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Original Risk: A Society for Change Agents

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


Non-life insurers in Japan have found themselves in a precarious situation as their capital positions have become depleted by massive catastrophe losses in the last year or so. The combined impacts of the March 2011 Japanese earthquake and tsunami and the flooding in Thailand have seriously depleted catastrophe reserves in the Japanese non-life sector leaving many to rely on their life operations to top up depleted capital.

The non-life insurers are working to rebuild their capitalisation but rating agency Fitch says that they are at risk of coming under rating pressure should any events impact their capital building efforts, such as a rise in insured catastrophe losses or any sharp fall in the domestic Japanese stock market.

Fitch says that the Japanese non-life insurers have again raised the net loss figure from the Thai floods. Three of the largest Japanese non-life players, Tokio Marine Group, MS&AD Insurance Group and NKSJ Group, are between them facing JPY513 billion in losses, that’s an astonishing $6.55 billion of insured losses being shouldered by just these three insurance groups. It is also more than double the losses that these three insurance groups suffered from the March 2011 earthquake. It’s no wonder they need to rebuild their capital positions.

Combine this reduction in capital and solvency with the unsurprising hike in reinsurance prices (anywhere from 15% and upwards) after such a huge amount of losses and suddenly the catastrophe bond market must be looking very attractive to Japanese non-life insurance companies. The cat bond market has been functioning well in 2012, with high levels of issuance and market participants suggesting that the ILS sector as a whole is becoming price competitive with traditional reinsurance. Recent cat bond deals have been closing with pricing at the lower, or even below the lower, end of the expected range suggesting that cat bond coverage has become more cost-effective for issuers in recent months. Perhaps cat bonds could be a cost-effective way for the Japanese non-life sector to increase their reinsurance coverage at a time when their capitalisation is under pressure.

The capital markets, via insurance-linked securities, are in a good position to assist these non-life players with providing multi-year covers at prices that would be attractive when compared to traditional reinsurance offerings. When replacing depleted capital is the goal putting their available capital to work in securing cover from diverse sources and at fixed multi-year costs could prove much more attractive to Japans primary insurers. We’ve spoken with ILS investors who agree and who would be willing to take on more risk from the Japanese primary market is it was transferred in ILS or cat bond form. Similarly a number of our contacts in the Japanese insurance and reinsurance market have expressed a growing interest in the cat bond space.

Interest in the capital markets as a source of risk transfer was cited as a growing trend in Japan after the April renewals and it seems that this trend is increasing. It seems likely that these factors will contribute to some growth in the issuance of Japanese risk and risk assumed by Japan’s non-life insurers into the cat bond and ILS space over the next twelve months.

You can read Fitch Ratings report on Japanese non-life insurer capitalisation here.

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