A Japanese perspective from S&P Global Ratings
If typhoons Faxai and Hagibis prove as big an insurance event as Jebi, domestic primary insurers’ capital and earnings assessment will take a hit, Eiji Kubo of S&P Global Ratings tells SIRC Today.
“The insurance groups may purchase more reinsurance cover to lower the volatility of their accounting profits.”
What lessons can we draw from the recent typhoons in Japan?
Events have forced insurers to come to terms with the fact that storms are becoming more powerful, and that Japan’s ever more sprawling mega cities are particularly vulnerable, with insurers quickly racking up billions of dollars in claims when extreme weather strikes.
Typhoon Hagibis hit Japan in October, flooding the Kanto and Tohoku regions, and killing scores of people. This followed another powerful typhoon, Faxai, which hit Kanto just weeks before, forcing the evacuation of hundreds of thousands and causing billions in damage. The typhoon left a swath of destruction in Chiba prefecture and triggered power failures that lasted for weeks.
Hagibis and Faxai were extremely powerful when they landed in the Kanto region, which includes Japan’s capital, Tokyo. Hagibis was strong enough to draw comparison with one of Japan’s largest typhoons on record, Kanogawa, which caused 1,269 casualties when it hit in 1958.
After Jebi’s loss creep, how should we view the loss estimates for Faxai & Hagibis?
That one-two hit shocked residents. It also followed a catastrophic typhoon season for Japan in 2018, the low point of which was Typhoon Jebi, one of the most devastating storms in decades.
S&P Global Ratings believes Faxai and Hagibis may each prove as costly to insurers as Jebi, once the dynamic of loss creep fully plays out.
We model what that looks like for the insurance industry. Catastrophe modelling companies estimate that Japanese gross insurance claims against the two typhoons will hit at least ¥1 trillion ($9.2 billion) in 2019. In our stress analysis we assume the total may exceed ¥2 trillion if both storms prove as damaging as Jebi.
We expect Japan’s primary insurers to be amply covered for such an outcome, having pushed out much of their risk to reinsurers. However, we also think that Japanese primary insurers’ access to reinsurance will become more expensive following this succession of catastrophic storms, which will hurt their profitability for years to come.
What is the impact on the performance of the mega Japanese insurers?
Conservatively, if we assume Hagibis and Faxai to become Jebi-sized insurance events, we expect net claims connected to the two 2019 typhoons to exceed the three groups’ budget this year for domestic natural disasters.
In this stressed scenario, we expect their reinsurance costs will rise through payments of reinstatement additional premium or additional purchases of reinsurance, which would push down the profitability of the insurers.
Having said that, Japan’s three domestic groups have been enhancing liability coverage reinsurance for wind and flood damage over the past few years. In our base case assumption, their coverage remains sufficient to contain the net losses from Hagibis and Faxai-class typhoons.
Furthermore, the three groups have some buffer in their overseas catastrophe budgets. Without a surprise, however, their group profits will be under negative pressure.
How will Japanese insurers respond, having faced back-to-back domestic catastrophe events?
With record back-to-back catastrophe losses in 2017–2018, higher losses in certain business lines, and loss creep from Hurricane Irma and Jebi, global reinsurance pricing has been hardening in 2019 in loss-affected lines and regions.
In Japan, insurance property rates for catastrophe-affected layers (eg, wind and flood damage) rose by 15 to 25 percent at the April 2019 renewal. We expect the resulting catastrophe losses from Hagibis, Faxai and Dorian to support the firming rate environment in 2020 in Japan and the US in particular.
The reinsurance costs of the three Japanese P&C groups in fiscal 2018 rose by about one-fifth, mainly due to the hike in reinsurance premium rates. In fiscal 2019, reinsurance rates increased 15 to 25 percent, and we expect further rate rises for the next renewal season in fiscal 2020, in our view.
Amid higher costs, we expect the Japanese P&C insurers to maintain or strengthen their reinsurance cover at the sacrifice of higher reinsurance costs, which will negatively affect their bottom line going forward. In fact, with increasing frequency of back-to-back domestic catastrophe events, we expect the insurance groups may purchase more reinsurance cover to lower the volatility of their accounting profits.
This is because accounting profits are the sources of return to shareholders and important performance measures. To balance out economic and accounting considerations, we expect the reinsurance demand from Japanese insurers to rise.
Eiji Kubo is director, financial services and international public finance ratings, at S&P Global Ratings. He can be contacted at: eiji.kubo@spglobal.com
