Japanese fire insurance premiums, which are the prevalent type of homeowner and commercial insurance policy in the country, are likely to rise as insurers grapple with rising climate risks and the fallout of natural catastrophe losses, according to Moody’s.
This expectation could be a positive one for the reinsurance and insurance-linked securities (ILS) market, as many have been struggling with the low rates-on-line available in Japan despite its exposure to peak perils.
While Japanese property catastrophe risk is seen as a valuable diversifier, there are many who feel rates for reinsurance in the country have been too slow to move higher, so some capital providers, especially on the ILS side, are finding Japanese risks increasingly less appealing.
So Moody’s prediction that fire premiums in Japan will gradually rise amid increasing climate risks, and that property and casualty insurers will also shorten policy durations and use location-specific pricing to better reflect natural catastrophe risks, will be seen as very positive.
There is a need to account for the growing frequency and intensity of climate-related natural catastrophes, Moody’s noted.
However, “policy changes will be gradual because of social pressure to keep insurance affordable,” Moody’s explained.
“A reference rate that P&C insurers use to set fire premiums will likely continue to rise over coming years, which will allow insurers to gradually increase prices to better reflect heightened natural catastrophe risks,” explained Tomoya Suzuki, a Moody’s Vice President and Senior Analyst.
“Insurers will also gradually shorten policy durations to five years from 10 and switch to a location-specific pricing system. The changes will support insurers’ efforts to make their fire lines profitable in an environment of rising claims stemming from natural catastrophes,” added Suzuki.
Japanese property rates are unlikely to rise quickly though, as there is social pressure to keep insurance affordable.
In addition, Moody’s cautioned that, “The difficulty in striking a balance between well-priced premiums with affordability and availability to people in risky areas will mean a new location-specific pricing system will take time to evolve.”
If the Japanese industry does increase its fire insurance premiums to better account for climate-related natural catastrophe risks, as Moody’s suggests, it will provide further fuel for reinsurance rates to rise, as well as for higher ILS and catastrophe bond pricing for Japanese transactions.
Given reinsurers are expecting rates to firm again in January, it’s possible we could see more firming at the Japanese reinsurance renewals on April 1st 2023, with any increases in fire premiums likely to help reinsurers and ILS specialists in their Japanese renewal negotiations.