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Chapter 9 Reinsurance market 9/13

Example 9.1
Bermuda’s reinsurers paid 30% of insured losses from 2005 Hurricanes Katrina, Rita and Wilma, a sum greater than
its European competitors. Furthermore, the Bermudian market paid sums in excess of US$22 billion to rebuild the
Florida and US Gulf coasts following the hurricane seasons of 2004 and 2005.

Nonetheless, a more or less constant concern to Bermuda’s reinsurers is the possibility of taxation by
the US Government of US-sourced business whether written directly or indirectly by a Bermuda-based
entity. As a result, reinsurers face an uncomfortable choice between the advantages of a Bermudian
domicile and access to the vast US market. Some have already chosen to exit in favour of, for example,
Ireland and Switzerland, while others have stopped short of full re-domestication and opened
subsidiaries there.
The tax and regulatory burdens placed on Bermuda-based companies are greater than before,
particularly with the introduction of regulations equivalent to the EU’s Solvency II.

B5 Asian market

B5A Japan
Historically, the Japanese insurance market was characterised by tight government regulations under the
Ministry of Finance. With the revision of the Insurance Business Law in 1996 came far-reaching
deregulation of the sector, allowing insurers to establish subsidiaries to write both life and non-life
business. A fundamental component of this liberalisation was the reform of the so-called ‘Rating
Organisation’ in 1998. Its function is now reduced to preparing and calculating non-obligatory standard
policy conditions and referential pure rates, which provides the market with some level of guidance.
However, the final setting of rates and margins is left to individual companies, with a few exceptions.
It is usual for almost all business to be channelled through agents and even the largest reinsurance
Usual for almost all
companies accept business through an intermediary. business to be
channelled through
Today, Japan has the fourth largest commercial insurance market in the world and its domestic market is agents
dominated by three mega groups – Tokio Marine, MS (Mitsui Sumitomo) & AD (Aioi Nissay Dowa), and Reference copy for CII Face to Face Training
Sompo Japan NipponKoa – which control more than 70% of non-life premium. The market also includes
Toa Re – a top 40 global reinsurer – and all major (re)insurance groups also have a presence.
Interestingly, property (commercial and domestic) is heavily under-insured in Japan and it is estimated
to have the largest protection gap in the world.

In recent years, investment returns have been low and the domestic market has continued to shrink
because of a declining population, declining manufacturing base and industrial assets and prolonged
economic weakness. As a result, the mega groups have looked abroad for growth by expanding into both
mature and emerging markets by acquisition and by equity participation. They have, however, been
hampered in this by domestic regulations limiting the size of any such investment to 10% of own assets.
The regulator, the Japan Financial Services Agency of the Japanese Government, has indicated that there
are plans for deregulation in this area. Insurers have also sought to reduce operational expenses as a
means of generating a return on capital.
All earthquake business written with regard to residential buildings is reinsured with the Japan
Earthquake Reinsurance Company (JER), which retrocedes part of the business to the government and
Japanese primary insurers on an excess of loss basis. Foreign reinsurers are not included in this
reinsurance scheme. Earthquake industrial insurance is predominately reinsured internationally. Of the
total ceded earthquake industrial exposure, it is currently estimated that about 70% is ceded on a Chapter
proportional or facultative basis. Covers are often combined for wind and earthquake.
Following the earthquake and subsequent tsunami in 2011, the insurance market contracted due to 9
higher rates in fire and earthquake insurance and looked to diversify risk portfolios away from those
affected classes of business. By contrast, the reinsurance market remains characterised by enduring
long-term relationships.
Be aware
There is a preoccupation with earthquake coverage in the Japanese market because of the level of seismic activity in
this region.