DP2017-14

Great East Japan Earthq uake and Risk
Management for Sma ll andMedium-Sized Enterprises
̶How Do Japa nese SMEs Prepare
against Natural Disasters? ̶Nobuyosh i YAMORI
Yoshihiro A SAI
May 8, 2017

May 2017

Great East Japan Earthquake and Risk Management for Smalland Medium-Sized Enterprises #―How Do Japanese SMEs Prepare against Natural Disasters?－

Nobuyoshi Yamori (Kobe University)
Yoshihiro Asai (Meiji University / California State University, Northridge)

Abstract
We conducted a questionnaire survey regarding insurance and risk management ofsmall and medium-sized enterprises (SMEs) all over Japan in 2014. Based on thatsurvey, this research examined who prepared less against natural disasters before the2011 Great East Japan Earthquake and how seriously Japanese SMEs with poor risk
management were affected by the earthquake. We find that SMEs in a weaker
financial condition tended to take fewer measures against earthquakes before theGreat East Japan Earthquake. We also find that companies in a weaker financial
condition tend to prepare less for earthquake risks even after the Great Earthquake.
Furthermore, we find that direct damages from the Great East Japan Earthquake weremore serious for SMEs with poor risk management than for those with sound risk
management.

JEL Codes: G22, G31
Keywords: small and medium-sized enterprises (SMEs), earthquake insurance, risk
management, natural disasters#

This paper was financially supported by JSPS Grants-in-Aid for Scientific Research(25245042, 15H03366, 26380405, and 17K03817). We thank Professor Hikaru Ogawaof the University of Tokyo and participants in his seminar for valuable comments on
Yamori and Asai (2016), on which this paper is based.
11. Introduction
In recent years, the number of natural disasters has increased worldwide, and large
earthquakes have been occurring frequently in Japan. In the Great East Japan
Earthquake, which occurred on March 11, 2011, approximately 20,000 people died orwent missing, and the damage caused by the earthquake amounted to 16.9 trillion yen
according to the estimation by the Cabinet Office of the Japanese Government. 1 As
Yamori and Okada (2007) point out, an extremely important issue is how to use risk
management methods, including insurance, to deal with earthquake risks for the
economic agents in Japan, where there are many earthquake disasters. On the other
hand, according to Swiss Re (2015), the reality is that insurance coverage for natural
disaster damage in Japan is the lowest by far as compared to other countries, andmany economic actors in Japan are not using insurance for earthquake risks. 2
While the occurrence of natural disasters cannot be controlled, it is possible toreduce the economic impacts caused by them through several preparations, including
seismic reinforcement works and post-disaster handling plans (or business continuity
planning), which will enable prompt restoration. In fact, many large Japanesecompanies implement full risk management for natural disasters. For instance, manylarge companies have built major factories in multiple locations (including overseas),
and they often designate a facility in a remote location that can assume headquarter
functions in the case of an emergency.
However, it is often the case for small and medium-sized enterprises (SMEs) thatthe major factory also functions as the headquarters, and the companies are not large

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 (about 70–130 billion dollars).
2

For example, according to Swiss Re (2015), the penetration rate of earthquake

insurance for corporate assets is very high in Chile and New Zealand, while that ofJapan, the State of California, Mexico, and Turkey is extremely low.
2

enough to disperse factories in remote locations. For SMEs, the sources of revenue (amajor market, for instance) are not geographically diversified as compared to thoseof large companies. Therefore, in many cases, major business partners (e.g., majorpurchasers) simultaneously suffer from damage caused by the same disaster due totheir physical proximity. As a result, not only direct damage but also indirect damage,such as from the loss of sale contracts and suppliers, could become serious. In thisway, since SMEs are more vulnerable to disaster risks than are large companies, it
can be said that disaster-risk preparations would critically affect the fate of SMEs.
In this paper, the current situation regarding how SMEs utilize insurance against
disaster risks will be examined first, using a questionnaire survey conducted by theauthors. Second, we will examine how the difference in the financial health of SMEs
before the Great East Japan Earthquake affected preparations for natural disasters.
Third, we will examine how the experience of the Great East Japan Earthquake has
affected corporate risk management activities. Last, we will see whether advance risk
management eased the deterioration of financial conditions caused by the earthquake.
Major results are as follows. First, most companies have insurance that covers
risks from fire, storm, and flood damage, but less than half of the companies use
insurance for earthquake risks. Second, the more inferior the financial condition of
the company was, the less prior risk management was conducted. Third, theexperience of the Great East Japan Earthquake has promoted company risk
management activities, but it was also discovered that the difference in financial
conditions of the companies affected post-disaster handling measures. In other words,
companies in an inferior financial condition were more vulnerable to disaster risks,
but such vulnerable companies were less likely to be prepared for disaster risks.
Therefore, in order to achieve a smooth revitalization from the massive earthquake
disaster that is expected to strike in the near future, it is urgent to construct a support
scheme that enables even vulnerable companies to revitalize rapidly after a disaster.
This paper is constructed as follows: We will briefly review the influence of theGreat East Japan Earthquake on the management of SMEs and insurance utilization in
Section 2. In Section 3, the data used in this paper will be introduced. In Section 4,

3

analysis results will be explained and discussed. Finally, challenges for the future
will be summarized in Section 5.

