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Original Risk: A Society for Change Agents

Buyers unfamiliarity with ILS boosted Japanese reinsurance rates


At the recent April 1 reinsurance renewals the insurance-linked securities market and third-party reinsurance capital sources have had a marked impact on renewal rates in many regions of the world. Interestingly, the one region of the world which saw traditional reinsurers at their happiest with the renewal terms and conditions achieved seemed to be Japan as well as some other renewing regions of Asia.

The April 1 reinsurance renewals have a focus on Japanese and Asian renewals, with many of the largest treaty programs in the world renewing in Japan and across the region. After steep rises in 2011 and 2012, the April renewals this year saw most commentators report stabilized pricing in Asia and Japan, with reinsurance rates achieved largely flat and some slight declines caused by a lack of recent catastrophe events.

At the same time the collateralized and third-party backed side of the reinsurance and retrocessional reinsurance market has been making its presence felt and has had a, sometimes dramatic, impact on rates in other parts of the world, such as the U.S. Recent declines in the pricing on catastrophe bond deals, and anecdotal reports of the rates on certain collateralized lines, suggest that third-party capital is showing its appetite for risk and forcing rates down.

Guy Carpenters GC Securities arm recently said that with pricing on recent cat bonds down by as much as 50% year-on-year and investors demonstrating their lower cost-of-capital by deploying it at reduced rates, the ILS and collateralized side of the reinsurance market is growing up and showing its maturity.

So if the third-party reinsurance capital and ILS markets are having such a dramatic impact on rates in the U.S. and some other regions, why didn’t it have an impact in Japan?

According to one insurance-linked securities investment manager Japanese reinsurance buyers are not yet fully comfortable with collateralized sources of reinsurance and ILS. In a recent update, Bermuda based ILS specialist investment manager ILS Capital Management, Ltd. said that it believes Japanese reinsurance buyers are still unfamiliar with ILS markets and continue to have a strong loyalty to traditional reinsurers.

This loyalty to traditional reinsurers that Japanese reinsurance purchasers have, was strengthened in 2011 and 2012 when reinsurers showed their willingness to deploy capacity into a country which had been so badly impacted by recent catastrophe events. This support is vital to Japanese insurers and for some made the difference between continuing to operate and perhaps having to shutter their operations.

Because of this loyalty the April renewals in Japan were relatively straightforward and reinsurers achieved rates that they were happy with. That’s not to say that ILS markets and collateralized reinsurance players didn’t participate, they did and to a larger extent than in some recent years particularly among some collateralized retro writers we understand. The fact that rates held up in Japan is of course attractive to ILS managers as well as traditional reinsurers.

It raises an interesting thought though. When will Japanese reinsurance buyers get fully comfortable with ILS and third-party sourced reinsurance capacity? The market there for catastrophe bonds and also ILS as an investment asset class is likely two to five years behind the U.S. The conservative nature of some Japanese business practices and the emphasis placed on the importance of relationships means that the penetration of the cat bond, ILS and third-party reinsurance markets are bound to be slower.

However, once Japanese reinsurance buyers get fully comfortable with these sources of cover the opportunity for those in this market will be huge. The same goes for the investment side of the ILS and reinsurance market as Japanese pension funds have significant assets to deploy into the space but at the moment are largely still in research-mode assessing the viability of catastrophe risk and reinsurance as an asset class.

Perhaps 2014 will be the year that Japanese reinsurance buyers fully embrace third-party backed reinsurance capacity? If it happens to coincide with the period of time that Japanese institutional investors also become more comfortable with insurance-linked securities and catastrophe bonds as an asset class then the renewals next April will be particularly interesting.

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