If losses from the recent earthquake that struck the west coast of Japan on January 1 were to hit individual companies’ earthquake reinsurance excess-of-loss layers, it could fuel rate increases in the upcoming 1 April reinsurance renewal, says AM Best.
In a report on the matter, the rating agency noted that Japan’s insurers’ adoption of “generally conservative reinsurance strategies” and the low earthquake reinsurance attachment point relative to their capital positions have largely transferred earthquake risks to the international reinsurance market.
AM Best’s Chanyoung Lee, director of analytics, added that while the earthquake losses for this event would drag the proportional treaties results, “if losses were to hit individual companies’ earthquake reinsurance excess-of-loss layers, it might fuel rate increases in the upcoming April 1 reinsurance renewal.”
The rating agency explained that in the past few rounds of reinsurance renewals, rate increases and restructuring pressures were mainly observed in the wind/flood layers in the aftermath of major typhoon losses in 2018-19.
Elsewhere in the report, AM Best stated that while it is still premature to estimate the insurance loss from the earthquake, the firm anticipates that any negative impacts on its credit ratings of major domestic non-life insurers to be limited given their strong capital buffers.
“Japan’s four major domestic non-life insurers represent the vast majority of the Japanese property market share—Tokio Marine & Nichido Fire Insurance Co., Ltd. (Tokio Marine), Sompo Japan Insurance Inc. (Sompo Japan), Mitsui Sumitomo Insurance Co., Ltd., and Aioi Nissay Dowa Insurance Co., Ltd. —all of which AM Best considers to have well-diversified business profiles as well as strong capital positions,” the rating agency said.
The firm continued, “The aggregate net assets of these four domestic insurers totalled about JPY 7 trillion (USD 48.6 billion) (non-consolidated basis) as of March 31, 2023.
“AM Best expects their strong capital positions would be more than sufficient to support the potential loss from this earthquake event.”
AM Best also said that it expects the negative impact on profitability for the fire segment – in which most losses from the earthquake are expected – to be offset by profits from other lines of business.
The rating agency concluded, “Most non-life lines of business have reported growth in premium income in the past 12 months, supported by primary rate increases.
Voluntary automobile insurance, which accounted for over half of the non-life sector’s net written premium, continued to generate underwriting profits offsetting disappointing fire insurance results in fiscal year 2022.”
