Japanese insurers expected to buy more reinsurance & cat bonds: Fitch

Despite losses from recent catastrophe events in Japan being manageable there is an expectation that Japanese non-life insurers will seek to retain less risk on their balance-sheets and make greater use of reinsurance and ILS instruments like catastrophe bonds.

Fitch Ratings said in an announcement this morning that Japanese non-life insurers are tightening their risk management in order to limit catastrophe losses in the face of an increasing perception of the frequency and magnitude of such events. This trend, of increased management and transfer of catastrophe risk is expected to result in improved performance at Japanese insurers in the future.

Fitch expects the tighter risk controls will be particularly targeted at typhoon risk, although earthquake exposure will also no doubt be a feature of any efforts to reduce risk retention and better structure risk transfer and reinsurance programmes. However typhoon is a particular concern, as there is an expectation of an increase in these storms due to climate change and recent events such as Phanfone only serve to drive this home despite insured losses being manageable.

Fitch says that it has observed Japanese non-life insurers beginning to implement measures to limit losses from natural disasters, especially from typhoons. One example they cite is that Japanese non-life insurers are set to cap the maximum protection period for residential property fire insurance (covering damage from fire, wind and flood). The cap will see the protection reduced to a 10 year period, instead of the previous practice of providing insurance cover for these risks for the duration of a mortgage repayment.

That will give Japanese insurers the ability to adjust rates and their view of risk more frequently and is expected to result in a greater use of risk transfer, reinsurance and potentially insurance-linked securities (ILS) or capital market protection.

This change to fire insurance policies is expected to come into force in the third-quarter of 2015, at which time insurers will get an opportunity to reprice policies to reflect the trend in unfavourable occurrence and loss from catastrophes.

In addition, Fitch says that it expects Japanese non-life insurers are planning to increase premium rates for insurance products covering fire, wind and flood risks from the financial year ending 31 March 2016. Again, this will allow them to factor in the latest science and loss experience and could result in a greater need for reinsurance and risk transfer. The standard premium rate is expected to rise by 3.5% on average for these products, which is not insignificant.

Furthermore, says Fitch, some insurers are planning to reduce their retention of catastrophe risks, by placing more international reinsurance or buying catastrophe bonds. The Japanese non-life sector’s performance is sensitive to major catastrophes which could weaken their capital positions, as a result any effort to better control risk exposure or to transfer more risk could be positive for these Japanese insurers performance.

Also read:

– Japan typhoon shrinks to just 1% of outstanding catastrophe bonds.

– After Kizuna Re II, expect more Japanese catastrophe bonds: Moody’s.

– Japanese non-life insurers could turn to catastrophe bonds to support capital position.