Moody’s predicts that Japanese P&C insurers will increase fire insurance premiums, shorten policy durations, and use location-specific pricing to account for the growing frequency and intensity of climate-related natural catastrophes.
This will be a credit positive for insurers, says Moody’s, as it will give them greater flexibility to lower premiums for their other business lines.
Reinsurance rates in Japan will also increase, as in most cases they tend to follow primary lines.
Tomoya Suzuki, a Moody’s Vice President and Senior Analyst, said, “A reference rate that P&C insurers use to set fire premiums will likely continue to rise over coming years, which will allow insurers to gradually increase prices to better reflect heightened natural catastrophe risks.”
“Insurers will also gradually shorten policy durations to five years from 10 and switch to a location-specific pricing system. The changes will support insurers’ efforts to make their fire lines profitable in an environment of rising claims stemming from natural catastrophes,” added Suzuki.
Social pressure to keep insurance affordable and widely available will prevent insurers from sharply increasing prices over a short time, suggests the report.
Likewise, the report notes that the difficulty in striking a balance between well-priced premiums with affordability and availability to people in risky areas will mean a new location-specific pricing system will take time to evolve.
Moody’s writes that if insurers do lower premiums for other types of insurance, it will somewhat offset profitability gains from higher fire premiums, meaning that overall profitability gains will be modest. It notes that insurers have more flexibility to adjust premiums in corporate lines than those in consumer lines.
