[Summary] Study on the Underwriting Reserves for Natural Catastrophic Risks (Translation)
released on April 1, 2004（April 26, 2004）
1. Current Situation of Catastrophic Natural Disasters
(1) Catastrophic natural disasters are increasing on a global scale with an effect of abnormal weather caused by global warming. For example, when we look at the highest insurance claims paid for natural disasters that have occurred from 1970 to 2002, the highest 30 claims out of 36 cases in that period occurred after 1987. This means that such catastrophic natural disasters were concentrated at the last 15 years. These highest claims include Typhoon No.19 in 1991 at 887.3 billion yen, Typhoon No.18 in 1999 at 519.1 billion yen, the Great Hanshin-Awaji Earthquake in 1995 at 347.2 billion yen. (source: sigma by Swiss Re)
(2) Japan is exposed to natural disasters such as earthquakes, typhoons, heavy rains and volcanic eruptions due to its geographic location, geological form, geological conditions and climate. We found that the highest 9 claims for natural disasters out of 10 occurred after 1990. This shows the same trend in the world. (According to the survey by GIAJ) In particular, in the last few years, we have experienced over 100 billion yen claims for Typhoon No 18 in 1999, Typhoon No.7 in 1998, the Heavy rains in the Tokai Area in 2000 other than Typhoon No.19 in 1991.
(3) In 1984, coverage of fire insurance policies* expanded with the introduction of coverage for windstorms, hail storms, heavy snowfalls and expenses caused by fire following an earthquake. Each insurer has actively developed new products since the Non-Life Insurance Rating Organization's rates were liberalized in 1998.
Such policies are Dwelling House Fire Insurance policies and the Ordinary Fire Insurance for General Risks / Factory Risks.
2. Underwriting Reserves for Catastrophic Natural Disasters
While the amount of claims for natural disasters has grown in the world, insurance policies with natural disaster coverage are also growing and the policy terms in Japan are now longer than before. In order to respond to the instruction given by the FSA, the Working Group studied an underwriting reserve system.
This reserve is set aside as a liability for insurance claims from the aspect of an insurance company's financial health and for policyholder protection. There are two underwriting reserves; the Ordinary Underwriting Reserve and the Catastrophe Loss Reserve. The report submitted by the Working Group proposed to strengthen both reserves.
(1) Ordinary Underwriting Reserve
The Ordinary Underwriting Reserve is calculated based on the amount of premiums written and is set aside for insurance claims for the contract in force. The Working Group proposed to have a measure to assess the amount of the reserve as properly accumulated based on the risks undertaken. Based on the risk model developed by the Non-Life Insurance Rating Organization, the Working Group proposed a measure to verify whether an insurance company has accumulated the reserve properly or not. In addition, it proposed a measure which enables an insurance company to make additional reserves in case the amount of carried reserve is smaller than the required amount and insufficient as a result of the verification mentioned above. This method is effective for risks of catastrophic natural disasters with low frequency and with the limited data that an insurance company has. This enables insurers to clarify whether the amount of reserve calculated by the conventional method was appropriate or not and also allows the calculation of appropriate level of reserves.
(2) Catastrophe Loss Reserve
The Ordinary Underwriting Reserve will be released when the policy matures because it is the reserve for claims for in force contracts. As the law of large numbers hardly pertains to natural catastrophe disasters, it is not appropriate to release all the reserve just because there are no big claims during the term of the policy. Rather it is necessary to reserve a certain amount of the premiums every year for future losses even though there is no claims payment during the policy term. In order to strengthen the Catastrophe Loss Reserve, the Working Group proposed to review and raise the annual limit of amount carried over to the reserve based on losses caused by the Isewan Typhoon scale disaster which was the biggest typhoon Japan has ever experienced.
3. Future Challenges
The report points out technical and practical challenges to be discussed prior to an introduction of the new system. These include the accumulation of data to verify insurers' reserves and a method to assess ceded reinsurance. Also mentioned is the necessity of discussion on regulations of solvency margin ratio; insurers are required to build up their capital as their liability may increase as a result of an introduction of a new reserve system.
4. For An Introduction of New Underwriting Reserve System
The Working Group recommends that the new system be applied to the financial statement of fiscal 2005 considering the remaining technical and practical issues. Until that time, insurance companies are required to prepare the necessary data and system arrangements and also to improve the analysis of risks of natural disasters.