Japanese non-life insurers may look for new sources of catastrophe reinsurance

by Artemis on November 21, 2011

Japanese non-life insurers, hit by huge claims followed by soaring reinsurance rates after the devastating earthquake and tsunami which hit the country in March may become active in sourcing alternative catastrophe reinsurance arrangements, according to Fitch Ratings in a new report. The report ‘Japan Earthquake Insurance: The Great Tohoku’s Effects‘ looks at the state of the Japanese non-life insurance market after the quake and some sections discuss the prospects for catastrophe bonds.

Since the quake Japanese non-life insurers have successfully recovered more than two-thirds of their losses through their reinsurance coverage. The insurers are generally well reserved and have had good reinsurance coverage but Fitch Ratings hints that reinsurance price rises and an increased perception of the risk of future earthquakes could push these non-life insurers to seek out alternatives to diversify their sources of reinsurance coverage.

Renewed reinsurance premiums for fiscal year 2012 have risen between 30% to 70% with Fitch expecting that the Japanese cooperatives such as Zenkyoren will have seen the largest increases. Fitch hint that further rises may happen next year as they expect that risk modelling firms will update their Japanese earthquake models to reflect the increased view of risk of further quakes after the March event. They expect any possible model revision will increase the magnitude of Japanese earthquake risk estimates along with the frequency of occurrence. This is likely to increase reinsurance premiums further not just for the cooperatives but also for all non-life insurers in the country.

Japanese non-life insurers have historically been more than able to afford their reinsurance coverage due to their massive buying power in the reinsurance market. However with rates already hiked significantly and the potential for further rises once the risk model view of Japanese earthquake risk increases they may consider the possibility of issuing cat bonds as a way of diversification.

The report from Fitch Ratings also says:

“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.”

“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.”

You can download the report from Fitch Ratings here (may require registration).

Related reading:

Read our article from July about Japanese insurers heightened interest in cat bonds after Muteki was triggered.

Read our article from September discussing that insurers could turn to catastrophe bonds due to rising reinsurance rates.

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