2. Great East Japan Earthquake and utilization of earthquake insurance by
SMEs

2.1 Previous research related to earthquake insurance in Japan
There is a limited amount of economic research related to earthquake insurance inJapan. For example, Yamori and Kobayashi (2002) analyzed the stock market
immediately after the Great Hanshin Earthquake that occurred in 1995 anddiscovered that, unlike in the United States, the stock price of non-life insurancecompanies in Japan dropped significantly. Likewise, Takao et al. (2013) revealed thatthe stock price of non-life insurance companies in Japan significantly dropped after
the Great East Japan Earthquake. These studies attempted to analyze the relationshipbetween earthquakes and insurance providers (i.e., non-life insurance companies). On
the other hand, not enough research has been conducted from the demand side. To fillthis gap, this research will analyze the demand for insurance by SMEs from thestandpoint of risk management activity against earthquakes.

2.2 Insurance usage by SMEs affected by the Great East Japan Earthquake
There are not many analyses of the impact of the Great East Japan Earthquake
from the standpoint of corporate activities. One of the few attempts to do so is theRegional Industry Reconstruction Survey Research Project by the Graduate School of
Economics and Management, Tohoku University. In this project, the Earthquake
Reconstruction Research Center of the School conducted the “Factual Investigationof Companies Recovering from the Earthquake” annually, beginning in 2012.
This was a large-scale survey in which approximately 11,000 companies weresurveyed, with approximately 5,700 companies submitting valid responses. The
survey attempts to reveal the actual situation of disaster-affected companies withregard to their employment management, business investment, relocation, supply
4

chains, and financial arrangements. By using this survey data, Uchida et al. (2015)
reported that only 2.1% of companies who did not obtain an additional loan from thebank “requested a new loan but were denied.” Therefore, it seems unlikely thatdisaster-affected companies were discouraged from reconstructing due to financial
restrictions. 3
However, as Asai (2015) points out, for investments during normal conditions, thepreferred sources for financial arrangements for SMEs are internal reserves (43.7%)
and loans from financial institutions, such as banks and credit unions (51.8%). When
restoration expenses are required due to damage caused by serious disasters (e.g., fire,
earthquake and flooding), 58.6% of companies choose “purchasing insurance policy
in advance” as the first means to acquire funds. This dramatically exceeds internal
reserves (19.7%) and loans from financial institutions (18.7%). That is, it isindispensable to consider the role of insurance when considering financial
arrangements for SMEs in the event of damage caused by natural disasters such as theGreat East Japan Earthquake.
Based on the survey by Tohoku University, Nishiyama et al. (2014, 2015) indicatedthat the contract rate for earthquake insurance (or the specified earthquake risk
contract) before the Great East Japan Earthquake was approximately 30% andincreased to 40% after the earthquake (as of August 2013). Nishiyama et al. (2013)
also showed that the companies who had purchased earthquake insurance before theearthquake had more than 50% of earthquake damage covered by insurance.
Thanks to contributions from the research team organized by Tohoku University, therole of insurance in the areas affected by the Great East Japan Earthquake can beanalyzed. However, the occurrence of massive earthquakes in Japan is not limited to
the Tohoku area, and a powerful earthquake that may bring heavy damage is expected
to occur in the Pacific Ocean coastal areas. Moreover, there are great risks of3

Once a catastrophic disaster occurs, the debt-to-income ratio becomes enormous

when a company wants to borrow new money from the bank. Therefore, many
companies often hesitate to apply for new loans and give up on continuing thebusiness.
5

volcanic eruptions, massive storms, and floods all over the country. Therefore, it isnecessary to figure out how SMEs across Japan are preparing for natural disasters.
In this research using the results of questionnaires that we conducted in 2014,
targeting not only the areas directly affected by the Great East Japan Earthquake but
all areas of the country, we will analyze preparations against natural disaster damage
by SMEs before and after the Great East Japan Earthquake.

2.3 Specified earthquake risk contact
The earthquake insurance mentioned in this research refers strictly to contracts forcompanies, not households. 4 With normal fire insurance for companies, neither firedamage caused by earthquakes nor direct damage caused by earthquakes, such as
destruction and sinking, are covered. In order to get coverage for damage caused byearthquakes, it is necessary to purchase a specified earthquake risk contract inaddition to fire insurance. Once firms purchase the specified earthquake risk contract,(a) fire caused by earthquakes or volcanic eruptions and damage caused by burstingor explosion, (b) damage from a tsunami caused by earthquakes or volcanic eruptions
and damage caused by flooding or other water-related disasters, and (c) destruction,sinking, or outflow caused by earthquakes or volcanic eruptions are covered.
The earthquake risk contract is designed to provide customized coverage for every
company. 5 Unlike the case with an earthquake insurance policy for a residential
house, damage assessment for a company is not based on a three-step classification(i.e., total loss, half loss, or partial loss); rather, it is typical to compensate for actual
damage. The insured company sets the deductible amount and payment limit before
purchasing the insurance policy in consideration of the necessary insurance benefits
and insurance costs. However, since the premium is expensive, there are few cases
where the expected losses are fully covered by the specified earthquake risk contract.

4

Regarding public earthquake insurance for households in Japan, see Yamori et al.

