for the next tsunami?
Jul 31st 2003 | TOKYO
>From The Economist print edition
insurers may be more vulnerable than they look
earthquakes, one measuring around 6.2 on the Richter scale, struck
north-eastern Japan on July 26th. More than 600 people
were injured and more than 5,800 buildings damaged. A week earlier, torrential
rain and mudslides killed 22 people, washing away houses and cars in rural
areas of Kyushu, in the south of Japan. In Fukuoka, Kyushu's biggest city, the downpour flooded
the main railway station and deluged hundreds of businesses for the second time
in four years.
The bill for
much of this will be picked up by Japan's insurers. Despite the rising cost of
such events, however, the country's non-life insurers do not seem to be setting
aside enough reserves to cover future disasters.
Should a couple of huge catastrophes occur within several years of each other,
there are concerns that some might have to dip into, and perhaps exhaust, their
capital to cover the shortfall. The Financial Services Agency (FSA), the
insurers' regulator, is worried. It wants to tighten rules on how to set aside
reserves for natural disasters by April 2004, and is currently studying a
report by an industry committee on what to do.
Japan's non-life insurance industry, which
has assets of ¥33 trillion ($270 billion), is smaller, but healthier, than the
country's deeply troubled life insurers. Like life firms, non-life insurers
have suffered as stockmarkets have fallen and dented
their share portfolios; but strict regulations have prevented them from making
the poor credit decisions that have left life insurers and banks with enormous
bad debts. Whereas life insurers were locked into long-term contracts with high
pay-outs even though investment returns were plummeting, the non-life trade has
been steadier. About half the industry's premiums come from car insurance, for
which policies are renewed annually.
Yet in the
past year or so, non-life insurers have been selling a growing number of
long-term fire-insurance policies (which in Japan cover more general damage to property)
that may commit them to huge pay-outs for natural disasters. Since deregulation
in 1998, they have faced intense competition from foreign entrants. The
car-insurance market is saturated. Meanwhile, the risk of fire damage has
fallen because building materials have become more fire-resistant.
cut fire-insurance premiums, insurers have thrown in extra natural-disaster
cover for the same price. Since restrictions were lifted in October 2001,
insurers have been selling more fire cover through banks, offering 20- or
30-year policies to customers taking out mortgages. Because these policies are
not rewritten annually, companies cannot bump up premiums every year.
insurers' reserves are linked to premium income, which has been falling, not to
the risks covered, which are increasing. The non-life industry has around ¥800
billion of reserves for fire and natural-disaster insurance. Its biggest
natural-disaster pay-out so far, after a typhoon in 1991, is ¥568 billion.
Insurers think a similar typhoon now would cost ¥700 billion. A serious flood
of the Tone river, just north of Tokyo and Japan's second-longest, would cost a lot
more. Admittedly, reinsurers would pay something. But
insurers have found reinsurance dearer and harder to get in the past couple of
So far the
industry is not resisting the FSA's plans, though
that might change if new rules requiring extra provisions pushed some firms
into the red. In any event, the FSA has learnt from mistakes made in the 1980s
by its predecessor, which ignored problems in the banking and life-insurance
industries until it was too late. This time, the regulator seems determined to
force non-life insurers to fix the problem while they still can