Japanese non-life insurers continue to produce underwriting profits despite the impacts of significant catastrophe events, and while A.M. Best maintains a stable outlook on the sector, major headwinds are on the horizon.
Highlighted most recently by the devastating impacts of typhoons Faxai and Hagibis this year and typhoons Jebi and Trami in 2018, Japan is one of the countries affected the most by natural catastrophe events.
The majority of non-life Japanese insurers have a level of exposure to catastrophe risk and as such, profits generally deteriorated in fiscal year 2018/2019, notes A.M. Best. But despite fading profits in the catastrophe space and also the fire line, most other business lines experienced improved underwriting results, which in turn contributed to the overall segment’s underwriting profit.
As a result, A.M. Best has maintained its stable outlook on the Japanese non-life insurance segment, but has also warned of some major challenges facing the sector.
One such headwind is an expectation that more taxes will be imposed on various underwriting and operating expenses for the majority of domestic insurers, following the increase in the country’s consumption tax rate by two percentage points. A.M. Best says that this could drive combined ratios higher and underwriting income down for non-life Japanese players.
“However, this factor alone is unlikely to dampen the outlook for Japanese non-life insurers. AM Best considers the potential effect of the tax hike to be manageable, given the overall market’s premium base and underwriting profitability.
“In addition, there is a high probability that the potential effects of this rise in consumption tax will be mitigated by both premium rate increases and enhanced cost efficiencies,” says the ratings agency.
Another potential challenge for the segment highlighted by A.M. Best is the ongoing trade war between China and the U.S., which has driven a lot of global financial market volatility in recent times. The ratings agency notes that some progress has been made in certain areas, although the preliminary trade deal is yet to be signed.
Ultimately, A.M. Best finds that the majority of players are well capitalised despite consecutive years of heavy cat losses, hence maintaining its stable outlook on the Japanese non-life insurance segment.
“Overall, most companies are actively seeking to mitigate any potential negative impacts from these headwinds, primarily through premium rate adjustments, cost-cutting initiatives, and investments in technology to improve operational efficiency and profitability,” says A.M. Best.