(2009), Naoi, Seko and Ishino (2012) and Jiang et al. (2013).
5

Discussion in this paragraph is based on the findings of the Society for Natural

Disaster Risk (2013).
6

Furthermore, many companies decide not to purchase any insurance coverage forearthquakes. As a result, earthquake insurance for companies is not as widespread as
for residential houses.
For example, according to a press release from the East Japan Railway Company(JR East) after the Great East Japan Earthquake, JR East had purchased civilengineering structural insurance and a specified earthquake policy that would cover
up to a compensation limit of 71 billion yen (with a 10-billion-yen deductible). 6
Although it suffered extraordinary losses costing more than 70 billion yen, it hadreceived insurance compensation of only 24.2 billion yen as of March 2013.
Furthermore, based on the fact that business profit dropped by more than 130 billion
yen due to the Great East Japan Earthquake, earthquake insurance covered only asmall part of the firm’s actual damages. 7

2.4 The situation of a specified earthquake risk contract after the earthquake
The “specified earthquake risk contract” for businesses (hereinafter, “specified
earthquake policy”) does not receive support from the Japanese government, and theinsurance company must assume all risk. 8 Therefore, a situation sometimes occurred

6

Based on the company’s financial reports for fiscal year ended in March of 2011.

See the website for more details.
https://www.jreast.co.jp/investor/guide/pdf/201103guide3.pdf
7Additionally, JR East had purchased 260 million yen worth 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
as a result of the Great East Japan Earthquake, JR East did not receive money fromthe derivative contract.
8

Some SMEs with fewer than 20 employees may use a house as an office or factoryand may have purchased an earthquake insurance policy for an individual residence.
The Japanese government is involved and supports earthquake insurance forindividuals. The premium rate is publicly set. Therefore, it has different
characteristics from the specified earthquake risk contract for private companies, and7

in which “major non-life insurance companies stopped offering new contracts of thespecified earthquake policy for earthquake insurance for businesses in March
immediately after the earthquake” because “there was an increasing demand but they
became cautious of enormous payout risks” (Nihon Keizai Shinbun, June 3, 2011).
In July 2011, the Tokio Marine and Nichido Fire Insurance Company took the leadand resumed offering earthquake insurance for businesses (Asahi Shinbun, July 7,2011), but some insurance companies kept rejecting increased insurance demand forearthquakes for more than half a year. Companies that newly sought earthquake
insurance policies ended up being uninsured (Yomiuri Shinbun, November 13, 2012).
Thus, the market for earthquake insurance for businesses failed to function
immediately after the Great East Japan Earthquake.
The background behind ceasing to offer new contracts is the problem of thereinsurance market onto which private insurance companies passed the earthquake
risks. According to Society for Natural Disaster Risk research (2013), the payout of
the specified earthquake risk insurance policy associated with the Great East Japan
Earthquake was approximately 600 billion yen, and approximately 400 billion yen
out of it could be recovered through reinsurance. Non-life insurance companies
would reduce the impact of the Great East Japan Earthquake through reinsurance, but
as a result, reinsurance companies began rejecting earthquake risk policies in Japan,
and reinsurance contract renewals proceeded with difficulty. Since earthquake risks
could not be reinsured, private insurance companies ceased to offer specified
earthquake risk policies for businesses.

caution is required not to consider them to be the same.
Since our survey was targeted only at companies with more than 20 employees, itdoes not include many of the companies that use a private residence as an office orfactory. In fact, we asked the companies in the questionnaire about this issue, andonly 3.9% of them said they used the residence of the business owner or an employee
as an office or factory. Thus, the conclusion of this research will not be affected
regardless of whether this fact is explicitly included.
8

3. Overview of corporate questionnaire used in the analysis
We created our own questionnaire, consisting of 41 questions. 9 The survey
questionnaire was mailed to 3,500 companies at the end of January 2014. 1 0 The
target was limited to small to mid-sized manufacturers across Japan (i.e., those withmore than 20 and fewer than 299 employees). 1 1 We obtained responses from 909
companies (a response rate of 26.0%) by the end of February 2014.
Among 909 companies, 58 are in the Tohoku region, where the Great East Japan
Earthquake hit. In other words, the remaining 854 companies are from areas notdirectly affected by the Great East Japan Earthquake. 1 2

4. Analysis results
4.1 Insurance usage to prepare against disasters
4.1.1 Insurance as a countermeasure against risks and its relationship to business
management
Our corporate questionnaire survey (hereinafter, “the survey”) gives examples ofvarious risks and asks, “How much are they covered by purchasing insurance
policies?” Table 1 indicates how well insured companies are against major risks. 1 3

9

See Asai (2015) for details.

10

The survey was outsourced to TEIKOKU DATABANK, a major credit researchcompany in Japan.
11

The reason the survey was limited to manufacturers is not that we areuninterested in non-manufacturers but that it is easier to grasp production facilities tobe covered by non-life insurance in manufacturing businesses.
12

They are 35 companies in the Hokkaido region, 243 in the Kanto region, 57 in the

Koshinetsu region, 35 in 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 andOkinawa regions.
13

Caution is required with regard to the degree of risk coverage, as it may contain9

First, consider the “Overall” number listed in the first line for each risk. More than
60% of companies have “almost full coverage” for fire risks, and almost allcompanies are taking action against fire risks if “covered to some extent” is included.
More than 80% of companies have insurance for storm and flood risks when “almost
full coverage” and “covered to some extent” are combined.
In contrast, countermeasures against earthquake risks are extremely low. Less than
20% of companies have “almost full coverage,” and only a little over 40% ofcompanies have any form of earthquake insurance even when “covered to some extent”
is included. Thus, we can conclude that using insurance as a countermeasure against
earthquake risks is not common among Japanese SMEs. 1 4

the subjective judgment of responders.
14

Strictly speaking, specified earthquake risk policies that are currently sold do notcover 100% of the damage amount, so we must interpret the answer “almost fullcoverage” 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 isless than the limit amount), and the other uses a “reduced payout calculation method”(in which a percentage of the amount after the deductible has been subtracted fromthe 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, but
once the damage cost exceeds the aggregate limit amount, it is only partially covered.
10Table 1 Countermeasures against risks through purchasing insurance

