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Market optimism returns to Japan despite maturity

JAPAN'S insurance sector has been a persistent laggard in a country that saw the bottom fall out of most of its financial services economy about a decade ago.

By the early part of the 1990s, as the stock market boom of the 1980s was ending, the Japanese insurance sector was close to reaching maturity and was suddenly weighed down by a tailing-off in premium growth.

Another negative factor was the sudden deterioration in claims records of some of the biggest companies and the combination of all three factors meant the words consolidation, merger and acquisition soon came easily to everyone involved in the sector. What took place between 1995 and the end of last year amounted to a massive shake-up in Japan's non-life insurance sector.

Today there are just six major insurance companies of any size and momentum left in Japan. These are in turn an amalgamation of about a dozen companies that either ceased underwriting and had their ongoing business taken over or decided to merge and combine their businesses.

Now Japan's non-life sector is in a far healthier state than 10 years ago, when there were just too many companies existing on investment income in the face of consistent underwriting losses.

The six largest non-life insurers have recently done better and served up slightly better premium income figures for last year. Figures confirmed by the industry at the end of last month show premium income growth remains stubbornly flat, with income at the six largest companies rising a mere 0.1% to a combined (Y)6.25trn ($57bn) in the past year to March 31. But premium revenue from the sector's mainstay motor insurance fell at five of the companies, with total revenue from car insurance for the six falling 1.6%.

The premium income figures do not disguise the rather more positive facts that the claims record across most sectors has been gradually improving in Japan's domestic business, allied to the much-improved figures for investment income. These two issues will no doubt make last year's bottom-line figures look much healthier than the basic premium income figures appear at the moment.

But the flat premium income figures again demonstrate that despite the massive consolidation of the Japanese non-life industry and the great steps made in liberalisation, the fundamental message appears to be that Japan is a highly mature market with little or no prospects for growth in the short to medium term.

As the total market share of the top six is already high at more than 90%, where do the companies go now?

A clue to this lies in the way liberalisation has panned out for the big six in the past few years. One of the factors that has led to an increase in market share for the biggest firms is the rapid increase in the sale of non-life insurance products over the counters at banks.

NEW TRENDS

Since April 2001 the sales at banks of long-term fire insurance contracts related to housing loans, overseas travellers' accident insurance and insurance supporting debt repayment have been encouraged. In particular, the volume of insurance premiums for long-term fire cover is now significant because the vast majority of mortgage buyers also purchase the cover.

The second trend in new sales channels has been via the life insurers and all the big six have tie-ups with life companies. Potentially, these new channels could lead to premium income increases, but to date no significant rises have been registered. Another trend in the latest figures is that component ratios of net premium income by line of insurance show the market share of motor insurance continues to exceed about half the total non-life premiums.

So the situation in the motor market has a profound effect on the total earnings of the big six companies.

In Japan motor cover is divided into two categories fleet contracts for corporations and non-fleet, household. The latter accounts for 90% of all motor policies. The problem with Japan's motor market is that rate competition among insurers has intensified and a unit price of premium per one vehicle has continued to fall sharply. According to a study by Japan Credit Rating Agency, this is perhaps the major reason why premium income in Japan refuses to take a quantum leap upwards.

The agency notes each insurer has tried hard to increase the unit premium amount for a car insured under the non-fleet contract by re-examining the premium rates, including those for special clauses. But their efforts have not succeeded in holding back the decreases in the unit price of premium in the class as a whole.

The loss ratio of Japan's motor market had been stable at around 50% up to 1997, but has risen each year since then to around 65%, where it roughly stands today.

The greater number of cars on Japan's roads, an expansion of the scope of coverage and a rise in the number of vehicle thefts have all contributed to this rise.

The rating agency study says candidly that prospects of a return to sustainable growth and profitability in Japan's motor market remain remote.

"Claims control for motor insurance has become a serious challenge for every non-life insurer," it adds.

Japan's fire market accounts for about 15% of total premium income and, in comparison with motor, is relatively profitable, with a loss ratio of around 40%.

But the non-life insurers recognise that while profitable, there can never be long-term stability with fire cover as results fluctuate enormously due to natural catastrophes. The fire market in Japan has seen a dramatic rise in retentions among the non-life companies allied to an increase in reinsurance payments. The agency notes: "Recently there has been a tendency to transfer the burden to direct insurance premiums but the increase in reinsurance premiums has not been enough."

As full-year 2003 figures will show, the loss ratio continues to show an improvement across Japan. This is mainly due to the absence of any major natural disaster in the country last year or indeed in 2001 or 2002.

One bright spot was motor theft the bane of the motor insurer's life which actually dropped off a bit last year.

Another sign of optimism for the industry is that all the major companies are taking claims control more seriously than ever before, and efforts in both underwriting and claims payments are starting to pay dividends.

But as the agency study says: "There still exists the possibility that the loss ratio will sharply deteriorate due to the occurrence of large claims on industrial risks and/or natural disasters.

"Therefore we think it is inevitable operating expenses will have to be cut to ensure stable profits in future. Since each of the big companies has exerted its utmost efforts to cut both personnel and non-personnel expenses, the level of operating expenses is reducing marginally," it adds.

So although premium income growth may continue to level off, a combination of cost control and better distribution methods may just be the long-term salvation for Japan's non-life companies.