Abstract
We conducted a questionnaire survey regarding insurance and risk management among SMEs in Japan in 2014. Based on this survey, this chapter reports who prepared less against natural disasters before the 2011 Great East Japan Earthquake and how seriously Japanese SMEs with poor risk management were affected by the earthquake. We find that SMEs in weaker financial condition tended to take fewer measures against earthquakes before the Great East Japan Earthquake. We also find that SMEs in weaker financial condition have tended to prepare less for earthquake risks even after the Great Earthquake. Furthermore, we find that direct damage from the Great East Japan Earthquake was more serious for SMEs with poor risk management than for those with sound risk management. These results suggest that financial institutions should provide incentive and support to SMEs to prepare for disasters.
This chapter is a translation of Yamori and Asai (2016) with some modifications.
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Notes
- 1.
Since the exchange rate of March 2011 was approximately 80 yen per US dollar, it was approximately 210 billion dollars. This exceeds the damage from Hurricane Katrina in the United States (estimated to be 70–130 billion dollars).
- 2.
For example, according to Swiss (2015), the penetration rate of earthquake insurance for corporate assets is very high in Chile and New Zealand, while it is extremely low in Japan, Mexico, Turkey, and the state of California.
- 3.
Once a catastrophic disaster occurs, the debt-to-income ratio becomes extremely high when a company wants to borrow new money from a bank. Therefore, many companies hesitate to apply for new loans and give up on continuing their businesses.
- 4.
- 5.
Discussion in this paragraph is based on the findings of the Society for Natural Disaster Risk Workshop (2013).
- 6.
Based on the JR East’s financial reports for the fiscal year ending in March 2011. See the website for more details: https://www.jreast.co.jp/investor/guide/pdf/201103guide3.pdf.
- 7.
Additionally, JR East purchased 260 million yen of earthquake insurance derivatives. However, since the requirements (an earthquake larger than a certain magnitude and whose seismic center is within 70 km of Tokyo Station) were not met in the Great East Japan Earthquake, JR East did not receive money from the derivative contract.
- 8.
Some SMEs with fewer than 20 employees may use a house as an office or factory and may have purchased an earthquake insurance policy for an individual residence. The Japanese government is involved and supports earthquake insurance for individuals. The premium rate is publicly set. Therefore, such policies have different characteristics from the specified earthquake-risk contract for private companies, and caution is required not to consider them to be the same.
Since our survey was targeted at companies with more than 20 employees, it did not include many companies that use private residences as offices or factories. In fact, we asked the companies in the questionnaire about this issue. Only 3.9% of them said that they used the residence of the business owner or an employee as an office or factory. Thus, the conclusions of our research have not been affected, regardless of whether this fact is explicitly included.
- 9.
See Asai (2015) for details.
- 10.
The survey was outsourced to TEIKOKU DATABANK, a major credit-research company in Japan.
- 11.
The reason the survey was limited to manufacturers is not that we are uninterested in non-manufacturers but that it is easier to grasp production facilities covered by non-life insurance in manufacturing businesses.
- 12.
The regional breakdown for remaining companies outside the Tohoku region was as follows: 35 in the Hokkaido region; 243 in the Kanto region; 57 in the Koshinetsu region; 35 in the Hokuriku region, 124 in the Tokai region; 188 in the Kinki region; 68 in the Chugoku region; 30 in the Shikoku region; and 69 in the Kyushu and Okinawa regions.
- 13.
Caution is required with regard to the degree of risk coverage, as it may contain respondents’ subjective judgments.
- 14.
Strictly speaking, specified earthquake-risk policies that are currently sold do not cover 100% of the damage amount, so we must interpret the answer “Almost full coverage” with caution. Namely, there are two types of specified earthquake-risk policies for businesses. One type uses an aggregate limit method, in which an insurance company will pay for the damage, minus the deductible, if the damage is less than the limit amount. The other uses a reduced payout calculation method, in which a percentage of the amount after the deductible has been subtracted from the damage amount will be paid out. For the aggregate limit method, except for the deductible, the total amount can be covered if the damage cost is a small amount. Once the damage cost exceeds the aggregate limit amount, it is only partially covered.
- 15.
Since the survey was conducted in 2014, we should acknowledge that only the companies which survived the effects of the Great Earthquake were respondents. In other words, since we do not know the circumstances of the companies that went bankrupt due to lack of preparation, it is possible that we are underestimating the earthquake damage for unprepared companies.
- 16.
Strictly speaking, there is a possibility that risk management which had been implemented was canceled after the earthquake. Since we cannot know this from our survey and it is unlikely that risk management was canceled after the Great Earthquake, we do not consider the possibility of cancellation of risk management.
- 17.
The evaluation score used in this chapter was available at the time the questionnaire survey was conducted. We must note that implementation of a high level of risk management after the earthquake may be boosting the evaluation score.
- 18.
For instance, in the questionnaire survey conducted in Yamori and Tsubuku (2015), the rate of “No management plan” was 17.1% among two-consecutive-term surplus companies, while it was 23.5% for two-consecutive-term deficit companies. On the other hand, when compared by business size, 30.6% of companies with 10 or fewer employees had no management plan, while only 9.5% of companies with 51 or more employees had no plan.
- 19.
- 20.
For instance, in January 2016, Hiroshima Bank began loan services for SMEs that support disaster prevention measures as well as the establishment of business continuity plans for rapid post-disaster recovery (Chugoku Shinbun, January 13, 2016).
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Yamori, N., Asai, Y. (2019). The Great East Japan Earthquake and Risk Management for Small and Medium Enterprises: Evidence from a 2014 SME Survey. In: Roles of Financial Institutions and Credit Guarantees in Regional Revitalization in Japan. SpringerBriefs in Economics(). Springer, Singapore. https://doi.org/10.1007/978-981-32-9679-4_5
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