Fire risks

Storm andflood risks

Earthquake
risks

OverallCompany Segment I(49 points or less)Company Segment II(over 49, but 52 points or
less)Company Segment III(over 52, but 55.5 points or
less)Company Segment IV(over 55.5, but 60 points or
less)Company Segment V (over60 points)
OverallCompany Segment I
Company Segment II
Company Segment III
Company Segment IV
Company Segment V
OverallCompany Segment I
Company Segment II
Company Segment III
Company Segment IV
Company Segment V

Almostfull
coverage
63.6%

Coveredto someextent
33.5%

Not
much
covered1.8%

1.1%

Numberofcompanies
889

60.8%

36.0%

2.1%

1.1%

189

58.2%

39.0%

1.1%

1.7%

177

62.7%

34.3%

1.8%

1.2%

169

63.0%

33.9%

2.6%

0.5%

189

73.9%

23.6%

1.2%

1.2%

165

44.4%
38.6%
38.1%
47.6%
44.1%
54.9%
17.2%
18.2%
15.8%
16.0%
19.8%
16.4%

39.2%
45.1%
42.6%
37.5%
38.2%
31.7%
27.5%
23.2%
29.8%
26.4%
24.7%
33.3%

9.8%
10.9%
9.7%
7.7%
12.9%
7.3%
17.6%
20.4%
18.1%
17.2%
19.2%
12.6%

6.6%
5.4%
9.7%
7.1%
4.8%
6.1%
37.6%
38.1%
36.3%
40.5%
36.3%
37.7%

878
184
176
168
186
164
858
181
171
163
182
159

Hardlycovered(Note 1) The insured situation against damage and loss of corporate assets caused byfire, storm and flood, and earthquake was queried.
(Note 2) Company segments I through V indicate responding companies that wereclassified into five categories depending on the “evaluation score” that indicatedtheir financial health (provided by TEIKOKU DATABANK during the survey in2014).

The second through fourth lines in each risk category in Table 1 indicate theresults of insurance coverage situations depending on each company’s financial
health. This research uses the evaluation score by TEIKOKU DATABANK for the
responding company’s financial health. TEIKOKU DATABANK evaluated whether
11

“the company has healthy business operations, sufficient capacity to pay or can be areliable business partner” and scored them out of a possible 100: the higher the score,
the better their financial state. We split 909 companies into five groups based on theirscore and examine how each group purchases insurance for various risks. For
convenience, the groups are named Company Segment I (49 points or less), Company
Segment II (over 49, but 52 points or less), Company Segment III (over 52, but 55.5
points or less), Company Segment IV (over 55.5, but 60 points or less), and Company
Segment V (over 60 points).
According to Table 1, Company Segment V, which includes companies in thehealthiest financial condition, has the highest rate for “almost full coverage” for firerisks. However, even Company Segment II, which has the lowest rate for fire risks, is58.2%, and it can be said that almost all companies have fire risk insurance coverage,
if “covered to some extent” is included, regardless of their financial state.
As for storm and flood risks, unlike fire risks, 10 to 20% of companies are “notmuch covered” or “hardly covered.” Company Segment V has the highest rate for“almost full coverage,” which shows a tendency for good-standing companies toproactively use insurance as a countermeasure against disaster risks. However, it isnotable that there is no significant difference depending on the company’s financial
state if “covered to some extent” is included.
Finally, unlike the case with fire risks and with storm and flood risks, Company
Segment V does not have the highest rate of “almost full coverage” for earthquake
risks. Due to the nature of the specified earthquake insurance contracts, it seems
reasonable to include “covered to some extent” for earthquake risks. When
comparing the total of these two, Company Segment V more actively uses insurance
for earthquake risks than Company Segment I. Therefore, it is possible to judge that,compared with the case of fire insurance, the financial state of a firm has a powerful
effect on whether it purchases earthquake insurance.
Furthermore, if companies can deal with the risks by using the reserved capital orloan from financial institutions, the disasters won’t pose a significant problem forbusiness operations. However, it can be expected that companies in a weakened
financial state are lacking in such funds. Therefore, it should be expected for12

companies in such a financial condition to have a higher rate of insurance coverage.
Nevertheless, there is a tendency among companies in good standing to better prepare
for risks by purchasing insurance. This demonstrates the possibility that themagnitude of earthquake damage would be predominant among financially weakcompanies. In other words, it indicates a strong possibility that companies that are
already financially weak suffer catastrophic damage and extensive public assistancewill be necessary.

4.1.2 Circumstances of purchasing a non-life insurance policy
We asked companies that have “almost full coverage” for fire, storm, and flood
risks and companies that have “almost full coverage” or are “covered to some extent”
for earthquake risks why they purchased an insurance policy for various risks. Table
2 indicates their reasons according to the company evaluation score category.
For any risk, low-scoring company segments have a higher rate of “requirement forloan by the bank.” For storm, flood, and earthquake risks, “opinions within yourcompany (management and employees)” is low among low-scoring companies. It canbe assumed that it is difficult for low-scoring companies to spontaneously implement
far-seeing risk management. Therefore, even if such companies need insurance
protection, it is conceivable that they tend not to take any specific actions unlessproactive approaches come from outside of the company. For example, it is desirable
for a financial institution that functions as a main bank to provide emphatic advice
for risk management situations to SMEs. Tax accountants or CPAs can also play animportant role for SMEs in this regard.

