AM Best has maintained its stable market segment outlook on the Japan non-life insurance segment given recent profitable underwriting performance and the likelihood carriers will maintain positive results in the face of expected economic headwinds.
In Best’s Market Segment Report, “Market Segment Outlook: Japan Non-Life Insurance,” the rating agency notes that Japan’s economic recovery continued in fiscal year 2021, although certain business segments still faced pressures.
Over the next 12 months, the Japanese economy is likely to face major headwinds, including impacts from the ongoing Ukraine & Russia conflict, elevated commodity prices, the major possibility of economic slowdown in several of Japan’s trading partners, as well as the development of the COVID-19 pandemic at home and abroad, all of which will impact the country’s economy.
However, despite expectations of strong underwriting profitability, AM Best is of the view that underwriting results for most major domestic non-life insurers will retreat moderately for fiscal year 2022.
While the rating agency expects premium revenue to increase, mainly driven by fire, personal accident and other specialty insurance, it is probable that underlying underwriting profit will contract from a higher loss ratio for voluntary automobile insurance.
“Given the underwriting risk profile of most domestic non-life insurers–which is skewed toward voluntary automobile and fire insurance–AM Best considers the earnings base of Japan’s non-life insurance companies to be sustainable,” said Jason Shum, associate director, analytics, AM Best.
Furthermore, despite rounds of rate revision in October 2019 and January 2021, AM Best noted that most leading non-life insurers plan to raise fire insurance premiums further in late 2022, to reflect the emerging claims experience from large-scale catastrophe events, such as typhoons Faxai and Hagibis in 2019.
Given the increase in catastrophe occurrences in recent years, most major non-life companies in Japan recognise the need to raise the profitability and sustainability of their fire insurance products. Other than transferring some of the reinsurance cost hikes to policyholders, several major insurers have also sought to improve their understanding of the potential impact of climate risk.
Best also highlights that non-life insurance companies in Japan continue to contend with investment challenges amid the volatile domestic and global capital markets. Leading domestic non-life insurance companies such as Tokio Marine & Nichido Fire, Sompo Japan, Mitsui Summitomo and Aioi Nissay Dowa typically hold one-fifth of their investment assets in domestic stocks, while more than one-third is allocated to foreign securities.
However, as the majority of domestic non-life companies have very strong capital positions, the solvency capital of the Japanese non-life insurance segment, which represents the level of real net assets available for regulatory solvency purposes, remains very large compared with the regulatory capital requirement.
Meanwhile, a recent report from GlobalData suggests that Japanese life insurers face a series of tough challenges over the next five years because of the country’s ageing demographic and economic factors.
