Reinsurance cover demand in Japan is set for growth and is expected to be ceded to international reinsurance markets, according to FitchRatings analysts, as the country implements plans to expand its governmental residential insurance scheme – which has more than doubled its earthquake insurance limit since 2011.
The Japanese government is expanding residential earthquake premiums after the country was rocked last year by heavy post-event economic losses – its total insurance limit has already increased from JPY5.5 trillion in 2011 to JPY11.3 trillion – (based on higher seismic estimates).
2016s costliest natural catastrophe, the Kumamoto earthquake, left Japan with devastating economic consequences as only 19% of losses were insured, according to Munich Re.
But the government is now looking to pass on more of the bill to re/insurance, raising the bar for earthquake cover premiums at an average of 19% across a three phase growth-scheme that began early this year, reported Fitch analysts.
This premium growth represents massive strides of progress for Japanese earthquake insurance, but with a maximum percentage of fire insurance protection still set at 50% in the government’s scheme, the protection gap in Japan will remain high.
And despite the residential earthquake scheme’s expansion, Fitch analysts say Japanese corporates have been, “spending more on earthquake-resistant buildings, or spreading their manufacturing bases to control potential earthquake losses, rather than buying protection against earthquake risks and business interruption risks as they consider premiums too expensive.”
This means for Japanese non-life insurers, any ensuing underwriting boom, will likely remain within the scheme’s growth limits – however, for the global reinsurance community, a considerable demand increase is already apparent on the horizon, as risk “from any increased demand for commercial earthquake coverage is expected to be sourced to international reinsurance and alternative insurance markets,” according to Fitch.
Despite natural disasters prompting greater demand for residential earthquake cover, particularly in the Kyusu area after the April earthquake struck the region, Japan’s commercial earthquake risk remains significantly underinsured.
In 2014, just 0.02% of the country’s GDP went to commercial insurance penetration – the protection gap problem in Japan has also recently been highlighted in a Swiss Re report which emphasized the growing protection gap throughout developed markets.
Analysis of last year’s insured and economic losses for earthquakes reveal a large protection gap in earthquake coverage; “The quake in Japan resulted in economic losses of USD 25 billion to USD 30 billion, while insured losses were USD 4.9 billion,” stated Swiss Re’s sigma report.
Figures from the insured and economic loss difference from earthquakes in Italy show a similar striking protection gap.
Combined economic losses from 2016 seismic shocks were at $43 billion, but the insured loss figure is at just $9 billion, “signalling a still-large earthquake protection gap.
Earthquake risks make up the majority of the protection gap in Japan, and the residential insurance scheme expansion shows the government has woken up to the need to take measures to address the issue, in the meantime risks from any increase in demand for commercial earthquake coverage are expected to be sourced to the reinsurance or alternative insurance market as domestic natural catastrophes account for a large portion of underwriting risks, according to FitchRatings.
Some demand for reinsurance protection was seen at the just-completed April renewals, according to market sources, with increases in placements seen at a number of Japan’s largest cedents, particularly those with significant earthquake exposure.