Ed Fenton, Managing Director
Reinsurance rates generally increased in Japan at the April 1, 2009 renewal. Specific changes, however, varied by line of business. There was not a substantial shortage of capacity, though conditions were tighter this year than at prior April 1, 2009 renewals. These conditions are consistent with worldwide reinsurance rate and capacity trends.
Buyers expected rate increases on catastrophe lines of business, though the implications of macroeconomic conditions on per risk property and casualty lines of business were unclear. Favorable loss experience last year relieved the pressure on per risk business and helped cedents to avoid large increases on catastrophe business.
The Catastrophe Market
Movements in exchange rates meant that capacity was restricted for some reinsurers especially those in Lloyd’s and the London market, whose capacity, being denominated in British Pounds, had been particularly affected. Traditionally, these reinsurers play an important role in quoting windstorm catastrophe business. Restrictions in capacity were top of mind at the beginning of the quoting process because some reinsurers opened with extremely aggressive early pricing. In the end, all companies paid increases, though they remained in the range of 5 percent to 10 percent year-over-year, with a few outliers based on program-specific circumstances.
For earthquake and earthquake fire expense insurance (EFEI) excess of loss (XOL) programs, which are generally seen to be more price-adequate by the reinsurance market, price increases, were modest — where they occurred at all. In certain cases small technical reductions were possible, especially in the EFEI standalone line. Perhaps surprisingly given capacity concerns, earthquake pro rata treaties enjoyed a smooth renewal with commissions unchanged.
Overall, capacity purchased was increased for windstorm and increased modestly for earthquake. Especially in the windstorm line, though, over-placement was virtually nonexistent. Even earthquake XOL placements, many of which are traditionally over subscribed, experienced a reduction in spare capacity. There was some move to combine windstorm and earthquake cover by non-life companies in order to enhance cost effectiveness of purchase or to attract new capacity to the windstorm line. In terms of the domicile of reinsurance capacity, there was a shift away from London to elsewhere in the world, especially to Bermuda and the Asian based subsidiaries of global players.
The Fire Market
In contrast to the experience of the past few years, favorable results meant that the fire market enjoyed a relatively quiet renewal. Pro rata treaty commissions were generally unchanged as companies continued to make good on the deficits of the past few years. Fire per risk XOL renewal pricing generally moved broadly in line with exposures. There was a modest easing of reinsurer sentiment towards Japanese fire business, and the overall amount of fire capacity purchased by the market increased fractionally.
Quotation to Firm Order: Despite the perception of a hardening market, firm order terms tended to be around the lowest first round quotation. In fact several programs were able to complete placement successfully, without loss of leaders, at terms less than the lowest first round quotation.
Hours Clauses: A few more windstorm XOLs expanded their “hours clauses” from 72 hours to 96 hours for wind perils. As in previous years, this was generally accomplished with an accompanying sacrifice of the right to reinstate in the same event. While 96 hours non-reinstateable seems to be becoming the market standard, several competing and subtly non-compatible wordings are in use in the market.
Other Lines of Business
General Third-Party Liability: Prices were up. New capacity continued to flow into this market easing pressure and giving cedents more power in terms negotiations with major reinsurers.
Personal Accident: Little change to pricing and no changes to terms, despite pressure from some reinsurers. Reinsurer concerns over “pandemic” disease did not lead to any changes to contractual terms; this issue may develop further throughout 2009.
Credit and Bond: Given the global financial catastrophe, it was no surprise that the renewal of these lines was difficult. Capacity for Japanese business remains tight but placements generally hit targets or fell only just short. Cedents were reluctant to reduce special limits for their key original clients. Commissions were stable or marginally reduced.
Engineering: Expansion of the number of reinsurers willing to entertain Japanese engineering business and a willingness of cedents to change leader enabled buyers to reduce the dominance of the traditional market leader.
Future View for Japan
Reinsurer balance sheets remain weakened by the problems in the global financial system. It is likely that this problem is not fully played out, which may lead to short term problems for buyers.
The series of planned mergers amongst Japanese insurers may change the reinsurance landscape in the mid- to long-term range. Fewer (though larger), programs are likely to be the result of these changes. The challenge of the upcoming year for each market participant will be to consider the changes and its associated options and successfully redesign its strategy accordingly.