Japan's top four non-life insurers' average combined ratio remained strong but deteriorated to 95% in the financial year ended 31 March 2018 (FY18), affected by weather-related loss events including US hurricanes, says Fitch Ratings.
The combined ratio (excluding the impact of catastrophes) also worsened slightly. This was due to the completion of upward premium revision in the mainstay voluntary automobile business lines, in addition to rising repair costs.
Insurers are projecting their loss ratio – excluding the compulsory auto-business lines and residential earthquake insurance – to remain largely flat, in FY19.
Fire premium rate to be increased
Insurers expect net premium written (NPW) to decline by 0.2% in FY19, based on their aggregate forecasts. Nonetheless, non-life insurers are likely to revise upward the premium of the fire business lines in 2019, given the lower underwriting results.
The three non-life groups (Tokio Marine, Sompo and MS&AD) are continuing to look for M&A opportunities, particularly in the developed markets, to offset sluggish domestic growth prospects.
Each group plans to expand the contribution from overseas business to 40%-50% of their respective earnings. However, MS&AD and Sompo suffered losses from their newly acquired overseas subsidiaries.
Fitch sees due diligence, post-merger integration and prudent risk management as important factors for cross-border M&A.
Diversification of risks
The three non-life groups have been diversifying their portfolio into overseas underwriting and life insurance risk, and reducing investment risk and domestic catastrophe risk.
However, investment risk has remained the biggest component of the overall portfolio, despite the continuous reduction of cross-held shares. Fitch feels that Tokio Marine is one step ahead in terms of diversification of risks, based on the groups’ disclosures.
Strong capitalisation but exposed to volatility
Non-life insurers’ average solvency margin ratio remained high at 765% at 31 March, compared with 756% a year earlier, due to better financial market conditions. Some continued to issue subordinated debt to strengthen capitalisation, while maintaining low financial leverage. The non-life insurers continued to issue catastrophe bonds in 2018, in addition to their reinsurance arrangement to mitigate these risks. Fitch expects non-life insurance groups’ capital adequacy to remain strong, but to remain volatile due to exposure to domestic equities.