ILS funds and collateralised reinsurance markets have more work to do on gaining market share in Japan, according to analysts who say that relationships with traditional reinsurers continue to dominate there.
With the upcoming April 1st reinsurance renewals forecast to see price increases after the heavy catastrophe load suffered by Japan in 2018, it’s certain that ILS and collateralized managers will be doing all they can to gain share if possible.
Analysts from JMP Securities recently visited Japan and toured the market to discuss conditions for the upcoming renewals.
They found that there is little expectation of a change in the level of dominance the large traditional reinsurers show in Japan, in terms of market share.
In fact, “ILS continues to struggle,” the analysts said following their meetings, although it is unlikely any of these took place with ILS funds actually deploying capital into the renewals.
But it is true that two factors create the conditions for ongoing market dominance in Japan.
The long-term relationship between a conservative Japanese insurer and its reinsurance providers is hard to come between and program panels are slow to evolve or change in the country.
The other factor is the ability of the major reinsurers to utilise Japanese catastrophe exposure as a diversifying peril versus higher returning U.S. risk, which means that discounting for the sake of diversification has become accepted practice in the region over the last two decades and this does keep ILS players locked out of certain layers of programs where in other regions they would otherwise have a much larger share.
Given the extreme catastrophe exposure Japan faces the rates have been considered too low for many ILS players for a decade now, with it often only being the very largest ILS fund managers who can meaningfully build a portfolio of Japanese risks.
It can be hard for anyone else to do much more than the odd transaction in the country, while the major reinsurers of the world soak up so much of the risk in Japan.
Another interesting fact of the Japanese market is that it can even be hard for a newcomer to gain access to underwriting on the traditional side of the market. So it’s not just ILS players that can often feel locked out of Japanese risks, or at least left to what little comes through the catastrophe bond market these days.
On the prospects for the ILS market at the upcoming April renewals, JMP’s analysts said, “The long-term relationship/ partnership nature of the market has also presented a headwind for ILS funds looking to gain share. By their very nature – generally limited-duration capital that needs to re-commit for future periods – the structure of ILS funds culturally does not sit very well with the large Japanese buyers, in our view.
“While some limit is bought from the collateralized market in Japan, we suspect it will continue to hold a lower market share position here than it does in many other parts of the world.”
Perhaps the best hope for the ILS market lies in its patience and ability to sustain rates, without such need for payback style increases as we see from traditional reinsurers.
In this way ILS funds may be able to take their opportunities when they can to increase their writings in Japan, perhaps with this renewal an opportunity given the expected rate rises that traditional players are likely to push for.
Over time, of course, the Japanese market will increasingly open up to ILS backed capacity and already is being seen to.
Structural changes and rated reinsurance vehicles are likely to help here, so too the cat bond market which has been present in Japan for two decades.
Of course, some ILS fund managers are making good headway here already, with Japanese market presence growing steadily, despite the still traditional approach to reinsurance in the country.
As ever, the renewal experience is not the same across the entire market and we hear some ILS funds are feeling very positive about their prospects to increase their deployment into Japan at April 1st.
There is also a chance that we see elevated cat bond activity for Japan in the coming months, compared to prior years, as we understand cat bond rates look attractive to lock-in right now, compared to the price indications seen on some Japanese renewals.
With the typhoon season not really set to begin for some months there is a chance larger Japanese players could secure their renewal, but leave higher layers to securitise with cat bonds in advance of the storm season beginning.
We understand discussions like this have been ongoing with their brokers, so it may depend on final pricing conditions at renewals as to whether any risk flows through the cat bond market instead.
One final point of note on market share at Japanese renewals is how one player pushing too hard for rate can change things significantly, as was seen in 2011 after the Tohoku quake and tsunami.
Pushing too hard, seeking rate increases far above where others are willing to underwrite, could provide opportunity for ILS players who did not suffer particularly significant losses from 2018 catastrophes in Japan.
As ever, the dynamic at the renewals in Japan will be fascinating and while traditional market domination is assured, there is also the chance of some headway being made by the largest and best prepared ILS or collateralized markets.