Japan’s insurance market leaves big gaps!!!!!!!!

Eqecat, a catastrophe-modeling firm, estimated Wednesday that the quake may trigger $12 billion to $25 billion of insured losses. Read about the latest tallies by the insurance industry.

Earlier in the week, Eqecat put the total economic cost of the disaster at $100 billion. The ultimate impact may be closer to $190 billion, according to Barclays Capital. See story on the economic impact here.

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After natural disasters struck other countries in recent years, insurers have covered much bigger portions of total losses.

Hurricane Katrina, which struck the U.S. in 2005, caused total losses of $125 billion. Insured losses were $62.2 billion, almost half, according to the Insurance Information Institute, which represents the industry.

The quake that struck New Zealand in February could cost $20 billion and the insurance industry may absorb half of that, according to estimates by Munich Re(DE:MUV2 108.99, -1.61, -1.46%) , the world’s largest reinsurer.

The Northridge earthquake in California in 1994 caused economic losses of $44 billion. Insurers paid $15.3 billion of that, or 35%, according to Munich Re.

“Japan has a very different insurance market,” said Don Windeler, director in the natural catastrophe and portfolio solutions group at RMS, another catastrophe-modeling firm. “It’s likely to be a much smaller proportion of the total economic loss than if this happened in the U.S.”

Limited, expensive

The Japanese property and casualty insurance industry is the third-largest in the world behind the U.S. and Germany, with more than $100 billion in premiums written in 2009, according to the Insurance Information Institute.

But many quake risks in Japan are covered by the government, or they aren’t covered at all.

“The Japanese government is the big backstop against residential losses,” said Vincent Fea, a managing director at Deutsche Insurance Asset Management.

That’s partly because earthquakes are known to be such a problem in the country, so policies are usually very limited or too expensive for many individuals and businesses to buy.

“There’s much less purchase of quake insurance coverage on the commercial and industrial side in Japan,” Windeler said. “Quake is a special coverage that many companies opt not to take because it’s so expensive.”

For residential quake insurance, up to 30% of households have coverage, but it depends on the region of Japan. Take-up rates in some regions are as low as 10%, Windeler noted.

‘Sublimits’

Japanese property and casualty insurers also have very strong “sublimits,” which limit the amount of coverage available to cover a specific type of loss, according to Tom Larson, product architect and senior vice president at Eqecat.

For example, there could be a $10 million sublimit on a policy that protects a commercial building worth $100 million. If there was a total loss on a policy like this, the policyholder would only get $10 million.

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