Japanese non-life insurers appear likely to raise premiums on their fire business from 2019, but the additional revenue is unlikely to offset the negative impact on profitability of the consumption tax hike scheduled for October 2019 and a cut in the statutory interest rate in April 2020, says Fitch Ratings.
The international rating agency expects these headwinds to push up the average combined ratio of large insurers by around two percentage points.
Companies have yet to announce the size of their planned fire business premium hikes, but increases were recently approved by the Japan's Financial Services Agency. Major non-life insurers are also unlikely to revise down premium rates for their voluntary automobile business, as they have in recent years. This should support revenue, but the short-term boost from the fire premium increases will be limited, as most retail fire policies have multi-year terms. The maximum term for fire policies is currently set at 10 years, but it was previously over 30 years.
Moreover, the fire business accounts for only 13% of non-life insurers' net premiums written, compared with 50% for voluntary auto and another 13% for compulsory auto.
The consumption tax hike will have a negative impact on earnings by pushing up incurred losses, as auto and other repair costs are taxable. Agency commissions are also taxable.
Meanwhile, the cut in the statutory interest rate will raise insurance claims in auto business lines, as it is used to calculate the net present value of "loss of profit". The statutory interest rate will be lowered from 5% to 3% from April 2020 and will be reviewed every three years to ensure it is consistent with market interest rates.
In the near term, flooding in west Japan in July is likely to result in elevated losses on the fire business in the fiscal year ending March 2019 (FYE19), given that its insured losses are likely to be among the 10 largest ever for typhoons and windstorms in Japan. Fitch estimates that gross insured losses from those floods could exceed JPY150bn, based on estimates from insurers. That said, losses will be partially recovered through reinsurance arrangements and the release of catastrophe reserves.
Accordingly, the three non-life groups - Tokio Marine Holdings, MS&AD Insurance Group Holdings and Sompo Holdings - left their full-year earnings forecasts unchanged for FYE19 in their first-quarter results released last week. Strong capital buffers should help them withstand any additional financial consequences.
High losses on the fire business due to natural disasters had been a drag on non-life insurers' overall performance in recent years.