The 2012 renewal presented potential difficulties for all participants. Losses in Thailand and the after-effects of the March 2011 Tohoku earthquake combined with a hardening trend in the wider reinsurance market. The result was a complex renewal season for Japanese cedents. Careful planning by insurers and their brokers ensured that capacity was secured. But, capacity was secured at increased prices for excess of loss covers and with tightened terms and conditions in many lines.
Prices, Terms and Conditions
Rates were up in all property-catastrophe and per risk lines. Casualty lines showed a mixed picture, but the general trend was for modest increases. Low rate on line business came under particular pressure for rate increases across classes - reinsurers have been chastened by a series of losses worldwide on such business, including in Chile, New Zealand and Thailand.
For catastrophe lines, prices had already increased in the 2011 renewal that immediately followed the Tohoku earthquake: the two-year compound price increase is significant. For excess of loss covers, prices are back to a level last seen in the mid 1990s.
The pricing of the other major component of catastrophe risk reinsurance in Japan, earthquake pro rata, is not directly comparable to historical data since the structure of the original market and policy types issued have changed considerably over the past 20 years. Nevertheless, pricing in this class hit record levels, primarily driven by rate increases in the original market. Changes to terms and conditions on these covers were also to reinsurers’ benefit.
There was a general pre-renewal expectation that a hardening market would prompt a significant increase in capacity purchased via the excess of loss route at the expense of pro rata. No such wholesale change was observed and where there was a shift from pro rata to excess of loss cover in either cat or per risk schemes it was the result of a planned change.
The effect of the Thailand floods was most heavily felt in the property per risk (fire) lines. There was some re-structuring and prices for excess of loss covers went up considerably. Fire pro rata treaties were maintained through judicious application of reduced commissions, additional fire quota share cession and restriction or removal of worldwide catastrophe cover. Reinsurers required additional information on contingent business interruption and overseas cat exposures in order to maintain coverage. These subjects will continue to be debated over the next 12 months.
Casualty lines showed a modestly hardening trend in pricing. Capacity for Japanese personal accident business remains ample. Capacity for global third party liability excess of loss and engineering pro rata remains limited.
Capacity was available - at a price - to satisfy the needs of buyers. Overall there was a minor shift from the direct to the broker market.
As traditional reinsurance rates increase, more Japanese ceding insurers are evaluating the capital markets as an alternative and/or supplemental source of risk transfer capacity. Consistent with the traditional reinsurance market, there is capacity available subject to pricing. There is also more focus and discussion on the underlying risk analysis, as the Tohoku event was not contemplated in the existing event catalogs of any of the three leading catastrophe model vendors. Dedicated insurance linked funds continue to receive strong capital inflow mainly from global pension fund and other institutional investors. Subject to return requirements and properly structured transactions, they are looking for investment opportunities in diversifying perils, including Japanese earthquakes and typhoons.
In February, Zenkyoren’s issuance of the Kibou cat bond secured USD300 million of limit and was the first single Japanese earthquake peril bond since 2008. Investor support soon after the Tohoku earthquake was an important test of the capital markets as a viable and reliable supplement to the traditional risk management schemes for purchasers of major catastrophe programs. In addition, dedicated catastrophe risk investors have started approaching Japanese markets to provide capacity on a collateralized reinsurance basis.