The costs of the extensive casualties and property damages, from a series of natural catastrophes in the current fiscal year ending 31 March 2019 (FY2018), will hit the earnings of Japanese P&C insurers, says the international credit agency Moody's. However, the resultant credit impact on the rated P&C insurers will be limited because of their very strong capitalisation and their sound management of catastrophe risk through the use of reinsurance.
The natural catastrophes include Typhoon Jebi and the Hokkaido earthquake in September, heavy rainfall in western Japan in July and the Osaka earthquake in June.
The loss amounts associated with these events are very small when compared with the insurers’ consolidated capitalisation – as defined by net assets plus after tax catastrophe reserves.
In particular, the estimated low property losses from the two earthquakes reflect several factors. For consumer lines, Japanese insurers benefit from the government’s reinsurance scheme, where insurers do not bear related earthquake losses from earthquake insurance policies. For fire insurance policies of the insurers’ corporate lines, the related losses are also limited by their selective underwriting. Japanese insurers generally exclude earthquake risk for properties from their corporate fire insurance policies.
Earthquake risk coverage is provided to only a small number of customers under special provisions. This effectively limits the risk of significant earthquake loss accumulation from property damage. While the insurers could still suffer high losses in the extraordinary scenario of, for example, a significant earthquake hitting urban areas and/or accompanied by a tsunami, these were not the cases in recent events. Furthermore, the financial standing of the insurers is supported by their reinsurance cover for catastrophes such as those of this current fiscal year.
Catastrophe excess of loss covers (ELCs) generally cover individual catastrophe events with loss exceeding the attachment point and up to the detachment point, which are set to reflect the insurers’ risk appetite and tolerance. Moody's believes that the losses from the four events are far below the detachment points for many of the rated insurers, which implies that losses from each of the catastrophes are well within the range of their expectation. The ELC programmes are generally designed to be able to mitigate a far larger event than the above four, losses of which event are close to the detachment point.
In addition, Moody's believes that many of the rated insurers will receive additional recoveries from annual aggregate catastrophe reinsurance covers. Recent declines in reinsurance premium rates and the increasing frequency of relatively small catastrophe wind/flood losses – compared with the insurers' capital – have driven them to purchase these annual aggregate covers. These covers aim to mitigate annual aggregated catastrophe losses from multiple occurrences of relatively small wind/flood catastrophe events, such as the catastrophes so far this fiscal year. This reinsurance cover should mitigate potential decline in their net profits from these multiple events.
There is a downside risk – which is not Moody's current expectation – where losses from properties, business interruption (BI) and contingency business interruption (CBI) related to Kansai International Airport would rise. It generally takes some time for BI and CBI losses to develop, and losses of a large claim generally depend on specific policy conditions, leading to relatively difficult ultimate loss estimates shortly after the occurrence of a catastrophe. Nonetheless, at this stage, the agency does not expect these BI and CBI losses to be outsized.
Another downside risk would also come from additional severe catastrophes for the remainder of this fiscal year. At this point, Moody's remains of the view that Japanese P&C insurers will continue to maintain their strong capitalisation and credit standing despite that they face above average catastrophe losses in the current fiscal year.