Nat cat, supply chain risks to boost commercial insurance in Japan

Report reveals significant protection gap and lack of options for businesses

Nat cat, supply chain risks to boost commercial insurance in Japan

Insurance News

By Gabriel Olano

Total commercial insurance premiums are expected to grow 4.4% in Japan for 2019, amid a host of natural catastrophe and global supply chain risks, according to a report by the Swiss Re Institute.

The report pointed to several major natural catastrophes that struck the Asian nation in 2018: two major earthquakes in Osaka and Hokkaido, Typhon Jebi, and torrential rains in July that caused massive flooding.

It continued that business interruption (BI) risks will be a strong driver of commercial insurance growth in the coming years. This is because natural catastrophes and fires are key factors in business interruption risk scenarios, but insurance coverage is lacking.

“Natural catastrophes remain at the core of property risks in Japan,” said Jérôme Jean Haegeli, group chief economist at Swiss Re. “Yet, there is still a high level of under-insurance. Recent catastrophe events will increase awareness of the potential of business interruption losses, and spark new commercial demand for associated covers.”

Japan’s commercial insurance market is the third-largest in the world, with premiums of US$40 billion in 2017. However, Japanese companies’ options for business interruption remain quite limited. In 2018, natural catastrophe events in Japan caused total economic losses of at least US$24 billion, of which only US$14 billion were insured, leaving a protection gap of US$10 billion.

Aside from natural catastrophes, globalisation has drawn more attention towards BI risks. Multinational firms, and even some mid-sized businesses, have worked with several input and service providers across the world, leading to more supply chain vulnerabilities. In 2017, the total value of outbound investment from Japanese business was US$1.5 trillion. Despite that huge level, a survey by Japan’s Ministry of Economy, Trade, and Industry revealed that 75% of Japanese firms with substantial business abroad do not have a dedicated risk management division.

“Business disruption is becoming an increasingly important topic,” Paul Atkinson, head for Japan at Swiss Re Corporate Solutions, said. “Many of our clients have far-reaching interests and are connected to suppliers across the globe. If we look at the auto industry, for example, which has a truly global spread, we see frequent, increasingly-expensive recalls due to more complex supply chains and stringent product safety regulations.”

According to Swiss Re, another area for growth is parametric insurance. With a transparent claims process and quick payout features, parametric or index-based solutions are often discussed when seeking potential covers for exposures that have historically been hard to insure.

“New business models, such as the sharing economy, are changing the nature of risks that companies face,” said Atkinson. “New insurance solutions have emerged to cover pure financial losses that impact businesses. At Swiss Re Corporate Solutions, we developed a series of products that can complement traditional insurance programmes, filling in current protection gaps or exclusions. One such example is our Disaster Relief Insurance solution, which helps consumers repay loans and mortgages following an earthquake if their house is damaged.”

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