Disaster
threat lengthens policy terms |
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PERHAPS more than any other
developed nation, Japan lives under the threat of massive disruption, loss of
life and economic turmoil due to its exposure to natural catastrophe. Although
there has not been a major earthquake now for several years, Japan lives with
the knowledge that catastrophe is never far away. |
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Today, insured aggregate values
in the big Japanese cities are truly enormous. Over the past few years the
number of natural catastrophes and the amount of insured and financial losses
have risen dramatically and this is also the case in Japan. |
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The Kobe earthquake of 1995 was
one of the severest natural catastrophes and the Japanese market believes that
if and when a similar calamity takes place, the volume of insured losses will
be far higher than what resulted from that disaster. |
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The growing number of
catastrophic natural disasters around the world today and the rise in insured
values have prompted calls in Japan for insurers to dramatically strengthen
their catastrophe underwriting reserves. |
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This was a major conclusion in
the report carried out by the General Insurance Association of Japan (GIAJ)
into the country's current exposure to natural catastrophes produced in April. |
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LONG-TERM COVER |
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The report, which was
commissioned by the GIAJ last year, concludes that the number of long-term
insurance policies issued in Japan is increasing and this has become an
integral trend in the local market. In the case of home insurance such as fire
policies, contracts with a policy period of four years and longer now amount to
more than half the total sales or 56% total and 64% by insured amount at the
end of 2002. The report says long-term policies are here to stay in the
Japanese market as the share of these policies is growing every year and a
trend of policy term lengthening will continue for the future. |
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Regarding underwriting reserves
for catastrophic natural disasters, the report notes the amount of claims for
natural disasters has grown in the world but that insurance policies with
natural disaster coverage are also growing. Policy terms in Japan are now
longer than before. |
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The report, produced in
association with Japan's Finance Ministry, says the country's underwriting
reserves are set aside as a liability for insurance claims to protect insurance
companies' financial health and boost policyholder protection. There are two
underwriting reserves the ordinary underwriting reserve and the catastrophe
loss reserve. The GIAJ report proposes both these reserves should be
strengthened. The ordinary underwriting reserve is calculated by the amount of
premiums written and is set aside for insurance claims for contracts in force. |
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The GIAJ report proposes to
have a measure to assess the amount of the reserve as properly accumulated
based on the risks undertaken. |
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Based on a risk model developed
by Japan's Non-Life Insurance Rating Organisation, the GIAJ proposes a measure
to verify whether an insurer has accumulated the reserve properly or not. |
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"In addition, it proposes
a measure which enables an insurance company to make additional reserves in
case the amount of carried reserve is smaller than the required amount,"
it adds. "This method is effective for risks of catastrophic natural
disasters with low frequency and with the limited data held by an insurance
company." |
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This enables insurers to
clarify whether the amount of reserve calculated by the conventional method was
appropriate or not and also allows the calculation of appropriate level of
reserves. In the case of the catastrophic loss reserve, the ordinary
underwriting reserve would be released when the policy matures because it is
the reserve for claims for in-force contracts. |
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"As the law of large
numbers hardly pertains to natural catastrophe disasters, it is not appropriate
to release all the reserve just because there are no big claims during the term
of the policy," it says. "Rather it is necessary to reserve a certain
amount of the premiums every year for future losses even though there is no
claims payment during the policy term." |
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In a bid to strengthen the
catastrophe loss reserve, the GIAJ suggests it should review and raise the
annual limit of the amount carried over to the reserve based on losses caused
by the Isewan typhoon-scale disaster, which was the biggest typhoon Japan has
ever experienced. The report also admits there are many future challenges in
terms of attempting to cope with the adequate catastrophe reserving in Japan. |
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TECHNICAL CHALLENGES |
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The report points out there are
technical and practical challenges to be discussed before the introduction of
any new system. "These include the accumulation of data to verify
insurers' reserves and a method to assess ceded reinsurance. Also mentioned is
the necessity of discussion on regulations of solvency margin ratio; insurers
are required to build up their capital as their liability may increase as a
result of an introduction of a new reserve system." |
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The GIAJ report recommends a
new system should be applied to the financial statement of fiscal 2005
considering the unresolved technical and practical issues. |
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"Until that time insurance
companies are required to prepare the necessary data and system arrangements
and also to improve the analysis of risks of natural disasters," it says. |
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The report states changes in
reserving are needed because catastrophic natural disasters are increasing on a
global scale with an effect of abnormal weather caused by global warming.
"For example, when we look at the highest insurance claims paid for
natural disasters that have occurred from 1970 to 2002, the highest 30 claims
out of 36 cases in that period occurred after 1987," it says, adding that
this means such catastrophic natural disasters were concentrated in the last 15
years. |
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These highest claims include
Typhoon No 19 in 1991 at (Y)887.3bn ($8.1bn), Typhoon No 18 in 1999 at (Y)519.1bn,
and the Great Hanshin-Awaji earthquake in 1995 at (Y)347.2bn. Japan is exposed
to natural disasters such as earthquakes, typhoons, heavy rains and volcanic
eruptions due to its location, geological form and conditions, and climate. The
report says the nine largest claims for natural disasters out of 10 occurred in
Japan after 1990. This follows a global trend. |
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"In particular, in the
last few years, we have experienced over (Y)100bn claims for Typhoon No 18 in
1999, Typhoon No 7 in 1998, the heavy rains in the Tokai area in 2000, other
than Typhoon No 19 in 1991." |
In 1984 coverage of fire
insurance policies expanded with the introduction of cover for windstorms, hail
storms, heavy snowfalls and expenses caused by fire following an earthquake.
The report says most, if not all, Japanese insurers have actively developed new
products since the Non-Life Insurance Rating Organisation's rates were
liberalised in 1998.
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