Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Japanese insurers looking to capital markets for risk transfer alternatives


According to reinsurance broker Guy Carpenter, in their just published April renewals report, they have noticed ceding insurers in Japan increasingly evaluating the capital markets as a potential alternative or supplemental source of risk transfer capacity. April renewals are particularly important for Japanese insurers as this is the main reinsurance renewal season for the Asia Pacific season. Capacity has been tight at the renewals and rates have risen across all property catastrophe lines of business, this seems to be triggering the increased interest in capital market solutions.

Reinsurance rates in Japan have risen by significant amounts due to the heavy catastrophe toll experienced in 2011. Guy Carpenter note that earthquake excess of loss cover has practically doubled in price since the 2010 renewal. Japan typhoon cover has also risen, despite not experiencing specific large losses last year. Low layers of windstorm coverage have risen by 10%-15% while the upper layers of cover have risen by up to 20%. Other property catastrophe related covers have risen by anything between 10% and 100%, so it’s hardly surprising that the capital markets are being evaluated.

With rate rises of those magnitudes instruments such as catastrophe bonds, collateralized reinsurance covers and industry loss warrants will be more competitively priced compared to traditional reinsurance for Japanese insurers.

There is capacity available in the capital markets to take on Japanese risks according to Guy Carpenters report but of course this is subject to pricing. Insurance linked funds continue to receive inflows from pension funds and other institutional investors and they are open to opportunities in the region. Guy Carpenter say they are looking for diversifying opportunities in risks such as Japan earthquake and typhoon as long as returns are reasonable and transactions properly structured.

They cite the Kibou Ltd. Japan earthquake catastrophe bond, which was issued in January as a good test of the capital markets appetite to take on Japanese risks again. The report also says that dedicated catastrophe risk investors have begun to approach the Japanese markets to provide capacity on a collateralized reinsurance basis.

This is encouraging as Japanese perils are a shrinking part of the cat bond and ILS universe at the moment. At a time when investors are keen to enter the sector an increase in Japanese cat bond issuance would be welcomed.

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