been shaken by recent figures. Earthquake insurance in Japan has been in effect for the last 50 years. Experts say insurance coverage is wide and includes the tsunami's damage on buildings and land. However, a report by Property Casualty 360 states that only 50% of homeowners own earthquake insurance.

So how should we assess the situation of reinsurance companies? Are they between a rock and a hard place? Once again, it's too early to call.

Risk modeling agency Eqecat has estimated the total loss could go up to $25 billion. Another agency, AIR Worldwide, estimates a similar $20-30 billion for the earthquake damages. These numbers do not include the tsunami damages caused by the earthquake, and we are not sure if they include burned commercial plants, industrial facilities, office buildings and oil refineries.

Japanese insurance markets tend to keep a load of their insurance market in the domestic limits. So unfortunately, they are the first ones to get hit by this disaster.

We wanted to look at some of the insurance companies (global) that would face this harsh bill. On top of our list there is a name that doesn’t surprise anybody, Aflac (NYSE:AFL). On a Fox Business Network interview, Aflac’s CEO Daniel Amos assured that "Tokyo is 90% the level it normally is." Previously, in a WSJ interview (requires subscription), he said the earthquake and tsunami "will not be that impactful" on the firm's earnings. This is hard to believe, as one of every four households in Japan is insured by Aflac. The company provides supplemental insurance in the United States and Japan. Some of Aflac's products include accident/disability plans, cancer expense plans, short-term disability plans, sickness and hospital indemnity plans, and hospital intensive care plans. All of these seem relevant to the possible claims in Japan.

Aflac is down around 10% since the earthquake hit. When insurance claims kick in, we will have to monitor the situation much more closely. The impact of the earthquake and tsunami doesn’t limit itself to Aflac. Investors are advised to watch the following insurance companies which have exposure to Japan:

MetLife (NYSE:MET), the insurance giant, might be indirectly hit by the disaster since its newly-purchased Alico was a subsidiary of AIG (NYSE:AIG) last year. Alico expects some of its revenue to come from Japan, totaling $7 billion.

ACE Limited (NYSE:ACE), Allianz (AZ), Prudential (NYSE:PRU) and Hartford Financial (NYSE:HIG) are the other insurance companies that have some exposure to the Japanese market. Hartford Financial especially still has exposure to potential losses in the country. Global insurer Munich Re is expected to lose 1.5 billion euros, and Swiss Re is expected to lose $1.2 billion. Hannover Re’s losses will be around 250 million euros, and Chartis, which is also a subsidiary of AIG, is expected to lose $700 million from this disaster (see here for details). Berkshire Hathaway (NYSE:BRK.A) also is expected to report higher losses on a nominal basis.

One other question that comes to mind is whether prices would rise for Japan's reinsurance renewals. Industry experts say rates are expected to increase by at least 20 percent. Global reinsurers such as Swiss Re, Munich Re, Hannover Re, and XL Group (NYSE:XL) should benefit from this increase (see here for more). There will be some spillover effect that will benefit insurance brokers such as Aon Corp (NYSE:AON), Marsh & McLennan (NYSE:MMC), Travelers (NYSE:TRV), Brown & Brown (NYSE:BRO), Arthur J. Gallagher & Co (NYSE:AJG), Catalyst (NASDAQ:CHSI), CNinsure (NASDAQ:CISG) and Willis Group Holdings (NYSE:WSH). George Soros has a relatively large position in CISG. David Einhorn had a $118 million position in Travelers at the end of December.

There are other areas untapped by the estimators, such as contingent business interruption (CBI) claims. A CBI policy will reimburse a company for its expenses and lost profits when it can't operate because a disaster has struck one of its suppliers. Since a contingent business interruption claim could be filed by a company anywhere in the world, catastrophe modelers like Eqecat don’t include contingent business interruption claims in their estimates.

We will be following insurance companies' conference calls closely to determine the net effects of the earthquake.

Source: Top Insurance Stocks Affected by Japanese Earthquake