Posted on Nov 24, 2011 by Sergio Ulloa
Japan's insurance industry has faced unprecedented natural catastrophe conditions throughout 2011, including earthquakes, tsunamis, typhoons, and now the ongoing Thailand floods, which have badly affected major Japanese manufacturers. Due to these considerable disaster losses, many Japanese insurers have begun turning their focus to risk management and are actively seeking alternative catastrophe reinsurance arrangements.
The March 11, 2011 earthquake and tsunami that struck off the coast of northeast Japan, and the widespread devastation that followed, has had a significant impact on the previously under-utilized catastrophe insurance market in Japan. The catastrophic event is now reported to have destroyed or damaged over 500,000 Japanese buildings, many due to the accompanying tsunami. According to the latest figures released this month by the General Insurance Association of Japan (GIAJ), the country's non-life insurance sector has incurred total insured losses of ?1.3 trillion (US$16.9 billion) from the March 11 earthquake and tsunami and the two sizeable typhoons that have occurred since then in September.
The GIAJ furthermore reported that the country's top 25 non-life insurance companies had received 831,130 claims inquiries related to earthquake insurance on housing risks, with 718,484 claims already settled. These same non-life insurers have, as of November 9th, paid out ?763.2 billion (US$9.86 billion) on insured properties in the north-eastern Tohoku region, settling 393,895 claims in the area closest to the original catastrophic event. In the eastern region of Japan including Tokyo, insurers have paid out ?413.6 billion (US$5.35 billion) in claims with 422,455 settled cases. The Hokkaido region and the other remaining prefectures meanwhile reported ?283.9 million (US$3.67 million) in insurance claims, according to the general insurance association. In total, the March earthquake and tsunami has lead to ?1.18 trillion in insurance claims for dwelling risks across the country.
In the second half of the year, Typhoon Talas caused ?33.18 billion (US$ 430 million) in insurance claims according to the GIAJ. The biggest claims came from fire insurance, accounting for ?25.8 billion (US$33 million) in insured losses. Another typhoon in September, Roke, resulted in a further ?88.8 billion (US$1.15 billion) worth of insurance claims.
The life insurance industry in Japan meanwhile has paid out ?185 billion (US$2.4 billion) in claims from catastrophe losses this year, including ?141 billion (US$1.8 billion) in claims for death benefits and a further ?44.3 billion (US$570 million) in accident-related insurance benefits from settling 18,391 claims. Usually these accident benefits would have excluded cover for earthquake-related damages, but the 47 members of the Life Insurance Association of Japan all agreed to pay out benefits without applying de jure policy restrictions, a previously unheard of conceit in Japan's insurance market.
Despite these pervasive catastrophe events, the balance sheets for these Japanese insurers in general have not been badly affected by these losses, a reflection on the importance conservative risk management strategies currently play in the country. Since the earthquake in fact, Japanese general insurers have managed to successfully recover more than two-thirds of their gross insured losses via their pre-existing reinsurance coverage agreements. Most of Japan's insurance companies are big conglomerates and remain financially strong, well reserved, with solid risk management practices designed to counter these adverse market conditions.
Japan's national earthquake reinsurance scheme has also proven particularly effective. The system at present is a private-public mixed scheme, in which domestic insurance companies retain most of their costs locally by reinsuring each other, with the national government providing backstop support. The insurance claim mechanism allows for indemnity liability to be shared, with a reinsurance system limiting exposure for any single insurance company. The Japanese government also keeps a residential earthquake relief fund, expanded in May to ?4.8 trillion from ?4.3 trillion, which is reserved to help the non-life insurance industry meet cost obligations. For the country's general insurers, the government reinsurance system has been important in maintaining stability in the aftermath of this recent string of natural disasters. Furthermore, the Japanese government, Ministry of Finance, and GIAJ members are now starting to promote residential earthquake insurance to fill in the funding gap, as market penetration was under 25 percent as of March 2011.
However, while Japans's insurance industry has been able to largely absorb natural catastrophe losses so far, a new report by Fitch Ratings suggests more will need to done to preserve the sector's solvency under adverse conditions going forward. In 'Japan Earthquake Insurance: The Great Tohoku's Effects,' the ratings agency forecasts that the sharp rise in global reinsurance premium pricing, driven by the greater frequency of catastrophic events across Asia and the United States, will prove particularly costly to Japanese insurers and will necessitate greater involvement in catastrophe bonds and other mechanisms designed to offset rising coverage costs.
Japan's general insurance companies have historically had no problem affording reinsurance cover due their massive buying power in the international reinsurance market. However, with reinsurance rates already hiked between 30 and 70 percent for 2012, and more increases likely once risk modelling firms update their Japanese catastrophe models, insurers may have to further diversify their risk portfolio options. Fitch Ratings explain that catastrophe bonds could offer a solution, instead of just passing higher reinsurance coverage rates onto the consumers themselves, "As the accuracy of the Japan's earthquake loss model are further improved, with wider acceptance among specialised investors of participating in Japanese earthquake risk as a proxy for portfolio risk diversification strategy, catastrophe bonds could potentially become more important as an alternative to traditional earthquake reinsurance.," Fitch wrote, adding that these solutions are only available through Japan's increased involvement in the international reinsurance markets, "Risk sharing via reinsurance or catastrophe bonds will become more important in the market place given their important role in managing this high frequency and high magnitude risk in Japan and throughout the globe."
Outside of catastrophe losses, growth prospects for the Japanese general insurance industry have remained low due to a stagnant economy, and a mature, saturated and overtly competitive market. Overall the industry's profitability has been on the decline, with the automobile insurance market under particular duress due to the increase in traffic accidents, injury claims, and skyrocketing prices for auto parts. This consequently has kept underwriting results for these businesses at a level and often below the break-even point. Despite these concerns however, Fitch Ratings affirmed all of the five Japanese non-life insurers it observes by June.
Fitch Ratings is a global rating agency and provides ratings and analytical services for thousands of banks, financial institutions, insurance companies, corporations, and national governments. Fitch was founded in 1913 and now features dual headquarters in New York and London with over 50 offices worldwide,