The effects of liberalisation and deregulation are making themselves felt in the results of the Japanese insurance market with repercussions - and opportunities - for reinsurers, as Martina Pering explains.
The 1999/2000 renewals season in Japan showed no trace of last year's concerns about the possible impact of liberalisation and deregulation on the country's insurance market. Gone were the speculation and fear about meltdown and other cataclysmic scenarios, simply because insurers could clearly see the effects of liberalisation and were too busy dealing with them to worry about anything else.
Figures for 1998 show a serious fall in premium income and a drastic decline in profits for Japan's direct insurers. For the first time since 1945, motor premiums decreased. Profits on industrial fire business, too, were hit by the effects of Typhoon 7 and a sharp downturn in premiums, which in some cases slumped to just a tenth of what they were the previous year.
Besides these figures from the Marine and Fire Association, there are other signs that the market is changing. Identical product offerings from all 34 Japanese insurers are now a thing of the past. Companies are being forced to differentiate themselves and create a unique identity in a market driven by expertise, high service levels and the ability to meet customer needs. The Godfather role of Tokio Marine no longer carries any weight.
The new order also places big demands on the reinsurance industry's ability to meet the needs of Japan's insurance market. Whereas a few years ago it was possible to manage a Japanese book of business with just three or four visits a year, now a permanent presence in Japan, in other words Tokyo, is essential. This explains the rash of new subsidiaries and offices set up by international reinsurers in Tokyo.
A change is also evident in the relationship between Japanese insurers and international reinsurers. A few years ago it was debatable just how much Japan's strongly capitalised and highly profitable insurers really needed reinsurance protection. That situation has been turned on its head. This new dependency is apparent in the approach of Japan's insurers to earthquake risks. They have released themselves from their self-imposed limits and are even prepared to offer 100% cover in vulnerable zones.
A sharp rise in first loss and multi-location policies has made it much harder to control the cumulative risk of earthquake liability. In addition, few companies have any clear idea of how earthquake risks will grow in the next three years, quite apart from the possibility that business interruption products will in future increasingly be sold with quake cover.
It is clear that Japanese insurers cannot handle this exposure to earthquake alone. The sharp rise in proportional quake capacity during the 1999/2000 renewal season will not solve this problem and can at most mean a temporary respite. Finding international quake capacity should not, though, be a problem. Most global reinsurers are hungry for premiums and see it as an opportunity to expand their Japanese market share.
On the other hand, Japan's insurers must be absolutely certain that, in the event of a catastrophe, their reinsurers will pay out. The last thing they want is to find out the hard way that they have bought useless reinsurance cover from innocent newcomers. Only two dozen or so reinsurers have the technical ability and size to assess and handle the huge quake risk in the Kanto area.
The 1999/2000 renewal season was also notable for the savage cost pressures on Japanese insurers, which in turn will feed through to reinsurers in the next renewals season as Japanese managers look to implement drastic savings. In the last renewals season, these savings were achieved through further reductions in rates, since the global market was still soft on April 1. Many Japanese insurers took the opportunity to secure multi-year deals in the hope that they can benefit from current low rates in years to come.
However, since April 1, evidence has also been growing around the world that markets are hardening. Consequently, Japanese reinsurance managers cannot rely on further rate cuts next year. Instead, they will have to look to running their businesses more efficiently.
There are many things they can consider. For example, they could maximise the potential of their most important business partners, both on the reinsurance and the broking sides, systematically going through their reinsurance needs, weeding out the inefficient and, if necessary, restructuring the whole programme.This would reduce the “true” reinsurance friends of Japan's insurers to at most two dozen. Long-term commitment and loyal partnership will be the key issues.Martina Pering works for Gerling Global Re, Cologne, and is responsible for the Japanese market and the underwriting of treaty business. Tel: +49 221 144 4283; fax: +49 221 144 4565; e-mail: firstname.lastname@example.org