Japan earthquake’s insured losses with have limited impact on credit ratings – AM Best

In a new commentary, AM Best anticipates that the financial impact of the January 1, 2024 earthquake in Japan on major domestic non-life insurers will be manageable in relation to the sector’s net profit.

This perspective was detailed in the commentary titled, “AM Best Expects Insured Losses from Japan’s January 2024 Earthquake to have Limited Credit Ratings Impact.” The report notes that a significant portion of residential earthquake risks in Japan are supported by a state-backed reinsurance scheme. Consequently, most losses incurred by domestic non-life insurers are likely to arise from commercial and industrial risks.

The firm added that Japanese insurers typically employ conservative reinsurance strategies. This approach, along with the relatively low earthquake reinsurance attachment point in comparison to their capital positions, has effectively transferred a substantial portion of earthquake risks to the international reinsurance market.

“While the earthquake losses would drag the proportional treaties results, if losses were to hit individual companies’ earthquake reinsurance excess-of-loss layers, it might fuel rate increases in the upcoming April 1 reinsurance renewal,” AM Best director of analytics Chanyoung Lee said.

The non-life insurance sector in Japan faced substantial catastrophe losses from Typhoons Nanmadol and Talas in 2022. However, the year 2023 was comparatively benign in terms of natural catastrophes for the industry.

AM Best expects that the adverse impact on profitability within the fire insurance segment, which is anticipated to bear the brunt of the earthquake losses, will likely be mitigated by profits from other lines of business. The report also highlights that most non-life insurance lines have seen growth in premium income over the past 12 months, buoyed by primary rate increases.

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