Japan non-life cat premiums set to continue rising

While the Japanese non-life sector has recently been steadily increasing catastrophe premiums the process will continue for several years as firms look to further improve their underwriting performance, according to Fitch.

Japan dropped two places on Swiss Re’s Nat Cat Resilience Index in 2023, with the reinsurer explaining that rising insurance premiums were the reason for the slip. 

Teruki Morinaga, Director of Fitch’s Asia Pac Insurance Group, said on a webinar that he expected premiums to continue rising into the near term.

This is due to Japan’s exposure to a number of Nat Cat perils including: typhoons, floods, and earthquakes. 

Japan’s non-life sector is expected to have limited losses from the magnitude 7.5 earthquake which hit the Noto Peninsula on 1 January.

But Moringa said the country’s overall cat risk exposure means premiums would keep rising.

“The most notable concern for the Japanese non-life sector will continue to be the possibility of huge natural catastrophes such as typhoons, and floods in Japan, which we cannot precisely predict. 

Japanese non-life firms are steadily raising cat premium rates. But it could take several years until they fully achieve the necessary price hikes to deal with catastrophe risks,” he said. 

According to Morinaga, Japan’s life and non-life sectors are both benefitting from a changed Japanese inflation outlook.

Inflated expectations

While Japanese inflation eased off at year end, at one point in 2023 it reached 4%, the  highest level since 1981.

Morinaga said that Japanese consumers reacquaintance with inflation means that insurers have been able to increase premiums.

“A positive secular trend for the Japanese life and non-life sector is that insurance premium rate hikes are likely to continue further.

This is supported by the recent moderate inflationary situation. More and more policyholders are now accepting price hikes in Japan,” Morinaga said. 

In November, Tokio Marine, one of Japan’s three main non-life firms, recorded a 12.5% quarterly increase in written net premiums and Morinaga said these positive results were due to the firm’s global portfolio. 

He also said the same was true of Japan’s other major non-life firms. 

“Tokio Marine group has demonstrated strong and robust results in its US non-life businesses.

These have supported the overall strong group total earnings, even if the firm’s Japanese domestic non-life businesses are sluggish, and we expect this to continue in 2024,” Morinaga said. 

“We also expect that it is highly likely other Japanese non-life groups will maintain their positive outcomes this year because they have solid and stable earnings sources outside Japan, especially from the US,” Morinaga added. 

Covid costs crimp

Morinaga said that Fitch’s outlook for Japan’s life and non-life insurance sectors would continue to be neutral for 2024, mainly because of healthy underwriting fundamentals. 

For the life sector specifically, he pointed to the end of the Covid-19 drain on health insurance profits. 

Japan’s health insurers took a hit from a dramatic rise in ‘deemed hospitalisation’ payments during the second wave of the pandemic as the country’s healthcare system became overwhelmed.

Deemed hospitalisation payouts are made to policyholders sick enough to require hospital care but where no beds were available for treatment. 

Toa Re reported in its 2022 Japanese Insurance Market overview that insurers’ deemed hospitalisation payments between April 2021 and March 2022 were eight times greater than the same period 12 months earlier.

The US reinsurance group explicitly put these heightened costs down to the outbreak of the more infectious Delta and Omicron Covid variants. 

Morinaga said that the changes Japan made to its Covid policy in May 2023, including downgrading the disease to a less serious classification, had eased the pandemic’s impact on the country’s health insurers. 

“The underwriting profits for Japanese life firms will continue to improve year-on-year in the first half of 2024”, said Morinaga.

“This is because losses from so-called deemed hospitalisation caused by COVID-19 had already started to diminish from the second half of 2023, following the government’s earlier rule changes,” Morinaga added. 

Morinaga also said that Japanese life insurers would receive a high investment spread for the next several years due to a decline in the average guarantee level on legacy life products. 

High hedges

It’s not all good news for Japanese life insurers, particularly given the sector’s high exposure to overseas assets.

The yen dropped to a multi-decade low against the dollar at the end of 2023, off the back of a series of aggressive rate-tightening moves by the US Federal Reserve. 

Morinaga said that Japanese life firms would continue to experience heightened hedging costs in the near term but this effect would be outweighed by their positive investment results. 

“Japanese life insurers may continue to suffer from rising currency hedging costs but despite this temporary negative impact firms will be able to maintain sizeable positive investment spread going forward,” he said. 

The Japanese insurance regulator is due to bring in a risk based capital (RBC) regime, based on the IAIS’s Insurance Capital Standard, in the financial year 2025-26.

Morinaga said that compliance with the new standard would improve carrier’s asset liability management (ALM).

“Meanwhile, decreasing ALM duration mismatch to cope with the Japanese economic base insurance regulatory regime from, financial year ending March 2026, would also be credit positive,” the Fitch Director said.