Working Paper: Hedging natural disaster risks in Japan

This note shows that Japan, faced with exceptional exposure to earthquakes, tsunamis, volcanoes, floods, and landslides, has developed an original natural disaster risk coverage system that relies neither on a unified scheme like in France nor solely on private markets.

After reviewing the country’s physical and administrative geography, as well as the specific features of the Japanese housing market (relatively abundant housing stock, strong divide between ownership and rental, low valuation of older buildings, and a high number of vacant homes), it explains that Japanese home insurance is structured around a basic fire insurance policy covering ordinary and climate-related hazards. On top of this, there is a specific earthquake insurance scheme, which is optional but tied to fire insurance contracts, partially indemnity-based, and largely reinsured by the state.

The study then analyzes each risk separately, showing that earthquakes are at the core of the Japanese model, with a highly institutionalized public-private partnership, while flood risk is mainly handled by private insurance complemented by ex post public aid. Tsunamis and volcanic eruptions, although legally included under the earthquake insurance regime, are managed administratively through separate systems involving monitoring, warning, evacuation, and hazard mapping.

Overall, the note argues that Japanese “coverage” is never limited to insurance alone: it combines private indemnification, public reinsurance, prudential reserves, budgetary support, hazard maps, and territorial governance. The objective is less about fully compensating losses than about rapidly stabilizing living conditions and organizing post-disaster reconstruction.

‍