Swiss Re Sees Potential in Japan as Corporations Reassess Risk Protection

Japan's commercial insurance sector will need to reassess the adequacy of its risk protection in the aftermath of the March 11 earthquake, tsunami and nuclear crisis events, a scenario that will create new business potential and innovation for insurers, according to a Swiss Re executive.

"There might be more demand on nonlife insurance products as a result of the tragic events of March 11," said Juerg Stoll, representative of Swiss Re International SE'sJapan branch, a direct nonlife unit of the reinsurer.

Some Japanese corporations will have to reassess their requirements for the level of risks protection related to earthquake and increasing liability exposures such as global product liability and environmental impairment liability, he said.

In Japan, Stoll said "we are yet to see the extent of business impact as a result of the earthquake" in the commercial sector. Many companies have resumed their operations and they are trying to equip themselves for the quickest recovery.

The aftermath of the March 11 events will result in an increase in both demand and capacity for earthquake, liability and casualty insurance. "We believe coverage such as corporate earthquake and liability could be expanded to support the Japanese commercial insurance market," said Stoll.

"In the particular case of corporate earthquake insurance, current procurement rates are substantially lower than those of other developed countries. It's expected that this market can grow by adding capacity," he added.

Reinsurers have already begun to increase rates and are hopeful for a firmer market, according to a new A.M. Best Co. briefing (BestWire, May 16, 2011). Domestic insurers in Japan appear to be well positioned to absorb net losses from the 9.0 magnitude earthquake and subsequent tsunami, A.M. Best said. Cumulative insured losses from other recent catastrophes, including the Christchurch earthquakes in New Zealand and flooding in Australia, have prompted companies to adopt strategies to conserve capital and press for higher rates. Companies are preserving capital in anticipation of rate increases, according to A.M. Best. While they are continuing to pay shareholder dividends, extraordinary dividends and share buybacks appear to have halted.

The issues of supply chain disruption and electricity shortage are expected to be mostly resolved by September. The current decline in Japan's economy is largely the result of supply-side factors, such as supply chain problems, created by the earthquake rather than a major decline in demand, said Takahide Kiuchi, an economist with Nomura Securities in Tokyo.

"We therefore expect the current decline in the level of real gross domestic product to be relatively minor and for GDP growth to pick up again relatively quickly once the supply-side problems have been resolved," said Kiuchi. The government's 4 trillion yen (US$49.5 billion) first supplementary budget for reconstruction and recovery will boost economic growth by the fourth quarter, he said.

Swiss Re recently gained a nonlife insurance license from the Financial Services Agency to open a corporate solutions operation in Japan. The newly licensed branch offers direct insurance on property/casualty and industry-specific products to large corporate clients.

"Our challenge is to first establish a presence, build brand awareness and help rebuild Japan after the tragic March 11 events," said Stoll. The company's goal is to become one of the key foreign player for corporate commercial business in Japan.

In the corporate casualty market, Japanese corporations pay insurance premiums of about 0.1% of the country's gross domestic product. This level is substantially lower than other developed countries, and as such, Stoll said "this market is also expected to grow as more capacity is added."

As one of the leading global economies, Japan has thousands of corporations with large assets and high liability exposures. Many Japanese companies are big global exporters with intensifying overseas expansion.

High risk exposures to natural catastrophes, a current underinsured level and a large number of big corporations with globalization moves create substantial opportunities for nonlife commercial insurance, according to Stoll.

Swiss Re's strategy for its corporate solutions unit is to build a presence in the largest industrialized markets and become a leading global commercial insurer, said Stoll. In Japan, Swiss Re International is eyeing domestic companies with global business activities, nationwide infrastructure and operations and massive product manufacturing.

The new unit offers commercial property, earthquake, general liability, product liability, directors and officers liability, product recall, engineering and construction insurance in Japan. It also offers risk transfer solutions such as captive retrocession and multiyear programs, according to Stoll.

As global liability becomes important for Japanese corporations, Stoll said the company seeks to add new products and capacity for this segment. The insurer is looking to offer Japanese corporations tailor-made solutions and capacity for areas such as commercial liability and earthquake.

"Our strategy is to provide new products to the Japanese market and additional coverage, particularly in areas which have not yet been covered adequately or when new risk exposures emerge," said Stoll.

Swiss Re International aims to serve the commercial market by better filling the gap between current and ideal protection levels. Stoll said the insurer offers top-up coverage for existing earthquake insurance with an additional layer if the existing coverage is insufficient. It can also add earthquake coverage for business continuity expenses which are usually uncovered in many cases.

In the first quarter of 2011, Swiss Re took a big hit from natural catastrophes, leading to a net loss of US$665 million. Catastrophes losses included an estimated US$1.2 billion from the March 11 earthquake and tsunami in Japan, US$800 million from the February earthquake in New Zealand, US$225 million from floods in Australia and US$100 million from Cyclone Yasi, also in Australia (BestWire, May 5, 2011).

Swiss Re currently has a Best's Financial Strength Rating of A (Excellent).

Listen to the interview with Stoll at http://www.ambest.com/media/media.asp?RC=186790

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