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October 30, 2007
Japan's chemical industry surprisingly could suffer financial losses equal to more than two years of pre-tax earnings, while the precision machinery and petroleum industries could suffer damage equal to more than one year of pre-tax earnings, from a very large earthquake, according to a just-completed study to be issued by ABSG Consulting Inc. (ABS Consulting) and its subsidiary, EQECAT, Inc., the leading authority on extreme-risk modeling.
The study, to be presented at a seminar here on November 14, also shows that "the five other industry groups in the study also have significant loss exposure," said Dennis Kuzak, Senior Viice President of EQECAT. The additional five groups are steel, non-ferrous metals, automobiles, electronics and pharmaceuticals. Mr. Kuzak said "the study does not represent all Japanese industrial companies, but demonstrates that the earnings impact for many industries can be very substantial."
"The study used EQECAT's highly advanced, probabilistic JapanQuake™ earthquake model to simulate the ground motions from earthquake events and to estimate the consequent industry damage," he said.
That model, based upon rigorous science and engineering research, incorporates the most recent Japanese government findings of increased risk in portions of Japan, including the potential for a magnitude 8-plus earthquake caused by a rupture in the Tonankai deep sea ocean trenches. Such an event is estimated to have an occurrence probability of 60-70 percent during the next 30 years, according to Japanese scientists.
"Interest and concern by Japanese business leaders in earthquake risk has been heightened by recent earthquake events," Mr. Kuzak said. "After the Niigata prefecture Chuetsu-oki earthquake earlier this year, the automobile industry suffered a production drop of about 120,000 units caused by damage to a critical supplier’s facility that manufactured piston rings. It is obvious earthquakes can inflict heavy property damage and loss of life, as well as severely affect business revenue and profit. To help protect their businesses and control possible losses, senior corporate officers should initiate studies to fully understand all their earthquake exposure, and if warranted, implement prudent, pre-emptive risk mitigation strategies to manage earthquake risk."
"Even earthquakes such as the Chuetsu-oki event, well below a magnitude 8 at a magnitude 6.8, caused considerable business losses," Mr. Kuzak said. Japan's Ministry of Economy, Trade and Industry estimated that industrial production in Japan shrank by 0.4 percent due to that earthquake.
The ABS Consulting/EQECAT study examined the potential earthquake damage and loss for 32 corporations in the eight industry groups. The number of enterprises in each group ranged from three to nine.
EQECAT, Inc. provides state-of-the-art products and services to the global property and casualty insurance, reinsurance and financial markets. EQECAT is the technical leader and innovator of catastrophe risk management models that quantify exposure to a range of natural and man-made catastrophic risks.
Through its modeling software platform, WORLDCATenterprise™, EQECAT enables clients to quantify and manage the potential financial impact of natural hazards. WORLDCATenterprise includes 181 natural hazard software models for 95 countries spanning six continents. These models are based upon innovative applications of the latest science, engineering expertise, claims and exposure data and advanced mathematics.
EQECAT, a subsidiary of ABSG Consulting Inc., was founded in 1994 and is headquartered in Oakland, California.
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