New specialty businesses to sustain Japan P&C insurers' capital

Growth of specialty products will support underwriting.

Japanese P&C insurers will sustain their strong capitalisation and profits, underpinned by a likely post-pandemic increase in demand for new specialty business which will sustain future profitability, according to a Moody’s Japan KK report.

The sector’s resilience against catastrophic loss events and the pandemic relied on their adequate use of reinsurance and geographic diversification, said Moody’s senior analyst Soichiro Makimoto.

The pandemic will also spur new demand for specialty products such as cybersecurity, business interruption and event cancellation insurance. The growth of these products will support robust capital and underwriting despite the inherent risks of potential claims inflation and unseasoned loss behaviour, the report said.

The motor business will still be the largest profit contributor in domestic business with a 90-95% combined ratio. On the other hand, domestic fire insurance lines will continue to pull down profits due to structural issues, such as long policy terms, low granularity in pricing system, and social pressure from domestic customers.

Asset risk will improve as insurers divest high equity holdings and hike the share of assets with lower market and concentration risks, notably overseas high-quality credit investments. More insurers are also gradually incorporating ESG factors into their underwriting, which is a credit positive as it will subdue potential higher claims and reputation risk.