Premiums for earthquake insurance in Japan are set to rise again, with Nikkei reporting rises of between 20% and 30% are likely from 2016. The upwards pressure on primary insurance may help to slow or even stop the softening of reinsurance premiums in Japan.
Last year it was reported that Japanese earthquake insurance premiums would rise by an average of 15.5%, as the local industry factored in the impact and scientific learnings from the April 2011 Tohoku quake.
Additional rises were also thought to be possible, as the Japanese primary insurance market factored in the potential scale of a Nankai trough earthquake into its rates for future years.
Despite this though, Japanese earthquake reinsurance rates have been falling steeply over the last two years, with Willis reporting declines of as much as -17.5% at the April 2014 reinsurance renewals and a further decline of -10% to -15% for Japanese earthquake risks at April 2015 and -10% to -12.5% for Japan combined peril renewals.
The General Insurance Rating Organization of Japan is expected to submit a new premium scheme for earthquake insurance, including the 20% to 30% rate increases, which in Japan typically includes fire-following, to the Financial Services Agency as early as this June.
At some point the rise in Japanese earthquake insurance premiums has to result in a slow-down in the decline of Japanese earthquake reinsurance premiums, or perhaps even a stabilisation.
With reinsurance rate declines generally moderating around the globe, after more than two years of steady and in some cases steep decline, consecutive years of insurance cost increases will eventually result in greater reinsurance demand in Japan as well.
As Japanese insurers take on greater amounts of earthquake exposure in Yen terms, they will surely need to protect themselves with greater amounts of reinsurance. Increased demand and a greater volume of exposed premiums should help to slow the decline in reinsurance rates, at least for earthquake exposures, in Japan.
Given the amount of capital in the global reinsurance market and the additional interest in peak-zone catastrophe risks from the capital markets, insurance-linked securities (ILS) players and third-party investors, it seems unlikely that any major rise in reinsurance rates would follow the insurance increases.
But it might just be enough to slow the decline, which could make Japanese earthquake reinsurance renewals a more attractive peril. Of course that could ramp up competition at renewals, if this is seen as a bright spot in an otherwise low-rate reinsurance environment. Competition may make it difficult to push for rate increases, thus moderating the effect of the premium increase on reinsurers ambitions.
2014 was the first time in 18 years that Japanese earthquake insurance premiums rose and it still seemed to have no effect on reinsurance rates. However it does show positively that the primary market has responded to the increased view of earthquake risk, post Tohoku and the Nankai trough findings. At some point the reinsurance market will have to follow suit, no matter how much capital is available.