Tsunami-stricken Japan’s non-life insurance sector still resilient

This is despite earthquake losses for five major Japanese non-life insurers totaling PY400bn for the residential sector and JPY200bn for the commercial sector.

Fitch Ratings says the Rating Outlook for Japan's non-life insurance sector remains Stable after the March earthquake, based on still sufficient capitalisation, premium growth and expansion into other aspects of insurance by major Japanese major non-life insurance groups.

"The direct insured losses are likely to be manageable for Japanese non-life groups and their capitalisation level should remain adequate for the current rating levels," says Teruki Morinaga, Director in Fitch's Asia Pacific Insurance team, in a Special Report published today.

Fitch estimates the earthquake losses for five major Japanese non-life insurers to total JPY400bn for the residential sector and JPY200bn for the commercial sector, after taking into consideration governmental and private reinsurance schemes.

Fitch expects Japan's non-life sector to see gradual recovery of both premium growth and underwriting profit in the financial year ending March 2012. This is based on non-life insurers' more sophisticated pricing for each risk category in the unprofitable motor insurance sector, with premium rates for the elderly segment rising faster than, for example, the middle-aged segment, due to the former's higher risk profile.

On the regulatory front, Fitch expects the Japanese major non-life insurance groups to strengthen enterprise risk management to cope with the new solvency margin regulation based on economic capital and International Financial Reporting Standards which are likely to be introduced in Japan over the medium term.

The agency notes that the biggest risk for the sector remains the exposure to domestic equities holdings, and expects that Japanese non-life insurers will continue to steadily reduce their exposure.

"Japanese non-life insurance groups are becoming insurance conglomerates, and the contributions from domestic life insurance and international non-life and life insurance have become much more important for their credit profiles than before. In particular, steadily growing and profitable domestic life insurance units should continue to underpin these groups' creditworthiness," adds Mr. Morinaga.

The key risk to the sector's performance is material erosion of capitalisation caused by a substantial financial crisis and/or catastrophe not only in Japan but also globally, as Japanese major non-life insurance groups are strengthening international insurance underwriting including re-insurance.

The report, entitled "Japanese Non-Life Groups: Fundamentals Resilient Despite Insured Losses from the March Earthquake", is available at www.fitchratings.com.