As in every past year, Japanese (re)insurers look to the January 1, 2013, reinsurance renewal for guidance as to the likely state of the market for their renewals at April 1. This year they will have been encouraged with a market characterized by excess capital, overcapacity and easing prices for loss-free business. This scenario is evidenced by the Guy Carpenter Global Property Catastrophe Reinsurance Rate on Line index, which fell at renewal, albeit marginally. This environment will come as a welcome change to Japanese buyers, who have fought their way through the last two renewals against adverse market conditions caused by a series of significant losses in the Asia Pacific region.
Adverse conditions in the global market were exacerbated for Japanese buyers by losses generated by the March 11, 2011, Tohoku earthquake. In renewals following that event Japanese buyers paid significantly increased prices for their earthquake protections. There was also an associated though less dramatic upswing in pricing for windstorm excess of loss placements, even though those covers have run loss-free for several years and many have significant cash “bank” balances. For 2013, the process of increase in the pricing of all of these treaties should have ended.
Japanese reviewers of the January renewal season will have noted with interest the consolidation of coverage and territorial scope in the protections of several large global buyers. As the large groups in Japan become increasingly global in nature they are likely to seek to adopt such initiatives in their own reinsurance programs over time. Increased purchase of aggregate protection was also a feature of the recent January renewal - again, Japanese buyers will study the benefits of such protection carefully when considering their own options at April 1. The entrance to the reinsurance market of significant amounts of capital in the collateralized reinsurance space could naturally find a home in any new aggregate purchases made.
In the original Japanese insurance market, increases in earthquake rates and tightening of conditions have enabled insurance companies to increase the attractiveness of earthquake pro rata treaties to reinsurers. Despite the Tohoku loss, at the time of the 2013 renewal the earthquake pro rata treaties of many of the large buyers will be back to or approaching a positive cash position when viewed over the past few years. Reinsurers should be expected to continue to look to support these treaties going forward.
Losses from the floods in Thailand in the latter half of 2011 caused headaches for all players involved. The Japanese companies and their reinsurers bore a heavy proportion of these losses and changes were made to treaty terms for 2012 around the cession of overseas business and the treatment of overseas catastrophe exposures. Some new or expanded layers of regional or worldwide catastrophe excess of loss reinsurance were purchased to help deal with risk newly perceived and re-evaluated. For 2013 such dramatic changes are not expected, but after a year to reflect it is possible that some players may look to fine-tune their protections further.
The Japanese non-life insurance market is currently in a period of consolidation, but the effect of this process on the reinsurance market to date has been limited.
Most Japanese marine programs have not been directly affected by Superstorm Sandy, so if market trends are followed a flat rating environment would be in line with the experience of global peers at January 1. Increases in reinsurers’ own retrocession costs may make reinsurance price reductions difficult to achieve for marine reinsurance buyers.
Japanese insurers value long-term continuity with their reinsurance partners. After the upheavals of the past two renewal seasons buyers will be looking forward to a quieter and smoother renewal at April 1, 2013, under what it is hoped will be more benevolent market conditions.