Ed Fenton, Managing Director
Japanese Interests Abroad Excess of Loss
Over the long term, companies are likely to continue to buy combined domestic and overseas programs in order to build their risk capacity. In fact, there are few standalone Japan Interests Abroad (JIA) treaties on which to build a view of market trends. In a tightening market, reinsurers are always sensitive to worldwide exposures within treaties, and there was evidence of this factor affecting the marketing of some treaties, especially if there were large increases in the proportion of overseas exposures. It was a better year than previous in terms of loss activity, and the renewal was successfully completed with few changes in structure.
For risk excess of loss (XOL) business, pricing was generally flat or upwards. Development in some of the losses from prior years during 2008 led to some price increases.
For catastrophe XOL business, U.S. exposures remain the key price driver. Pricing was slightly increased in this class, though the total capacity purchased is not significant.
Bond and Credit
General Market Report
During the 2008 reporting season, all major credit insurers showed significant capital deterioration. At the same time, reinsurers announced combined ratios over 100 percent for the class. Consequently, the primary challenge for each reinsurance buyer was to convince reinsurers that its original underwriting control would be strict enough to withstand the financial market downturn. Once that hurdle was cleared, capacity generally remained available, albeit at a much higher price than previously — and possibly associated with demands for significant downside protection.
Capacity for Japanese business remains tighter than for the global market as a whole, with the exception of the worst performing markets such as Spain and Italy. This results from the high limits sought and is currently exacerbated by the current strength of the Japanese Yen. Some reinsurers monitoring their aggregates in US dollars or Euros have been forced to reduce their percentage shares on some peak capacity programs by up to 20 percent to reflect the currency impact.
Fortunately, some of the slack thus created has been taken up by a small number of new reinsurers to the market, a few offering significant capacity. This influx has been especially important since existing reinsurers have been reluctant to expand their business to new cedents following management directives to limit growth. Overall, capacity requirements have been met or are only marginally short of target. Panels broadened with the introduction of new reinsurers and it is hoped that this expansion will provide some level of additional capacity protection in the event that the market has not improved for 2010.
In many cases, reductions in special limits being offered by cedents — particularly on second- and third-tier limits — has helped capacity requirements to be met. In these cases, the maintenance of unchanged limits for the highest exposures tends to reduce the benefit of such reductions — in effect increased capacity can only become available where the reduced special limit is significant on more than one treaty.
Coverage Terms and Conditions
Terms and conditions for Japanese renewals were relatively stable. Commissions remained as expiring or were marginally reduced. Some reinsurers did tentatively attempt to introduce loss caps (monetary or loss ratio) and loss ratio corridors, but ultimately these features were not incorporated. The main reason that such features did not gain traction in the market is that the reinsurance market leader did not insist upon them. However, if the 2009/10 treaty year does not show signs of improvement, such features may be discussed again in advance of the 2010 renewal.
Liability Excess of Loss
General Market Report
Liability treaty reinsurance prices increased, despite a continuation of overall favorable underlying loss results. Most programs experiencing increases have had deteriorating loss results or top layers that are perceived as too thinly priced.
There were no significant developments in terms of coverage. One major reinsurer was particularly vocal in pushing for a better alignment between contractual terms in reinsurance contracts and the original insurances. However, in the end there were no changes to reinsurance wordings.
Despite the strong Yen, capacity remained adequate to meet demand. New capacity was available to buyers that sought it.
A growing number of reinsurers were willing to provide support for Unlimited Motor Third-Party Property Damage Liability. Reinsurer premium expectations were consistent with what buyers were prepared to pay, and some new purchases were made in the open market.
Expansion of the number of reinsurers willing to entertain Japanese general third-party liability (GTPL) and adequate capacity slowed the attempts of the major existing players to increase rates. Price changes were generally in the range of 5 percent to 10 percent — but sometimes were greater.
U.S. exposures and pharmaceutical risks remain the major issues facing the market. These factors constricted but did not negate) buyers’ room for maneuver.
Personal Accident Excess of Loss
Japanese PA business continued to attract interest, despite its perceived competitive rate level. Capacity remained constant with a few new entrants (mainly from London).
Given its catastrophe characteristics, the pricing of Japanese PA programs is mainly based on earthquake scenarios. Therefore, price developments are correlated with the movement of earthquake aggregates. Rates remained mainly stable, ranging from -5 percent to 5 percent.