A Fitch report suggests that while Japan's residential earthquake insurance scheme proved effective, the extent of insurance payouts has led to the Japanese government expanding its share of insurance protection to JPY4.8trn from JPY4.3trn, further mitigating residential earthquake risk for Japanese non-life insurers.

However, following the March 2011 quake, Japanese non-life insurers' capital is more exposed to future residential earthquake risks, particularly if they occur prior to the rebuilding of reserves. While non-life insurers' maximum payment has been reduced to JPY188bn per earthquake from JPY593.2bn, this is still substantially higher than the residential earthquake reserve estimated at JPY40bn-70bn.

Without government support, insurers selectively underwrite earthquake risks on commercial lines. "The balance sheets of Japanese non-life insurers are well protected through adequate reinsurance scheme in place and through sufficient catastrophe reserves," says Akane Nishizaki, associate director in Fitch's Insurance team.

Gross insured commercial earthquake losses are estimated at JPY600bn, of which JPY400bn are likely to be recovered by Japanese non-life insurers from reinsurers.

Despite rising demand for commercial insurance lines, Japanese non-life insurers are not underwriting additional earthquake insurance beyond their existing reinsurance arrangements. The increasing amount of unprotected earthquake risk is largely borne by industrial companies themselves.
Fitch expects a sharp increase in reinsurance pricing, given the higher frequency of catastrophic evens in Japan, New Zealand and Australia.

The high probability of a potential earthquake in South Kanto (greater Tokyo area) coupled with tighter reinsurance terms may lead to Japanese non-life insurers actively seeking alternative catastrophe reinsurance arrangements.

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