As rescue and recovery efforts continue across the regions hit hardest by last week’s earthquake and tsunami in Japan, the leading rating agencies are offering their own assessments of insurers’ potential losses.
The March 11 quake, which was updated to a magnitude of 9 from 8.9 by the U.S. Geological Survey, and ensuing tsunami prompted Prime Minister Naoto Kan to call this the country’s worst crisis since World War II.
S&P, which earlier this week said it was cutting its outlook on the Japanese non-life insurance industry to negative from stable due to potential declines in stock prices possibly affecting insurers’ earnings, today updated its position, stating that it doesn't expect to take widespread rating actions on insurers as a result of this event because much of the industry is dealing with this disaster from a position of capital strength. "Nevertheless, if actual insured losses exceed current market aggregate estimates, some insurers' capital could erode significantly, so much so that it might prompt Standard & Poor's to downgrade them," S&P said.
Fitch noted in a report published on March 14 that while the March 11 earthquake in Japan will be among the largest insured losses in history, “such loses can be absorbed by the insurance and reinsurance industries without widespread solvency problems, or undue financial strain.”
A.M. Best says it doesn’t expect an immediate rating impact on Japanese non-life insurers and reinsurers due to the earthquake. However, the capitalization level will decrease by a fair amount.
“While the economic losses resulting from the earthquake are expected to be in hundreds of billions U.S. dollars and insured losses in tens of billions U.S. dollars, A.M. Best is of the opinion that the non-life insurance companies in Japan are able to absorb the net losses without a negative impact on their current ratings,” the agency said.
A.M. Best believes that the deterioration stemming from reduction of unrealized capital gains due to stock market decline will be more severe rather than deterioration stemming from the earthquake loss, as much of the insurance loss will be absorbed by ERR and catastrophe reserves. Risk-adjusted capitalization may drop further if the companies increase their risk retention due to the higher costs of catastrophe protection going forward, it said.
Moody’s Japan K.K. noted that insurance and reinsurance companies domiciled both in Japan and around the world will sustain heavy losses following last Friday’s catastrophe, resulting in negative credit implications for the two sectors.
And in its published reports on the earthquake, Fitch pointed to how Japan’s residential earthquake insurance is structured: Commercial and industrial risks are passed on to a government-owned reinsurance market. The coverage for nuclear power also comes under the government, not local insurers, noted a representative from Japan’s Financial Services.
According to Japan’s General Insurance Association, non-life insurers have set aside reserves for earthquakes that they can access for claims, and the Japan Earthquake Reinsurance will pay all losses amounting to 115 billion Yen on residential earthquake insurance.
“Japanese insurance companies have appropriate levels of reserves and capital and it should not have significant impact on their business or claim payments,” claimed Japan’s Financial Services Minister Shozaburo Jimi at a press conference on March 15.
S&P asserts that total claims payments for losses from the earthquake and tsunami will probably exceed those recorded after the Kobe 1995 earthquake, which killed 6,000 and cost insurers approximately $100 billion in losses. Still, the total payout will be “well under” the insurers’ contingency reserves, it said.
Modeling firm
Where the quake occurred also affects exposure, notes A.M. Best. Because the earthquake occurred outside the Kanto area (Tokyo and the surrounding prefectures), the gross loss will not exceed the reinsurance protection limit of each company, and the net loss will not exceed the large disaster risk (LDR) amount used in Japanese solvency calculation (the total LDR amount of the companies rated by A.M. Best is JPY 1,173 billion [USD 14.4 billion] as of fiscal year 2009). The total solvency capital of the companies rated by A.M. Best recorded JPY 10,340 billion (USD 126.9 billion) as of fiscal year 2009.
Additionally, because Japanese homeowners and businesses rely heavily on a government-funded earthquake insurance system, rather than private insurance, only 14% to 17% of Japanese homes have private earthquake insurance, according to estimates from the
Further, Japan Earthquake Reinsurance Co. Ltd. (JER), joint-owned by private P&C insurance companies, assumes residential earthquake exposure from domestic insurers, and provides capacity to pay claims up to 5.5 trillion Yen ($66.9 billion),
A.M. Best says that Japanese non-life companies and reinsurers are well capitalized to absorb some volatility, but remains cautious that further deterioration in capitalization or a major slowdown in economic activity may pose further pressure on the current ratings. The local solvency ratio of the companies is expected to drop to the fiscal year 2008 level, and further risk retention could result in a lower solvency level.
The non-life companies in Japan rated by A.M. Best are Tokio Marine & Nichido Fire Insurance Co., Ltd., Sompo Japan Insurance Inc., Mitsui Sumitomo Insurance Co. Ltd., Aioi Nissay Dowa Insurance Co. Ltd., NIPPONKOA Insurance Co. Ltd., The Fuji Fire & Marine Insurance Co. Ltd., and The Toa Reinsurance Co. Ltd. The six non-life primary companies represent 91% of net premium written in the Japan non-life market as of fiscal year 2009, notes A.M. Best.
MS&AD Insurance Group Holdings Inc.,Tokio Marine Holdings Inc. and NKSJ Holdings Inc., the three-biggest non-life insurers, may have 20 billion yen ($250 million) to 80 billion yen each in commercial losses, according to analysts. The three have set aside about 88% of their 593.2 billion yen maximum liability, Fitch said.
