The recent increase in Japan’s advisory pure premium rate for fire insurance is a credit positive and will improve the profitability of P&C insurers in the country, according to international rating agency Moody’s.
On June 15, the General Insurance Rating Organization of Japan (GIROJ) raised the advisory rate for homeowner’s fire insurance by an average of 5.5%, reflecting increased losses from natural catastrophe and water leakages.
According to Moody’s, Japanese P&C insurers tend to closely follow the advisory rate when pricing their insurance products, and it expects insurers to begin reflecting the revised rate around 2019. Fire insurance accounted for 15% of Japanese insurers’ total premium income in fiscal year 2016 (ended March 2017), making it the second largest business line after motor insurance. However, it is also the least profitable among the major lines of business, having generated underwriting losses for many years.
Increased profitability in fire insurance will be of great help to P&C insurers, due to falling profitability in motor insurance thanks to declining premium rates amid higher vehicle repair costs. But the effect could be marginal, with profits slow to materialise.
“Homeowners’ fire insurance sold before October 2015 can have maturities of up to 36 years and have lower premium rates,” said Soichiro Makimoto, vice president and senior analyst, Financial Institutions Group, Moody’s Japan K.K. “Even though insurers have stopped selling these super long-term policies, cut the terms of the new policies to a maximum of 10 years and raised premium rates, they still have large amounts of outstanding super long-term policies. Because this revision only affects newly sold policies, we expect only marginal improvement in profitability in the near term.”
Meanwhile, for corporate fire insurance, premium rates can be set freely, leading to severe price competition among insurers. Carriers are trying various strategies to improve profitability, such as reducing coverage or having higher deductibles to reduce risks while keeping the same premium rates.
“This kind of industry shift toward risk-based premium pricing will reduce price competition to some extent and support gradual improvement of profitability on commercial fire lines,” Makimoto said.
