The revision of the advisory pure premium rate for homeowners' fire insurance, announced on 15 June by the General Insurance Rating Organization of Japan (GIROJ), will increase the advisory rate by 5.5% on average, and reflects increased losses from natural catastrophe and water leakages.
The increase is credit positive because it will help improve the profitability of fire insurance business, said Mr Soichiro Makimoto, Vice President – Senior Analyst, Financial Institutions Group, Moody’s Japan, in an article in the 25 June edition of Moody’s Credit Outlook.
Profitability will improve because Japanese P&C insurers tend to closely follow the advisory rate in their pricing. Moody's expects that insurers will start reflecting the revision in pricing around 2019.
Fire insurance generally accounted for 15% of their total premium income in the fiscal year ended 31 March 2017 (FY2016), making it the second biggest business line after auto insurance. However, the business is the least profitable among the major lines of business, and has generated underwriting losses for many years.
The improvement in profitability for fire insurance is particularly important for insurers’ overall profitability, considering their falling underwriting profit on auto insurance because of the recent decrease in their premium rates and rising vehicle repair costs. Another factor in the decline in underwriting profit is the planned increase in the consumption tax rate and reduction in the legal cash flow discount rate, both of which will result in higher claim costs.
However, the improvement in the industry’s overall fire insurance portfolio will be marginal because existing homeowners’ fire insurance policies are often long term, making improvements in profitability slow to materialise. Homeowners’ fire insurance sold before October 2015 can have maturities of up to 36 years and have lower premium rates. 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, Moody's expects only marginal improvement in profitability in the near term.
For corporate fire insurance, insurers continue to face severe price competition because they can freely set the premium rates. Insurers are undertaking various efforts to improve corporate line profitability, including reducing coverage or having higher deductibles to reduce risks while maintaining the same premium amount. 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.