Japan quake could fuel April 1 rate increases if excess layer reinsurance hit: AM Best

The damaging magnitude 7.5 earthquake that struck Japan’s Ishikawa prefecture on the west coast of the main island of Honshu on New Year’s Day could affect the April reinsurance renewal outcome for Japanese insurers, if the excess layers of reinsurance programs are impacted, rating agency AM Best has said.

AM Best noted that proportional reinsurance arrangements, so quota shares and the like, are already set to feel some drag from the earthquake event.

As we’ve reported, the magnitude 7.5 earthquake struck in Ishikawa prefecture on the west coast of the Japanese main island of Honshu on January 1st 2024, with widespread damage reported and tsunami waves causing inundation for some coastal towns.

Investment manager Plenum Investments was first to highlight that catastrophe bond impact is not expected from this quake, while investment manager Twelve Capital then said it does not expect any impact to any cat bond or ILS positions it holds.

But, as we have been reporting, it seems likely any exposed quota share or proportional reinsurance arrangements will be affected and while the main route to reinsurance market loss is seen as via the Japanese domestic carriers, it’s not currently clear whether excess layers will face losses.

So far, we’ve only heard from sources of early industry loss estimates in the single digit billions of dollars, largely of the low to mid single-digit level. No official insurance industry loss estimate is available at this time.

AM Best provides another layer of insight on this, by highlighting that “Japan’s insurers’ adoption of generally conservative reinsurance strategies and the low earthquake reinsurance attachment point relative to their capital positions have largely transferred earthquake risks to the international reinsurance market.”

Which suggests the rating agency is perhaps not convinced excess layers will escape loss in every case.

Chanyoung Lee, director, analytics, AM Best, stated, “While the earthquake losses would drag the proportional treaties results, if losses were to hit individual companies’ earthquake reinsurance excess-of-loss layers, it might fuel rate increases in the upcoming 1 April reinsurance renewal.”

At recent reinsurance renewals, rate increases and restructuring have mostly been seen in the wind and flood layers of programs, in the aftermath of major typhoon losses in 2018 and 2019, AM Best further explained.

One of the factors that makes an estimate of private insurance market losses from an earthquake in Japan more challenging, is that the government also supports residential property insurance.

But, the Japan Earthquake Reinsurance Company (JER) also partially retrocedes quake risk back to non-life insurance companies in Japan, up to pre-defined limits, so it is not as if they are free of residential exposure.

AM Best explained that, “The Japanese government supports residential earthquake risks through a state-backed reinsurance scheme, so most losses to domestic non-life insurers are expected to come from commercial and industrial risks.”

Private market insurers also provide Earthquake Fire Expense Insurance (EFEI) in some cases, which covers additional expenses cause by fire following an earthquake.

AM Best said that it expects the earnings impact from this earthquake’s losses to major Japanese domestic non-life insurers will be manageable relative to the sector’s net profit.

In addition, the rating agency explained that a low take-up rate for commercial and industrial risks, limited business interruption coverage, and earthquake sub-limits designed to control aggregate exposures, could keep the domestic non-life insurers’ losses at a manageable level.

Also read:

Direct losses from Japan quake unlikely, but damage widespread: Twelve Capital.

– No immediate cat bond impact expected from Japan earthquake: Plenum.

– Japan hit by magnitude 7.6 earthquake, structural damage and tsunami reported.