13

Table 2 Reasons for purchasing insurance (multiple answers)
5.Recommended by tax
accountant/CPA

6.Recommended byacquaintance, such asother companies in thesame business

12.2
%
11.7
%

10.4
%
4.2%

Number of respondents

4. Recommended by the
insurance agency

13.9
%
12.6
%

7.Opinions within yourcompany (management
and employees)

3. Request fromstockholder

Earthquake
risks

2. Request from theparent company

Storm andflood risks

1. Requirement for loanby the bank

Fire risks

Company
Segment I
Company
Segment II
Company
Segment
III
Company
Segment
IV
Company
Segment V
Company
Segment I
Company
Segment II
Company
Segment
III
Company
Segment
IV
Company
Segment V
Company
Segment I
Company
Segment II
Company
Segment
III
Company
Segment
IV
Company
Segment V

0.0%

57.4%

7.8%

6.1%

55.7%

115

1.9%

53.4%

11.7
%

3.9%

55.3%

103

15.1
%

0.9%

37.7%

5.7%

8.5%

66.0%

106

11.8
%

0.8%

39.5%

9.2%

2.5%

69.7%

119

1.6%

46.7%

9.8%

3.3%

63.9%

122

0.0%

57.7%

9.9%

4.2%

50.7%

71

1.5%

52.2%

10.4
%

6.0%

53.7%

67

14.1
%
14.9
%

13.9
%
14.1
%
14.9
%

11.3
%

15.0
%

1.3%

35.0%

6.3%

10.0%

63.8%

80

4.9%

11.0
%

0.0%

40.2%

9.8%

2.4%

68.3%

82

4.4%

14.4
%

2.2%

44.4%

7.8%

4.4%

65.6%

90

9.3%

9.3%

0.0%

53.3%

6.7%

49.3%

75

11.5
%

11.5
%

0.0%

50.0%

5.1%

56.4%

78

10.1
%

10.1
%

1.4%

37.7%

8.7%

8.7%

65.2%

69

2.5%

8.6%

1.2%

35.8%

13.6
%

3.7%

56.8%

81

3.8%

12.7
%

2.5%

45.6%

8.9%

5.1%

65.8%

79

4.9%

13.3
%
14.1
%

(Note 1) “Others” and “don’t know” are omitted due to space constraints.
(Note 2) Fire, storm, and flood risks are calculated for companies that are “almost
fully covered” by insurance. Earthquake risks target companies that are “almost fully
covered” and “covered to some extent.”
144.2 Risk management before the earthquake
Because we could not obtain evaluation scores before the earthquake, we used thescores at the time of the survey in 2014 as a proxy variable of a company’s financial
state before the earthquake. Table 3 indicates the evaluation score calculated
according to the implementation status of risk management, such as insurance,
seismic strengthening, establishment of a business continuity plan (BCP), andconfirmation of supply chains. 1 5First, “Overall” in Table 3 indicates the business behaviors of the entire body of
responding companies. The number of firms that chose “Others” is small, but the
average evaluation score was the highest. The comment section, not shown in thispaper, suggests that these firms took extremely costly measures, such as “dispersal of
production base” and “relocation.” These measures would be applicable only when
their financial state is in absolutely excellent condition. Therefore, it isunderstandable that the average evaluation score for them is high.
“Seismic strengthening” is chosen by relatively financially successful companies,
as it requires construction costs. On the other hand, it is notable that the evaluation
score of the company that selected “Nothing special” is the lowest among six answers.
This indicates that relatively financially inferior companies tend not to take any
countermeasures in advance. Financially inferior companies are expected to bevulnerable to negative impacts caused by natural disasters, and they are strongly
encouraged to be more prepared for disruptive shock than other companies, but suchcountermeasures are not necessarily enacted.

15

As the survey was conducted in 2014, we should acknowledge that only thecompanies that survived the effects of the Great Earthquake are respondents. In otherwords, since we don’t 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.
15

In order to show this point more clearly, the right side of Table 3 indicates that
responding companies were divided into five categories based on the score thatshows their financial state, as mentioned above, and sorted according to the risk
management implementation status by each evaluation score class. The rate of“Nothing special” is more than 70% in company segments I and II, which arefinancially inferior, while the rate for the same in Company Segment V, which is inexcellent financial condition, is around 60%. This proves that risk management
significantly depends on the company’s financial state.
With the exception of “establishment of business continuity plan,” the selection
rates of Company Segment V are the highest regarding three measures (e.g. seismic
strengthening). As for “seismic strengthening,” there is a significant difference at the
1% level (one-sided test) between company segments V and I.

