AM Best: Japan Quake’s Effect on Insurers ‘Manageable; KCC Says Losses to Hit $6.4B

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The earnings impact on the major domestic non-life insurers of claims from the Jan. 1, 2024 earthquake in Japan is expected to be manageable relative to the sector’s net profit, according to AM Best in a market commentary.

Japan’s four major domestic non-life insurers —Tokio Marine & Nichido Fire Insurance Co. Ltd., Sompo Japan Insurance Inc., Mitsui Sumitomo Insurance Co., Ltd., and Aioi Nissay Dowa Insurance Co., Ltd. — have “well-diversified business profiles as well as strong capital positions,” which should be more than sufficient to support the potential loss from this earthquake, AM Best said.

The aggregate net assets of these four domestic insurers, which represent the vast majority of the Japanese property market share, totaled about 7 trillion Japanese yen (US$48.6 billion) on a non-consolidated basis, as of March 31, 2023, the commentary said.

In a separate announcement, catastrophe modeling firm Karen Clark & Co. said, total insured losses from the quake will reach $6.4 billion, with residential losses accounting for over two-thirds of the total.

AM Best expects the negative impact on profitability for the fire segment – in which most losses from the earthquake are expected – to be offset by profits from other lines of business. “Most non-life lines of business have reported growth in premium income in the past 12 months, supported by primary rate increases.”

A government-backed reinsurance scheme for residential earthquake insurance exposures should mitigate losses, so most claims to domestic non-life insurers are expected to come from commercial and industrial risks as well as “Earthquake Fire Expense Insurance (EFEI),” an insurance coverage designed to pay additional expenses caused by fire following an earthquake, AM Best said.

While additional earthquake losses could come from the marine line, the report said, earthquake is typically excluded from the motor line.

“A low take-up rate for commercial and industrial risks, limited business interruption coverage, as well as earthquake sub-limits designed to control earthquake aggregate exposures, are likely to keep the domestic non-life insurers’ losses at a manageable level,” the ratings agency added.

Conservative Reinsurance Strategies

The commentary noted 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.

“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 April 1 reinsurance renewal,” said Chanyoung Lee, director, analytics, AM Best, in a statement accompanying the report.

In the past few rounds of reinsurance renewals, rate increases and restructuring pressures were mainly seen in the wind/flood layers as a result of major typhoon losses in 2018-19, the report said.

However, after sizable catastrophe losses from Typhoons Nanmadol and Talas in the 2022 fiscal year, “Japan’s non-life insurance segment had experienced a relatively benign natural catastrophe year in 2023,” it continued.

The magnitude 7.5 earthquake, which struck the Ishikawa prefecture on New Year’s Day, has killed at least 94 people and more than 220 are missing, according to news reports as of this printing on Jan. 5. (The United States Geological Survey reports the quake at magnitude 7.5, while the Japanese Meteorological Agency lists the magnitude as 7.6).

KCC said it was the largest earthquake since 2015, and the deadliest in the country since 2016.

Photograph: A police officer and a canine dog search a collapsed house following earthquakes in Wajima, Ishikawa prefecture, Japan, on Wednesday, Jan. 3, 2024. (Kyodo News via AP)

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