2018 was one of the worst years for catastrophes, ranking fourth-highest in global insured losses from both natural and man-made disasters. Swiss Re estimated insured losses for 2018 at US$71 billion, and the trend is expected to go higher, due to the rising concentration of property and communities along disaster-prone areas.
Clarence Wong (pictured), chief economist for Swiss Re Asia and Asia regional head of Swiss Re Institute, examined the non-life insurance sector in Japan, which was one of the worst-hit markets in 2018, and why premium rates are likely to go up in the near future.
In 2018, Typhoons Jebi and Trami inflicted widespread damage in Japan and neighbouring countries, with the former being the strongest storm in 25 years to hit Japan.
“According to our sigma preliminary estimates, these events cumulated in an industry loss in Japan of US$12 billion last year – a large sum by all counts,” said Wong. “It is thus no surprise that the three largest Japanese non-life insurers are reported to have incurred record insurance payouts this fiscal year.”
According to Wong, as more disasters hit Japan, the bottom line of fire insurance policies covering typhoon damage has continuously eroded. This led to the General Insurance Rating Organization of Japan (GIROJ) raising the advisory rate for fire insurance by an average of 5.5 percentage points, resulting from heightened losses from natural catastrophe and water leakages. In recent months, major Japanese insurers have also announced plans to increase fire insurance premiums by an average of 5.5 percentage points this year.
“The non-life insurance sector has been in a weak phase of the profitability cycle, reflecting the impact of soft underwriting results and weak investment performance,” Wong said. “The fire business, which accounted for 15% of total premium income in 2016, is the second biggest business line after auto insurance in Japan, and high losses due to natural disasters have been a drag on non-life insurers’ overall performance in recent years. Despite a large client base, the fire business is among the least profitable after generating underwriting losses for many years.”
The global economic outlook is not helping, either. According to Wong, global economic growth is slowing and interest rates are softening. This spells low investment income for insurers in the short- to medium-term. He argues that in response to this situation, insurers should maintain their underwriting discipline and ensure adequate pricing for risks that they agree to cover.
The industry must also not become complacent over the vast amount of capital reinsurers hold.
“While the re/insurance industry, globally as well as in Japan, remains well-capitalised, preliminary information suggests that traditional capacity has remained flat while alternative capital may be on the decline for the first time since the 2009 Global Financial Crisis,” Wong said. “While more data and observations will be needed to confirm this trend, it not only points to long-term structural changes but also the fact that surplus capital is not a foregone conclusion.”
The recent increase in fire insurance rates, according to Wong, reflects Swiss Re’s September 2018 sigma report, which says that Japanese insurers must increase underwriting margins by five percentage points to regain profitability and maintain an ROE of 10 percentage points to investors.
This, he said, was derived from Swiss Re’s analysis of profitability over a 10-year period, which indicated that Japanese non-life insurers incurred a negative underwriting margin of 1.7% and a weak investment yield of 2.8%.
“In fact, Japanese investment yield is the lowest among the top nine non-life markets we investigated,” said Wong. “Adjusted for asset leverage and tax payment, our analyses show that Japanese non-life insurance reported the lowest profit margin of 3.1%. For comparison, the margins are 5.3% in China and 7.4% in the US. This methodology is necessary when looking at historical loss. If the recent increasing loss trend continues, this could raise the possibility that even higher rate hikes would be needed to return the sector to sustainable growth.”
In response to this situation, Wong called for the re/insurance industry to look towards innovation and technology to boost efficiency, strengthen underwriting performance, and provide customers with better value.
“This will also demonstrate the industry’s commitment to make Asia’s societies more resilient,” he said. “We cannot just sit back and wish away natural catastrophes. Actions that ensure we regain sustainable efficiency and long-term insurability are of utmost importance.”