16

Table 3 Company’s financial state by risk management implementation status before
the Great East Japan Earthquake
Overall

1.Seismic
strengthening (ofoffice, store, andfactory)
2. Purchasing
earthquake
insurance (foroffice, store, andfactory)
3．Establishmentof business
continuity plan
(BCP)
4.Confirmation of
supply chain
5. Others
6. Nothing special
Score/number ofcompanies

By financial state

Evaluation
sco reNumberof
co mp anies

Company
Segmen tI

Company
Segmen t
IICompany
Segmen t
III

Company
Segmen tIVCompany
Segment
V

56.0

66

4.7%

7.2%

7.0%

6.1%

12.0%

54.5

134

14.6%

10.6%

15.8%

15.3%

18.1%

54.7

82

6.8%

10.0%

8.2%

11.2%

9.0%

55.4

46

3.6%

4.4%

5.3%

5.6%

6.6%

58.3
53.9

8
607

0.0%
71.9%

0.0%
72.8%

0.6%
66.1%

3.1%
63.8%

0.6%
60.2%

54.2

905

192

180

171

196

166

(Note 1) For the “Overall” section, the average evaluation score provided by
TEIKOKU DATABANK was calculated for companies who responded that they
implement each risk management.
(Note 2) For company segments I through V, based on the evaluation score, the “Byfinancial state” section indicates the rate of companies among each company segmentthat chose each risk management measure.

4.3 Influence of the Great East Japan Earthquake on risk management activities
In this survey, we asked the respondents about “new risk management measuresagainst earthquake after the Great East Japan Earthquake.” We provided thefollowing five choices: “seismic strengthening (of office, store, and factory),”“purchasing earthquake insurance (for office, store, and factory),” “establishment ofbusiness continuity plan (BCP),” “confirmation of supply chain,” “others,” and“nothing special.” Based on the answers regarding each risk management option, we

17divided respondents into three categories: “has been implemented since before theearthquake,” “began implementation after the earthquake,” and “not implemented.” 1 6
Using the evaluation score provided by TEIKOKU DATABANK, Table 4 indicatesa company’s financial health by the change in implementation of each risk
management measure. When “began implementation after the earthquake” and “notimplemented” are compared, the evaluation score of the company that “began
implementation after the earthquake” is higher in any of the four risk management
measures. There is a significant difference in the evaluation score for both of themfor “confirmation of supply chain” and “establishment of business continuity plan
(BCP).” This suggests that financially successful companies are proactively working
on these two risk management methods after the Great East Japan Earthquake. 1 7
Table 5 indicates the rate of companies that did not implement any
countermeasures before the earthquake but newly implemented them after theearthquake. For example, the rate of new adoption of these countermeasures among
the most financially inferior Company Segment I is 2.7 to 8.4%, while that of themost financially successful Company Segment V is 4.1 to 15.2%. In other words, thecompanies that belong to the low evaluation score category have a low rate of newly
adopting countermeasures.
Summarizing the above, the more inferior the financial state of the company is, thefewer countermeasures are taken. Many companies began implementation ofcountermeasures after the earthquake, but the tendency is that financially inferior
companies have not yet taken countermeasures, even after the earthquake.

16

Strictly speaking, there is a possibility that risk management that had been

implemented was canceled after the earthquake. Since we cannot find out about thatin this 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

However, the evaluation score used in this research paper was available at the time

the questionnaire survey was conducted. We must note that implementation of a highlevel of risk management after the earthquake may be boosting the evaluation score.

18

Table 4 Average evaluation score by risk management implementation status
after the Great East Japan Earthquake

Seismic strengthening

Earthquake insurance

BCP

Supply chain

Implemented before the earthquake
Newly implemented after the earthquake
Not yet implemented
Implemented before the earthquake
Newly implemented after the earthquake
Not yet implemented
Implemented before the earthquake
Newly implemented after the earthquake
Not yet implemented
Implemented before the earthquake
Newly implemented after the earthquake
Not yet implemented

Evaluation
score
56.0
54.6
54.0
54.5
55.1
54.1
54.7
55.4
54.0
55.4
55.7
54.0

Degree
66
43
796
134
51
720
82
109
714
46
59
800

Table 5 Companies that newly implemented risk management after the Great
East Japan Earthquake (classified by financial state)

1.Seismic strengthening (ofoffice, store, and factory)
2. Purchasing earthquake
insurance (for office, store,
and factory)
3. Establishment of business
continuity plan (BCP)
4. Confirmation of supply
chain
Number of companies

Company
Segment
I

Company
Segment
II

Company
Segment
III

Company
Segment
IV

Company
Segment
V

2.7%

5.4%

6.9%

6.5%

4.1%

4.9%

6.8%

6.3%

6.0%

9.6%

8.4%

14.8%

11.5%

16.7%

15.2%

3.2%

7.0%

8.6%

7.6%

8.4%

183

167

159

184

146

(Note) The table indicates the ratio of companies that newly implemented
countermeasures after the earthquake, using the companies that did not implement
them before the earthquake as a denominator.

