Japan Reinsurance Renewals See Modest Price Hikes as Currency Movements Apply Pressure

Japan's reinsurance renewals followed global market trends, with general increases in reinsurance rates and demand for protection over the fiscal year starting in April. While capacity is in line with demand, some reinsurers are seeing difficulties related to a strengthening yen against other currencies, which is cutting into capital.

"It's in line with the global market cycle, where demand for protection is increasing while the supply of reinsurance is flat due to a reduction of risk-bearing capital and drying up of retrocessional capacity," said Takashi Goda, managing director for the Japan branch at Swiss Re [85009].

Modest Gains

This year, Goda said reinsurance rates for windstorm excess of loss increased 5% to 10%, and earthquake excess of loss rose around 5% on a risk-adjusted basis. Although pricing was "mostly flat" for pro rata treaties, Goda said certain special lines such as marine hull and engineering got "some improvement."

Some programs with low rates found it harder to achieve higher rate increases, said Goda. The price level for Japanese windstorm excess of loss "has been historically low and all reinsurers have sought the chance to rectify it after many years of failure to do so in the soft market situation and benign years," he told BestWeek Asia/Pacific.

Reinsurance rates generally increased in Japan at April 1 renewals, said Ed Fenton, managing director at global reinsurance broker Guy Carpenter.

"There was not a substantial shortage of capacity, though conditions were tighter this year than at prior April renewals," said Fenton in a report. He noted Japan's conditions were "consistent" with the worldwide trend for reinsurance rates and capacity.

Buyers expected rate increases on catastrophe business, although the implications of macroeconomic conditions on per-risk property/casualty lines were unclear, said Fenton. Last year’s favorable loss experience "relieved the pressure" on per-risk business and this helped cedants avoid a "large increase" in catastrophe lines.

Currency Impact

The strengthening of the yen against other foreign currencies implied a reduction of capacity for some reinsurers, but the impact has not been ubiquitous on overall capacity in Japan.

"The impact of the strong yen has been seen mostly in the Lloyd's market, where the capacity of syndicates is defined by its yearly business plan in the British pound, which suffered huge devaluation against the yen," said Goda. "We saw some small European players appearing to have an impact from it." But, Goda said he did not see "much impact" in the market.

For most reinsurers, Goda said the currency impact is "not very significant." Most of them look to return on risk-adjusted capital for capacity deployed for Japan, and that is more critical, he added.

Traditionally, Fenton said reinsurers from the Lloyd’s market “play an important role” in quoting windstorm catastrophe business in Japan. Movements in exchange rates restricted the capacity of these reinsurers.

At the beginning of the quoting process, Fenton said restrictions on capacity were “top of mind” because some reinsurers opened with “extremely aggressive early pricing." In the end, all companies paid increases although they remained in the range of 5% to 10% year-over-year, with a few outliers based on program-specific circumstances.

"Some reinsurers monitoring their aggregates in U.S. dollar or euro have been forced to reduce their percentage shares on some peak capacity programs by up to 20% to reflect the currency impact," said Fenton in the report.

“Fortunately, some of the slack thus created has been taken up by a small number of new reinsurers to the market, a few offering significant capacity,” said Fenton. He noted “this influx” is important as existing reinsurers have been “reluctant” to expand business to new cedants following management directives to limit growth.

Japan's Risks

Overall, capacity purchased rose for windstorm and increased "modestly" for earthquake. "Especially in the windstorm line, though, over-placement was virtually nonexistent. Even earthquake excess of loss placements, many of which are traditionally oversubscribed, experienced a reduction in spare capacity," said Guy Carpenter in a report.

Japan is a “catastrophe” and “peak risk” market with huge industrial business, said Goda. Therefore, it is a “real challenge” to achieve economic return from the risk capital required to write those business commensurate to the cost of risk capital for it.

Taking account of the “risky” and “volatile” nature of insurance business, Goda noted Japanese insurers’ return expectations are “too low” from a global view. “They expect reinsurers to understand such a low-return environment. This is not sustainable,” said Goda.

Also, Goda said reinsurers are given only peak risk programs. “But most diversified personal lines risks, which do not generate high return but also do not require a high amount of capital, are fully retained by the original market in Japan,” said Goda.

In Japan, Goda said capacity “continues to be available” from major and smaller reinsurers who all need to maintain a diversified portfolio. He added, “there is no shortage of capacity if quality of capacity and prices are not taken into account.”

As reinsurers need to maintain their diversified business portfolio, they "are willing to take Japan risk" in order to establish a "well-balanced" portfolio with their Europe and the U.S. programs, said Goda.

Fenton also noted Japan’s capacity requirements were met or only “marginally short of target.” Introduction of new reinsurers can provide “some level of additional capacity protection” in the event the market will not improve for 2010.

Terms Maintained

Reinsurance terms and conditions for Japanese renewals were “relatively stable,” said Fenton in the report. Commissions remained the same as those expiring or were marginally reduced. "Some reinsurers did tentatively attempt to introduce loss caps and loss ratio corridors, but ultimately these were not incorporated," he added.

In the long term, Goda said a regulatory move from a solvency margin ratio to Solvency II, which is scheduled to be implemented in Japan by 2011, and rating agencies concerns about risk management, would “compel” insurance companies to buy more reinsurance in Japan.

Reinsurers’ balance sheets have been weakened by the global financial downturn, said Fenton in the report. “It is likely that this problem is not fully played out, which may lead to short-term problems for buyers,” noted Fenton.

Consolidation of nonlife insurance companies in Japan may change the reinsurance landscape in the middle to long-term range, said Fenton. Fewer but larger programs are likely to be the result of these changes in Japan, he added.

“The challenges of the upcoming year for each market participant will be to consider changes and its associated options and successfully redesign its strategy accordingly,” said Fenton.

In terms of the domicile of reinsurance capacity, Fenton said there was a shift away from London, especially to Bermuda and Asia-based subsidiaries of global players.

In Japan, the two domestic reinsurance companies, Toa Re [85179] and Japan Earthquake Re [85864], are private reinsurers owned by nonlife insurance companies. Japan Earthquake Re was established in 1966 as a regulatory response for earthquake insurance. There is basically no public (state) reinsurance company in Japan.

In additional to the two domestic reinsurers, locally licensed foreign reinsurers, offshore overseas reinsurers and primary domestic and foreign insurance companies with reinsurance business currently offer reinsurance business in Japan.

(By Iris Lai, Hong Kong bureau manager: [email protected])