Non-life insurers in Japan will report lower premium growth in the 2021 financial year, while carriers’ earnings will bit adversely hit by the COVID-19 pandemic at a time of rising reinsurance costs, reports Fitch Ratings.
Japan, like much of the world, is enduring a slowdown in economic activity as a result of the ongoing COVID-19 pandemic.
For the country’s non-life insurers, the challenges arising from the virus outbreak follows some fairly sizeable catastrophe losses, notably Typhoons Jebi and Trami in 2018 and Typhoons Faxai and Hagibis in 2019, which, served to dampen underwriting returns.
“Potential market volatility due to heavy exposure to stocks and uncertainty on the ultimate claims of the non-lifers’ US and Lloyd’s business due to the outbreak of coronavirus, will affect their earnings in FYE21,” says the ratings agency.
According to Fitch, for each non-life group, investment risk is still the largest threat, owing to the high strategic share held at their domestic non-life operation, despite a continued reduction. On the liability side, Fitch says that it views the business interruption exposure as small for these groups, while the ultimate loss from insurance lines such as event cancellation, BI, and credit and surety of their overseas operations remains uncertain.
The solid capitalisation of non-life insurers operating in the region has, in recent times, been increasingly supported by reinsurance. However, this heightened use of reinsurance protection following a series of significant catastrophe events is coming at a higher cost for Japanese players, with loss-driven reinsurance rate rises signalling a return to a sellers’ marketplace after a prolonged softened market state.
Willis Re, the reinsurance arm of international brokerage Willis Towers Watson, reported that rates were up by between 30% and 50% for Japanese wind and flood risk at the April 1st, 2020 renewals.
Despite the elevated reinsurance costs and higher reinsurance coverage, Fitch expects primary pricing improvements in commercial business lines, as well as retail fire insurance, “to support bottom-line profitability if the catastrophe losses remain at the historical average.”
Although the losses incurred in the 2020 financial year were lower than those incurred in the previous year, the average combined ratio did jump by six percentage points. According to Fitch, the average combined ratio of the top-four non-life players in Japan strengthened from 101% in FY2019 to 97% in FY2020.
