A.M. Best Briefing: Japan Earthquakes to Have Moderate Impact on Insurers’ Earnings and Little Effect on Financial Strength

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best expects that the rated non-life insurers affected by the recent earthquakes in Japan will be able to withstand losses, with a moderate impact on earnings but little effect on financial strength, according to a new Best’s Briefing. While the series of earthquakes, which occurred in Kumamoto Prefecture in mid-April, are expected to lead to sizeable losses, the impact could be mostly mitigated by the release of catastrophe reserves. Although Japan is prone to earthquake risk, the penetration of earthquake insurance remains relatively low, which indicates insured losses would be a small portion of the economic losses caused by the series of earthquakes.

The briefing, titled, “Earthquakes in Kyushu – Moderate Impact on Insurers’ Earnings With Little Effect on Financial Strength,” states that the affected insurers have reported robust growth in capital over the past five years, largely due to an increase in unrealized gains under J-GAAP, recent improvement in profitability driven by premium rate hikes in major insurance lines and benign catastrophe loss experiences.

Japanese domestic non-life insurance companies have strengthened their catastrophe risk management over the past five years since the companies were hit in 2011 by the Japan earthquake and tsunami, as well as the Thailand floods. The report notes that for households, the residential earthquake insurance scheme has been recently strengthened by the government.

A.M. Best believes the underwriting losses of impacted non-life insurers will be manageable given the companies’ robust capitalization and conservative reinsurance arrangements. The insurers have addressed the management of catastrophe risk and investment risk as key risks through enterprise risk management. Investment risks mainly stem from the exposure to investments in domestic stocks, which account for more than 25% of total investment assets. Past experience suggests investment risks could increase upon the occurrence of a large-scale earthquake, as evidenced with the sharp fall in the stock market and strengthening of the Japanese Yen in the wake of the 2011 earthquake. Although the financial market conditions have not adversely moved since the recent series of earthquakes, any abrupt movements in the financial market could exacerbate the impact on the insurance companies’ earnings and balance sheets.

To access the full copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=248519.

A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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Source: A.M. Best