Japan’s non-life insurers are facing pressure to rebuild catastrophe reserves amid rising reinsurance costs that follow a catastrophe loss-heavy year in 2018, according to a new AM Best market segment report


Last year marked a record for natural disasters in Japan as a series of events resulted in significant insured losses, the costliest being Typhoon Jebi. In the new Best’s Market Segment Report, titled, “Japan Non-Life Insurers Focus on Profitability,” AM Best states that because of the disasters, Japan’s non-life carriers released a sizeable portion of their catastrophe reserves. The amount of catastrophe reserves released by Japan’s three non-life insurance giants—


Tokio Marine & Nichido Fire Insurance Co. Ltd., MS&AD Insurance Group Holdings, Inc., and Sompo Japan Nipponkoa Insurance Inc.— in the third quarter of fiscal-year 2018 (October-December) totaled approximately JPY340 billion (USD3.07 billion). These reserve releases represented a 13% net reduction of the insurers’ overall catastrophe reserves balance. The vast majority of these reserve releases came from the fire and allied line, and as a result, catastrophe reserves for this line declined by nearly 40%.

Those total catastrophe reserve releases were comparable in scale to the amounts released in fiscal-years 2011 and 2012, attributable predominantly to the Tohoku earthquake, the costliest earthquake-related insured loss in Japan’s history.


The report also states that some insurers’ lower wind/flood catastrophe excess-of-loss layers were exhausted after typhoons Jebi and Trami in 2018. As a result, insurers needed to pay the reinstatement premium for restoring the layer limit after the first loss event. Some also needed to purchase back-up reinsurance cover after Typhoon Trami to reinforce their lower-layer protection and cover any additional losses from potential winter snowstorms. These extra reinsurance costs were instrumental in a slight deterioration in the underwriting results of Japan’s non-life insurers in 2018, after the release of catastrophe loss reserves.


“In the wake of the 2018 catastrophe losses, this year’s 1 April renewal season reflected some relatively steep price hikes, particularly in catastrophe excess-of-loss covers for Japanese wind exposures,” said Christie Lee, director of analytics. “Although specific rate increments varied among insurers, depending on the level of loss, their reinsurance portfolios, and their relationships with reinsurers, Japan’s domestic non-life insurance companies generally faced higher reinsurance costs.”


Overall, AM Best views the capitalization of Japan’s major non-life insurers as robust and resilient to underwriting or economic challenges. AM Best expects Japan’s domestic insurance companies to remain focused on operating profitability over the medium term — underpinned by primary rate hikes in catastrophe loss-impacted lines of business, a stable book of voluntary automobile insurance and robust investment returns. Due to these factors, AM Best’s market segment outlook of Japan’s non-life insurance industry remains stable.


Over the last few years, Japan’s major non-life players have embarked on global expansion at an accelerated pace, seeking risk diversification. With regard to a change in companies’ risk profiles, AM Best views adopting a holistic approach to capital and catastrophe risk management remains crucial for the major Japan non-life insurersin the event of unforeseen catastrophe losses or amid challenging post-event market conditions.