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16 October 2019News

The surprise loss creep from Typhoon Jebi

The year 2018 was the fourth most costly natural catastrophe year on record, with insured losses at $90 billion, based on Aon’s estimate; it was the second year in a row that the reinsurance industry had picked up a hefty claims bill. Taken together, 2017 and 2018 constituted the costliest two-year period ever for insured natural catastrophe losses.

Focus has shifted from the 2017 hurricanes in the Americas to last year’s Typhoon Jebi in Japan, owing to the surprise losses that crept into the reinsurance and retrocession market.

Shortly after Typhoon Jebi, initial modelled losses were estimated at $3 to $5 billion. However, the most recent loss estimate has risen to $12 to $13 billion, with some reinsurers bracing for a settlement closer to $15 to $16 billion.

Typhoon Jebi’s loss creep was reported in two stages. The first was carried out shortly after the event occurred to reflect the difference between modelled results and the actual loss experience. The second stage took place several months after the event, during which late residential claims were reported, and there were further claim developments due to a surge in demand for surveyors and repair workers—partly complicated by Typhoon Trami, which happened less than a month after Jebi.

Japan is one of the largest buyers of natural catastrophe capacity outside the US, and thus plays an influential role in the sector’s supply and demand. After 2018’s major loss events, the bulk of capacity sought by domestic insurers is still being supplied by large traditional reinsurers and there is no indication of players or capacity withdrawing from the market.

Contributing factors to the loss creep

On September 4, 2018, Typhoon Jebi made landfall in the southern part of Japan’s Tokushima Prefecture with the strength equivalent to a category 3 hurricane, before striking major urban areas such as Kobe and Osaka and later making a second landfall in the Kansai region. Its powerful winds caused the collapse of buildings, toppled power lines and shut down the country’s third-largest airport for days due to flooding and a tanker that collided with an airport link bridge.

Typhoon Jebi was the strongest typhoon to strike Japan in 25 years and led to the most expensive insured typhoon loss in the industry. These losses were compounded by the fallout from Trami as well as heavy rainfall earlier in the summer, resulting in Japan’s most costly windstorm/flood year to date.

Days after Typhoon Jebi struck, catastrophe modeller RMS pegged insured losses at between $3 billion and $5.5 billion while counterpart AIR estimated between $2.3 billion and $4.5 billion. The projected losses were initially focused on property exposures, with high uncertainties around business interruption losses and contingent business interruption from industrial risks and Kansai International Airport, whose closure could disrupt supply chains.

According to the General Insurance Association of Japan (GIAJ), the total volume of paid industry claims stood at $5.5 billion as of November 2018 (Figure 1); however, AM Best noted that the market expected that amount to increase further.

This expectation was realised when the value of claims paid rose by 66 percent to $9.1 billion in the four months between November 2018 and March 2019 (the financial year-end for domestic companies). The occurrence of Typhoon Trami shortly after Typhoon Jebi and the resulting overlap in claims was a major contributing factor to the material development in losses after November 2018.

Recovery was further complicated by the limited availability of resources to correctly identify and repair the damage caused. Consequently, the surge in demand for repairs and costs (especially for labour) posed a significant impact to the late reporting and large loss development on residential claims.

Although several major reinsurers were caught by surprise and required to strengthen reserves in the first quarter of 2019, the GIAJ’s published statistics show a slower pace of claim development since March.

Impact to reinsurance market

The lag in claims reporting to direct insurers, compounded by the reporting lag from direct insurers to reinsurers, amplified the unexpected loss creep from the typhoon that struck Japan. As such, the retrocessionaires and the reinsurers participating in the mid-layers of Japan’s wind/flood catastrophe excess-of-loss programmes (wind cat XOL) were among the most impacted, and might have seen these layers deteriorate from partial to total losses due to the loss creep.

Nonetheless, the reinsurance companies that suffered substantially from Japan’s catastrophe losses hope that hardened pricing conditions in the market continue for an extended period to make up for their losses.

Although there is no accurate prediction as to the continuance of a rate hike in future renewals, AM Best notes that there appear to be no signs of a decrease or withdrawal of reinsurance capacity by major traditional reinsurers over the recent renewal season in April 2019. In addition, oligopolistic buying positions offered significant bargaining power, and reinsurance buyers in particular would point out that, in the two decades leading up to 2018’s loss events, reinsurers had built up large positive profit balances from windstorm treaties.

Key takeaways

Japan’s three mega non-life groups—Tokio Marine & Nichido Fire Insurance, MS&AD Insurance Group Holdings and Sompo Japan Nipponkoa Insurance—are robustly capitalised. In their efforts to diversify risks over the last few years, they have embarked on an accelerated period of global expansion.

Overseas business in each of the groups now accounts for more than 20 percent of their non-life net premium written (NPW). As such, AM Best notes, the influence of the top three Japanese non-life groups on the global reinsurance market continues to grow.

We expect that the overseas business portfolios will continue to help Japan’s three largest non-life insurance companies to expand, in line with their mid-term strategic plans, as well as help them achieve inorganic growth through strategic mergers and acquisitions.

With a broader global footprint and a weaker local catastrophe reserve position following an active 2018 in Japan, AM Best believes that Japan’s domestic insurers are likely to take a more conservative approach in their reinsurance strategy and focus on maintaining profit stability going forward.

Nevertheless, insurance management executives of the three Japanese mega-groups will require a holistic view of their firm’s global catastrophe risk management, as well as creativity in designing their reinsurance programmes to improve capital efficiency while ensuring stability of the group’s underwriting profits.

In particular, aggregate protection will be needed to reduce profit volatility and avoid capital erosion from the increasing catastrophe loss frequency caused by a more diversified business book.

In AM Best’s view, although Typhoon Jebi—on a standalone basis—is not a game-changer, it has had a significant impact on Japan’s catastrophe pricing. While this appears to have no impact on global reinsurance pricing more broadly, a combination of losses in the two major catastrophe-insured regions, Japan and the US, could represent a significant test of the abundant supply of capital to the reinsurance sector.

This article is an excerpt from AM Best’s Market Segment Report “Global Reinsurance: Fighting the Last War”.

Christie Lee is a Hong Kong-based senior director of analytics for the AM Best Company. She can be contacted at: christie.lee@ambest.com