Moody’s considers the outlook for the Japanese property and casualty (P&C) industry to be stable, citing strong domestic profitability and capitalisation, but predicts that further improvement is unlikely.
Japan’s P&C sector has maintained a stable outlook since July 2012, largely owing to the profitability of its auto insurance, which constitutes its largest business segment, and to stable investment profit that is underpinned by domestic stock dividends.
However, P&C re/insurers are unlikely to see their auto profitability improve due to reductions in premium rates, although these reductions will remain gradual due to the industry’s strong pricing power.
Additionally, having reached or exceeded their economic capitalisation targets, re/insurers are expected to slow the pace of capital accumulation through a combination of increased shareholder returns and strategic deployment of capital through activities like mergers and acquisitions (M&A).
Moody’s also considers natural catastrophe risks from both global and domestic businesses to be relatively well-managed, although it suggests that fire insurance – Japan’s second largest P&C business – may be vulnerable due to its low profitability and the impact of climate change on its super long-term policies.
Net income from overseas businesses will inevitably suffer due to the severity of natural catastrophe events in 2017, notably the North American hurricanes, although reinsurance profitability is expected to improve as global property premium rates are set to rise over 2018.
However, premiums rates will also feel downward pressure as the industry’s capacity to underwrite catastrophe risks is boosted by institutional investors, which are injecting large amounts of capital into the reinsurance market via hedge funds and pension funds.
Finally, Moody’s considers the impact of new technologies in its 2018 forecast, noting the beneficial opportunities that developments in cyber insurance may bring if P&C re/insurers can successfully manage underwriting risks.
In contrast, the report also speculates that the industry’s profitability may be threatened by technologies like telematics, which can be used to track activities like driving behaviour, and offer lower premium rates to the safest customers.