Natural Disasters: Financial preparedness of corporate Japan

In this paper, we investigate the factors behind the low disaster insurance subscription rate in the Japanese corporate sector using unique firm-level data sets. According to our data, disaster insurance participation rates are 59.5% and 47.0% for large enterprises and small and medium enterprises, respectively. Corporate awareness of disasters, resulting adoption of business continuity planning/business continuity management (BCP/BCM), and insurance participation are systematically related to the commitment of corporate executives, reliance on self-finance against disaster losses, and potential exposure to and past experience of natural disasters. Particularly, firms tend to be aware of disasters, set BCP/BCM, and subscribe to disaster insurance after being exposed to disasters, suggesting that disaster preparedness is not necessarily sufficient in the Japanese corporate sector. Since high exposure to a variety of natural disasters is likely to undermine economic prospects, expansion of formal insurance mechanisms will be indispensable. Our empirical results imply that effective interventions are needed to stimulate awareness and the commitment of corporate management.