Reinsurance of earthquake
insurance

Mechanism of reinsurance
In the event that a major earthquake happens, it can result in large payouts of insurance claim
by insurance companies. Because there is a certain limit, however, to the ability of these companies to make payments, the government shares insurance responsibility with them throughreinsurance.
We reinsure the earthquake insurance contracts underwritten by non-life insurance companies
to take on full liability, which we homogenize before we pass on the risk proportionally to thenon-life insurance companies and the government by retrocession according to the limit indemnity. We take up the remaining indemnity.
Treaty A

Reinsurance by JER for non-life insurance companies
JER has entered into a reinsurance contract with non-life insurance companies operated
in Japan. According to the contract, the non-life insurance companies conclude a reinsurance contract with JER on the earthquake insurance contracts in full underwritten bythem in accordance with the Law concerning Earthquake Insurance. JER takes up the fullliability for this earthquake insurance without fail.
Treaty B

Retrocession by JER on non-life insurance companies
JER enters into a reinsurance contract individually with the non-life insurance companies,
and retrocedes to each company part of the insurance liability taken up by JER to the limit
as determined according to the balance of earthquake insurance risk reserves and otherfactors.
Treaty C

Retrocession by JER on the government(Excess of loss reinsurance)
JER has entered into an excess of loss reinsurance with the government on earthquake
insurance for a loss exceeding the amount payable by JER, according to which JER retrocedes to the government part of insurance liability taken up according to Treaty A to theindemnity limit as approved by the Diet.

10Japan Earthquake Reinsurance Co., Ltd. Annual Report 2010

Mechanism of payment ofinsurance claims
The policyholder claims insurance money to the non-life insurance company when the policyholder suffers a certain loss or damage as a result of an earthquake, etc., and the company
will pay insurance claim to the policyholder.
The non-insurance company which paid an insurance claim to the policyholder will claim thefull amount from JER through reinsurance. JER will pay the reinsurance claim in full to thenon-life insurance company.
This means that the amount of reinsurance claim paid by JER is the same as the amount of
the insurance claim paid to the policyholder by the non-life insurance company.

Flowchart of reinsurance ofearthquake insurance
Flowchart of reinsurance

Flowchart of reinsurance claim payment

Policyholder

Policyholder
Claiming theinsurance claim

Conclusion of earthquake
insurance contract
Payment ofinsurance claim

Non-life insurance company

Non-life insurance company
Treaty A

Treaty A
Reinsurance in full amountPayment of
insurance claim

Japan Earthquake
Reinsurance Company, Limited

Japan Earthquake
Reinsurance Company, Limited

Owned by JER
Treaty C

Treaty B

The governmentof JapanNon-life insurancecompanies

Claiming theinsurance claim

Treaty C

Treaty B

Claiming
retrocession
insurance money

Claiming
retrocession
insurance money

Payment ofretrocession
insurance claim
The governmentof Japan

Payment ofretrocession
insurance claim
Non-life insurancecompanies

Japan Earthquake Reinsurance Co., Ltd. Annual Report 201011Insurance liabilities held by JER,
non-life insurance companies andthe government
The following is the reinsurance scheme, showing how JER, non-life insurance companies andthe government share insurance liabilities, and the way each handles the shared liabilities.
Revised as follows on April 1, 2009.
Reinsurance scheme(Payable insurance claim)
Up to
115 billion yen

Up to 1 trillion
122.6 billion yen

Up to 1 trillion
925 billion yen

50%

905 billion
115 billion

401.2 billion

Non-life insurance companies

50%

5.5 trillion yen

3 trillion
396.25 billion

100%
503.8 billion

JER

Up to 3 trillion
712 billion yen

89.35 billion

95%

89.4 billion

The government

Liability limit
JER
Non-life insurance companies
The government
Total(limit amount of payable insurance claims)

12Japan Earthquake Reinsurance Co., Ltd. Annual Report 2010

605.60 billion yen
593.15 billion yen
4,301.25 billion yen
5.50 trillion yen

5%The balance of risk reserves at JER and non-life insurancecompanies and the government liability reserves at the endof fiscal 2009
JER and non-life insurance companies save the risk premium of insurance premiums paid bypolicyholders as earthquake insurance risk reserves for the possible payment of earthquake
insurance claims while the government saves government reserves in the earthquake insurance special account under law. In the event that an earthquake occurs and causes losses ordamages, each of JER, non-life insurance companies and the government pays an insurance
claim according to each liability as stipulated in the reinsurance scheme by withdrawing fromreserves.
JER
Non-life insurance companies
The government

496.7 billion yen
524.3 billion yen
1,270.8 billion yen

Total

2,291.9 billion yen

Note: The risk reserves by the non-life insurance companies include the amount equivalent to deferred tax assets due totax effect accounting.

Examples of insurance claims to be paid by JER, non-life
insurance companies and the government
Suppose that insurance claims amounting to 2 trillion yen for losses or damages associatedwith a single earthquake are to be paid. JER, non-life insurance companies and the government will pay each in the following amount:(Unit: billion yen)

Claims paid

A person of burden

JER
Non-life insurancecompanies
The government
Total

Portion up to
115 billion
yenPortion over
115 billion yen,
and up to
1,925 billion yen

Portion over
1,925 billion yen, andup to2,000 billion yen

Total

115.0

401.2

—

516.2

—

503.8

3.75

507.55

—

905.0

71.25

976.25115.0

1,810.075.0

2,000.0

Japan Earthquake Reinsurance Co., Ltd. Annual Report 201013