Some “significant price increases” expected at April 1 renewal in Japan: JMP

Reinsurance rates for Japanese accounts are expected to broadly rise at the upcoming April 1st renewals, with some price increases expected to be “significant” while more broadly there is a hope for widespread double-digit rate improvements.

JMP Securities analysts visited Japan in advance of the April renewal season to discuss market conditions and prospects for the contract signings with ceding companies, brokers and reinsurers.

Following a significant level of insured catastrophe losses in Japan in 2018, from a range of perils across typhoon, flood and earthquake risks in particular, the chances of broad price appreciation is deemed high by the analysts.

However, while some areas of the reinsurance market for Japan are expected to see “significant price increases” at April 1st 2019, there will also be significant variation by product and ceding account, the analysts say.

While JMP’s analyst team say that if there is to be an average rate increase indicator for the April reinsurance renewals in Japan it would likely be in the double-digits.

However, as many in the market feel, they say these indicators of average rate movements are largely useless these days, with such a variation in rate increases by product and account or client.

The analysts explained, “While it sounds to us as if the technical average of the price increases seen at the upcoming April 1 Japan reinsurance renewal may very well push into the double digits, that average could be largely meaningless as there will be such a spread around that number depending on the type of contract and track record of the cedant.”

We would also add that the increasing difference that terms and conditions make to risk adjusted returns achieved from underwriting means that average rate figures are becoming less useful as true indicators of market direction.

But JMP’s analysts heard numbers discussed in their meetings in Japan that suggest rate increases could range from as low as 5% to as high as 30%, depending on performance of an account and the ceding company involved.

Catastrophe aggregate reinsurance programs are expected to see the largest rate increases, given the major losses these faced in 2018 after the multiple large loss events during the year.

After that, excess of loss windstorm reinsurance covers are expected to face the next highest level of rate increase, followed by earthquake and all-risk policies which may face much lower rate changes.

The major catastrophe year of 2018 is not being seen as a new normal though, rather as an outlier.

“Almost everyone we met with viewed it as a perfect storm of circumstances, created by the unusual occurrence of natural events (i.e., earthquakes, flooding and typhoons) and complicated by the amount of construction assets in the country being dedicated to the ramp up ahead of next year’s 2020 Tokyo Olympics,” JMP’s analysts said.

In terms of reinsurance program structure and design, the analysts expect little change as programs worked as anticipated in 2018.

This is likely to mean demand for catastrophe aggregate remains high in Japan at the April renewal.

One area that may change is in terms of where deductibles and retentions sit, as some Japanese insurers have eroded their reserves to the degree that they may need to buy additional lower layers of reinsurance to protect themselves. Here, the analysts suggest that Sompo and MS&AD may be the ones in this camp, while Tokio Marine is expected to be less so.

Finally, the analysts suggest that typhoon Jebi loss creep will continue and will continue to hit the international reinsurance market mainly, as most of the creep is now being passed out of Japan itself.

As we wrote this week, PCS has now placed an official $10 billion industry loss estimate on typhoon Jebi and says it could creep higher in the weeks to come.

While the analysts say that the status quo, in terms of reinsurance relationships in Japan, is not expected to change dramatically, market dynamics will make for an interesting renewal it seems.

The rate increases being discussed are going to make the business extremely attractive to underwrite, hence competition is likely to be high.

If major traditional reinsurers took the brunt of the Japanese losses in 2018, they may push more for rate at this April renewal, perhaps giving some ILS funds and alternative capital providers an opportunity.

This dynamic could also make the catastrophe bond market an attractive option for the Japanese insurers looking for expanded reinsurance covers this year, so it will be interesting to see if any new deals come to market in the run up to the typhoon season over the coming weeks and months.