News Non-Life27 Mar 2018

Japan:Further advances in domestic profitability of P&C sector seen as limited

| 27 Mar 2018

The outlook for the Japanese property and casualty (P&C) insurers is stable as it has been since July 2012. The industry will maintain strong domestic profitability and capitalisation, although further progress will be limited following multi-year improvements, says Moody's Investor Service.

In a report released yesterday, the international rating agency says that profitability of the P&C sector will remain strong, although further improvement is unlikely. The industry's profitability will continue to be supported by auto insurance, its biggest business segment, as well as stable investment profit underpinned by domestic stock dividends. A further improvement in auto insurance profitability is unlikely, because insurers have started to gradually reduce premium rates, but reductions will be gradual, because the industry has strong pricing power. Meanwhile, the profitability of fire insurance, the second biggest business, will remain weak.

Insurers will continue to have robust capitalisation but further capital growth will slow. Insurers will slow the pace of capital accumulation, because their capital levels are close to, or have exceeded their economic capitalisation targets. Insurers will adjust capital through a combination of increased shareholder returns and deployment of capital to accumulate incremental risks, such as through M&A. Natural catastrophe risks from both global and domestic businesses are relatively well managed. However, insurers have large volumes of super long-term fire policies, and as a result, they are vulnerable to climate change.

New technology application brings opportunities but is also a potential threat. The application of new technologies, such as telematics – which can be used to track driving behaviour for pay-how-you-drive (PHYD) type insurance products to offer lower rates for safe-driving customers – could threaten the industry's strong profitability. On the other hand, new products arising from technology development, such as cyber insurance, can be an opportunity in the future, if insurers successfully manage underwriting risks.

Moody's also says an erosion of underwriting margins due to severe price competition for the auto line could result in a negative outlook. Underwriting failures related to catastrophe events that lead to significant losses, or failures in overseas operations and expansion could also lead to a similar change.



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