19

4.4 Precautionary countermeasures and the earthquake’s impact on businessperformance
In this paper, we focus on whether precautionary countermeasures alleviated theeconomic difficulties in SMEs after the Great East Japan Earthquake. To reveal this,in the survey, we asked, “How was your company affected by the Great East Japan
Earthquake?” and asked companies to select an answer from among five choices:“deficit expanded,” “turned from surplus to deficit,” “hardly affected,” “turned fromdeficit to surplus,” and “surplus expanded.” We defined the companies that chose“deficit expanded” and “turned from surplus to deficit” as deteriorated companies,
and we focused on the share of deteriorated companies (i.e., downturn rate). Overall,among 860 responding companies, 57 of them (6.5%) chose “deficit expanded,” and77 (8.8%) chose “turned from surplus to deficit.”
In order to see the effect of precautionary countermeasures, after classifying themby whether there was direct damage to the company assets, the earthquake’s impact
on company performance was examined in the company evaluation score category.
The rate of deteriorated companies is used for the impact on company performance.
Looking at Table 6, when compared between the presence and absence of direct
damage, the downturn rate of companies that had “presence of direct damage” ishigher as a matter of course. However, the most important things are the following
two aspects: First, the lower the evaluation score of the company is, the higher the
downturn rate is. For instance, in case of “presence of direct damage,” there is adifference of more than 50 percentage points in the downturn rate between company
segments I and V. It is conceivable that preparedness contributes to a difference inthe degree of performance deterioration even when firms were affected by damage inthe same way. In case of “absence of direct damage,” the difference between them isreduced to 15 percentage points, but it is clear that the financial health of Company
Segment I had worsened more significantly.
Second, the lower the evaluation score of the company is, the more significant thedifference in downturn rate is, depending on the presence and absence of direct
damage. For example, among Company Segment I, the downturn rate with the“absence of direct damage” is 22.9%, while companies with the “presence of direct20damage” account for a high rate of 64.7%, a difference of more than 40 percentage
points. On the other hand, the difference between them in the financially excellent
Company Segment V is less than 5 percentage points. This could be because risk
management for companies with a high evaluation score functions thoroughly even if
direct damage has occurred, and they can keep the damage to the minimum, while
companies with a low evaluation score do not implement sufficient risk managementin advance to reduce damage. Thus, these companies leave their business operation tochance. It is often pointed out that SMEs in a deteriorated financial state do not haveprecise business management plans, but the same issue seems to exist in terms of risk
management. 1 8

Table 6 Financial state and company performance deterioration after theearthquake

22.9%

Company
SegmentII
12.0%

Company
Segment
III
11.4%

Company
Segment
IV
9.6%

Company
Segment
V
5.6%

166

150

140

157

142

64.7%

48.0%

37.5%

16.7%

10.5%

17

25

24

30

19

Company
Segment I
Absence of
direct damage
Presence of
direct damage

Downturn rate
Number ofcompanies
Downturn rate
Number ofcompanies

5. Conclusion
Using the data from questionnaires conducted from January to February 2014
regarding the insurance usage and risk management of SMEs, this research examined18

For instance, based on the questionnaire survey conducted in Yamori and Tsubuku(2015), the rate of “no management plan” is 17.1% among two-consecutive-term
surplus companies, while that of two-consecutive-term deficit companies was 23.5%.
On the other hand, when compared by business size, 30.6% of the companies with 10
or fewer employees have no management plan, while only 9.5% of companies with 51
or more employees have no plan.
21

their risk management implementation circumstances and their effects.
Quite a few companies took new countermeasures against earthquakes after theGreat East Japan Earthquake. This is consistent with previous research on the demandfor insurance. This is called a “wake-up call effect” in the literature. 1 9 In otherwords, experiencing catastrophic natural disasters makes people realize the risks,
which results in increasing numbers of people who purchase insurance policies.
Conversely, it means that people tend not to prepare for risks unless they experiencea catastrophic disaster, which is consistent with the conclusion of this paper.
The importance of promoting awareness of the risks for SMEs is suggested in orderto prevent panic after an earthquake has occurred. Although many companies havetaken countermeasures after an earthquake, as noted in the proverb “vows made instorms are forgotten in calm,” the importance of preparedness seems to be easily
forgotten even if the disaster was catastrophic. Therefore, we should emphasize theimportance of promoting continuous awareness of disaster risks.
The most important finding of this research is that the more financially inferior thecompany was, the less risk management was implemented. Furthermore, it was
revealed that the more financially inferior the company was, the fewer new risk
management measures were implemented after the earthquake.
The premium for the specified earthquake insurance policy has no relation to credit
risk, even for high credit risk companies that are financially inferior and haveproblems acquiring funds. That is to say, while premiums for earthquake insurance
are affected by such factors as location and building structure, financially-weakcompanies can purchase earthquake insurance at the same price as highly credible
companies do. Although financially inferior companies do not have enough money topurchase the insurance, purchasing earthquake insurance is a relatively inexpensivemeans to obtain capital.
A politically important issue is that the more financially inferior the company is,
the less prepared it is for risks. Once a catastrophic disaster occurs, financiallyinferior companies suffer from major damage, as they are not fully prepared for19

See Yamori and Kobayashi (2002) and Shelor, Anderson, and Cross (1992).
22

disasters. Of course, it costs money for seismic strengthening and purchasing
earthquake insurance, but risk management may be postponed due to poor judgmentof the managers of SMEs.
Given the situation, proactive advice from financial institutions and external
experts on the risk management of SMEs is necessary. In fact, many financial
institutions have been addressing this issue. 2 0 Providing knowledge and support for
SMEs that lack human resources are extremely important roles for financial
institutions. Experts, such as tax accountants and CPAs, are also expected to enhancetheir skills to be able to provide advice on these matters.
Unless we provide support for SMEs, which lack human resources with expertiseon seismic strengthening and risk management, it will be even harder to recover fromcatastrophic disasters. As shown by the fact that underwriting of earthquake
insurance for businesses stopped after the Great East Japan Earthquake, compared togovernment-assisted earthquake insurance for residential houses, earthquake
insurance for businesses is a commercially based product. In order to promote thepurchasing of earthquake insurance for businesses, governmental involvement should
be considered in the future. Grants and tax benefits for the implementation of seismic
strengthening and for the establishment of business continuity plans should also be
considered.

