Japanese reinsurance renewal pricing could move +50% in April

Rates and pricing at the upcoming April 1st 2020 renewals of Japanese reinsurance programs could see increases of roughly double the magnitude seen a year ago, with increases of 40% to 50% seen as possible in some loss impacted areas of the market, analysts at JMP Securities have said.

Following a visit to Tokyo, Japan where they met with Japanese ceding insurers, reinsurance companies and their brokers, the analysts from JMP Securities came away saying they expect the April 2020 reinsurance renewals will see much higher pricing movements than were witnessed in 2019.

The analysts also cite a reasonable consensus among market participants around the expected price increases, but also said demand is expected to be sustained as protection buyers need the coverage to sustain their business models.

Price increases at April 1st could be of as much as twice the magnitude seen in 2019, albeit varying significantly by program, layer and individual cedent.

The analysts learned that excess-of-loss reinsurance price increases of as much as 40% to 50% are anticipated, “with a surprising amount of consensus from all parties.”

This would consist of larger rate movements higher up in Japanese reinsurance towers, where rates-on-line are lower, and less significant rate movement in the lower layers where rates are already higher.

However, the analysts warned that “cedants’ appetite for rate increases is not unlimited” and efforts to push price increases of above 50% may receive push-back.

Aggregate reinsurance towers in Japan are also expected to see significant rate increases, especially as these have taken significant losses in recent years.

“Without changes to terms and conditions, the rate change needed would likely be unpalatable. In our meetings we heard expectations for more moderate pricing increases but with substantial changes to terms (some items being discussed include higher deductibles, event limits, and/or typhoons being excluded from deductibles),” JMP’s analyst team further explained.

The analysts said that their discussions left them feeling that Japanese primary cedents do not want to retain more risk in the face of expected higher reinsurance pricing, preferring instead to continue building their program towers.

They cite “a nearly-universal view” that reinsurance demand is unlikely to dramatically shift in Japan, even if rates do increase so significantly there.

Explaining, “While financially strong, these large primary insurers have also conditioned their stakeholders to expect low volatility in results, and the reinsurance structures they have purchased have proven their value over the past two years.”

The JPM Securitise analysts also noted that after two heavy years of catastrophe losses cedents reserves are weaker and pressure on solvency ratios means insurers may need to continue with current low retentions.

There was even some feedback that Japanese cedents may look to expand on their aggregate reinsurance coverage, as it has proven so useful to them in recent years.

Reinsurers are recalibrating their views of Japanese catastrophe risk and this is likely to set a new baseline in pricing for Japanese renewals as well.

As a result, the analysts believe that the April 1st renewals will not just be a case of reinsurers looking for payback, but rather looking to get paid for a more accurate representation of the underlying risk.

The analysts also noted that ILS markets may continue to struggle in building market share in Japan, as relationships are expected to continue to matter and as a result the major reinsurers may sustain shares.

However, we would note that in a market of rising prices more of the risk is likely to ultimately be backed by alternative sources of capital, especially as the major reinsurers are all utilising more ILS capacity backing their own books.

There will be some changes in terms of market share though, the analysts expect, with companies such as Munich Re expected to look to rebuild some of its Japanese book, while Convex, Fidelis and others may look to build on their Japanese portfolios in response to the much more attractive reinsurance pricing seen there.

Other than that, the analysts expect that some established players will look to shift slightly along the risk curve, as they optimise their books in the better priced underwriting environment at the April 1st 2020 renewals.

Adding our own insights from the ILS market, we are hearing of ILS funds seeing opportunities to grow their share of reinsurance programs that they are already on, as Japanese cedents look to diversify their already significantly sized programs more.

That’s a dynamic that has been quietly happening in some areas for a number of years and 2020 may provide an opportune time for some ILS funds and collateralised markets to grow their Japanese books a little.

However, we understand that ILS funds are being selective as to exactly where they target their capital within reinsurance towers and some concerns are still held over the way Jebi resulted in such significant loss creep, with the ultimate loss reporting practices of Japanese cedents still held as questionable.

Overall though, it looks as if the upcoming April 2020 reinsurance renewals in Japan are going to see rate movements that should satisfy the majority of the market.

Coming on the back of the increases seen a year ago, this will take Japanese reinsurance rates to levels not seen for some years.

The question going forward, for the market and its discipline, will be can the new baseline rates be sustained, even if 2020 proves a less impactful year of catastrophe losses?

As ever, it’s important to note that with the April 1st Japanese reinsurance renewals some way off there will be some significant posturing going on, meaning the eventual rate increases may (as ever) prove lower than these early indications suggest.