With Japan being a global economic powerhouse, it’s no surprise that it’s also the third largest insurance market in the world. However, despite its size, there is a huge protection gap for businesses, especially against business interruption and other newer risks.
“The vast majority of businesses in Japan (more than 99%) are small and medium enterprises (SMEs), a sector that has been served by a network of small agencies focusing on asset protection and compulsory covers,” Atkinson told Corporate Risk and Insurance. “The Japanese market, which has experienced good growth for decades, was sufficiently robust for these companies to focus solely on the domestic market.”
However, with Japan facing a shrinking and ageing population, middle- and even small-sized companies must look overseas in order to grow and stay relevant, he said.
“Additionally, governance and compliance legislation have tightened, and the agency force is reducing and becoming more professional,” Atkinson said. “Brokers, introducing global servicing and global best practices, have helped the market to innovate, based on global best practices. On top of this, large companies acquiring subsidiaries overseas have learned from the risk management solutions in place at the acquired companies, and local Japanese and international insurance companies have responded with product innovation.”
As such, there is a growing range of innovative risk transfer solutions to cover the ever-evolving range of exposures facing businesses in Japan. Product development and innovation with respect to data analytics have expanded the scope of insurance solutions to a wider range of threats and perils.
“We are now in a highly innovative phase in insurance in Japan, and the local regulator (FSA) is supporting innovative solutions,” Atkinson said. “We see risk management as a profession that has started to become more prominent in Japan and that is also driving the way corporations buy their insurance and manage risk.”
Huge earthquake protection gap
According to a recent Swiss Re report on Japan’s commercial insurance market, there is a large protection gap with earthquake cover in the country, despite being one of the most quake-prone in the world. Atkinson cited three factors that contribute to this gap.
First is pace of change, with the risk landscape altering rapidly in a very short period of time. Second is affordability and appeal, where many clients, working with tight budgets, tend to buy cover for nearer-term risks than for major nat cat events. And lastly, limits to insurability, where existing policies will sub-limit nat cat exposures and leave gaps in insurance. However, innovative parametric solutions are helping to overcome these gaps and provide holistic coverages, Atkinson said.
In order to address this situation, Atkinson proposed a collaborative approach, with the risk management and insurance sectors teaming with regulators to address the issue and raise awareness of today’s growing risks with respect to climate change. He shared that the Foreign Non-Life Insurance Association has conducted several risk management seminars, one of which directly addressed the protection gap in Japan.
“Risk management associations, such as PARIMA, provide a network for risk managers to exchange experiences and ideas and initiate client-led training and awareness,” said Atkinson. “Individual insurance companies are increasing training and development opportunities for their agent and broker partners, especially as they introduce new products.”
Also, simplifying insurance with easier-to-understand products and faster claims payments is a shared goal of insurance companies and regulators.
“Recently, parametric covers for earthquake and other nat cat perils have been introduced to simplify cover and allow fast claims payment in the event of loss as a differentiator,” he said.
Atkinson shared an instance where Swiss Re was able to apply an innovative solution for a client.
“A luxury goods company came to us concerned about how an earthquake could impact sales at the company’s flagship store in Tokyo, looking for protection against such an event,” he explained. “This unusual request required an innovative solution. We engaged in extensive modelling to map out the client’s normal sales patterns and to assess the impact of an earthquake on retail activity in the area.
“By doing so, we were able to create an effective solution centred on the client’s need to ensure business continuity following an earthquake. We devised a multi-year policy offering predefined payouts based on the level of an earthquake shake intensity index. This solution complemented the client’s existing cover, as it depends solely on whether an earthquake occurs. On the other hand, more traditional indemnity covers are triggered by damage to property which may only be a fraction of the financial loss to the company. This is in contrast to a parametric cover, which is straightforward and transparent and ensures a payout based on an earthquake’s intensity.
“This negates the need for the time-consuming claim reporting and handling process, thus resulting in a relatively fast payment, usually within six weeks. In the aftermath of a major natural catastrophe, [the payout] will provide crucial support to the client’s operations.”