References
Jiang, Ying Ying, Yoshihiro Asai, and Souichiro Moridaira (2013) “On Household
Insurance Demand and Loss Control: Evidence from the Great East Japan
Earthquake,” International Journal of Business 18(4), pp. 332–350.
Shelor, Roger M., Dwight C. Anderson, and Mark L. Cross (1992) “Gaining from20

For instance, regarding the establishment of a business continuity plan (BCP), in

January 2016, Hiroshima Bank began loan services that support disaster prevention
measures and the establishment of a BCP that prepares a post-disaster early recovery
plan for small to mid-sized companies (Chugoku Shinbun, January 13, 2016).
23

Loss: Property-Liability Insurer Stock Values in the Aftermath of the 1989
California Earthquake,” Journal of Risk and Insurance 59, pp. 476–488.
Swiss Re (2015) “Underinsurance of Property Risk: Closing the Gap,” Sigma 5, pp.
1–38.
Takao, Atsushi, Takuya Yoshizawa, Shuofen Hsu, and Takashi Yamasaki (2013) “The
Effect of the Great East Japan Earthquake on the Stock Prices of Non-Life
Insurance Companies,” Geneva Papers on Risk and Insurance - Issues andPractice 38(3), pp. 449–468.
Yamasaki, Takashi (2016) “Do Typhoons Cause Turbulence in Property-Liability
Insurers’ Stock Prices?” The Geneva Papers on Risk and Insurance - Issues andPractice 41(3), pp. 432–454.
Yamori, Nobuyoshi, and Takeshi Kobayashi (2002) "Do Japanese Insurers Benefit
from a Catastrophic Event? Market Reaction to the 1995 Hanshin-Awaji
Earthquake," Journal of Japanese and International Economies 16, pp. 92–108.
Yamori, Nobuyoshi, and Taishi Okada (2007) "Japanese Insurance Market andCompanies: Recent Trends," J. David Cummins and Bertrand Venard (eds.),
Handbook of International Insurance: Between Global Dynamics and Local
Contingencies, Springer Science, pp. 147–204.
Yamori, Nobuyoshi, Taishi Okada, and Takeshi Kobayashi (2009) "Preparing forLarge Natural Catastrophes: The Current State and Challenges of Earthquake
Insurance in Japan," International Review of Business 10, pp.1–22.

(References in Japanese)
Asai, Yoshihiro (2015) “On Small and Medium-Sized Enterprises Insurance Demandand Risk Management: Evidence from Questionnaire Results in Japan,” The
Bulletin of the Faculty of Commerce, Meiji University 97(4), pp. 597–634.
Graduate School of Economics and Management, Tohoku University, ed. by Researchand Study Project of Local Industry Restoration (2013) “Research on Recovery
from the Great East Japan Earthquake 2: Recommendations on Restoration and
ResurgenceofIndustryandSociety

Nanbokusha.
24

atTohokuRegion,”publishedbyGraduate School of Economics and Management, Tohoku University (2014)“Research on Recovery from the Great East Japan Earthquake 3: Verification ofEarthquake Disaster Reconstruction Policy and Recommendations on Creation of
New Industries,” published by Nanbokusha.
Graduate School of Economics and Management, Tohoku University, ed. (2015)“Researchon

Recovery

from

the

Great

East

Japan

Earthquake

4:

Recommendations on New Phase of Disaster Restoration at Tohoku Region,”published by Kahoku Shinpou Publishing Center.
Naoi, Michio, Miki Seko and Ishino Takuya (2012) “Earthquake Risk in Japan:
Consumers' Risk Mitigation Responses after the Great East Japan Earthquake”,
Journal of Economic Issues 46(2), pp.519-530.
Natural Disaster Risk Workshop (2013) “Interim Report by Natural Disaster Risk
Workshop,” PwC Research Institute.
Nishiyama, Shin-ichi, Satoshi Masuda, and Risa Osawa (2014) “Basic Information
and Post-Disaster Situation at the Disaster Area,” in Graduate School of
Economics and Management, Tohoku University.
Nishiyama, Shin-ichi, Satoshi Masuda, and Risa Osawa (2015) “Revival Situation ofDisaster-Affected Firms by the Great East Japan Earthquake—Summary of Field
Survey on Recovering Firms from Earthquake Disaster in 2014 Fiscal Year Big
Picture of Restoration,” in Graduate School of Economics and Management,
Tohoku University.
Uchida, Hirofumi, Iichiro Uesugi, Arito Ono, Kaoru Hosono, and Daisuke Miyagawa(2015) “Financial Arrangements of Firms at the Disaster Area,” in Graduate
School of Economics and Management, Tohoku University.
Yamori, Nobuyoshi, and Yoshihiro Asai (2016) “Natural Disaster Shock and Risk
Management of Small and Medium Enterprises,” in Hikaru Ogawa (ed.),EconomicsofShocksinthe

Globalized

Economy:Responses

of

Local

Governments, Firms, and Households, published by Yuhikaku.
Yamori, Nobuyoshi, and Masafumi Tsubuku (2016) “How Did Regional Governments
andFinancial

Institutions

Support

SMEs

after

the

LehmanShock?

Questionnaire Result,” Annals of Economics and Business 64, pp. 1–64.
25

A