REINSURANCE OF
EARTHQUAKE INSURANCEMECHANISM OF REINSURANCE
In the event that a major earthquake happens, it can result in large payouts of insurance claimby 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.
JER reinsures 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 tothe non-life insurance companies and the government by retrocession according to the limit
indemnity. We take up the remaining indemnity.

MECHANISM OF PAYMENT OF
INSURANCE CLAIMSThe 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.
When a major earthquake occurs, a non-life insurance company must make a large amountof money ready so that it can pay a large number of insurance claims. To avoid problems
in paying insurance claims, the government has set forth a ministerial ordinance that covers
the payment of reinsurance claims pertaining to earthquake insurance based on a roughestimate, and promptly pays reinsurance claims based on a rough estimate (makes aprovisional payment) through JER.

Japan Earthquake Reinsurance Co., Ltd. Annual Report 201821

FLOWCHART OF REINSURANCETo enable the government, non-life insurance companies and JER to share insurance liabilities
in an equitable manner, it is necessary to first collect and standardize evenly the risks non-life
insurance companies underwrote, and then distribute them to the relevant organizations. It
is also necessary to receive insurance premiums (reinsurance and retrocession premiums) ascompensation for taking on insurance liabilities. To collect, evenly standardize and distributerisks and to give and take insurance premiums (reinsurance and retrocession premiums),
reinsurance transactions are conducted, centered on JER.
JER first reinsures earthquake insurance contracts that were underwritten by non-life insurance companies, and then divides the risks evenly. After excluding the risks held by JER, JER
implements retrocession against the government and non-life insurance companies in accordance with the burden of risks taken on by each organization.

Policyholders
Direct insurance

Application of insurance contracts (Insurance premiums)

Non-life insurance companies
Treaty A
Reinsurance(Collection andequalization of risks)

100% reinsurance(Reinsurance premiums)

Treaty A:
Earthquake Reinsurance Treaty (A)Non-life insurance companies <=> JER
Non-life insurance companies are required to conclude areinsurance contract with JER on all liabilities of earthquake
insurance contracts underwritten by them in accordance with theAct on Earthquake Insurance, and JER is obliged to take up thefull liability for this earthquake insurance without fail. In otherwords, non-life insurance companies are not allowed to selectcertain earthquake insurance contracts underwritten by themand enter into reinsurance contract. Meanwhile, JER cannot turndown an application for a reinsurance contract to cover theinsurance liabilities taken up by non-life insurance companies inaccordance with the Act on Earthquake Insurance.

JER (Japan Earthquake Reinsurance Co., Limited)
Retrocession(Distribution of risks)Treaty B

Retrocession

Retrocession(Retrocessionpremiums)(Retrocessionpremiums)

Government(Earthquake reinsurance special account)

22Retaining of risks

Treaty CJER
Non-life insurance companies

Treaty C:
Excess of loss reinsurance
JER <=> Government

Treaty B:
Earthquake Reinsurance Treaty (B)JER <=> Non-life insurance companies

JER has entered into an excess of loss
reinsurance with the government inaccordance with the Act on Earthquake
Insurance. JER retrocedes to the government
part of the insurance liability taken up under
Treaty A. The government’s indemnity limit ofreinsurance is determined with the approvalof the Diet every year.

It has been determined that a certain part ofliabilities underwritten under Treaty A is to beretroceded to non-life insurance companies.
The proportion of underwriting by each non-life
insurance company is determined mainly inaccordance with the outstanding balance ofrisks reserves for earthquake insurance.

Japan Earthquake Reinsurance Co., Ltd. Annual Report 2018

INSURANCE LIABILITIES HELD BY JER,NON-LIFE INSURANCE COMPANIES AND
THE GOVERNMENT
The limit of the total amount of insurance claims to be paid per earthquake, etc. is set inadvance. This system is designed so that, even in the event of an earthquake as devastating
as the Great Kanto Earthquake, insurance claims can be paid without problems. The current
limit of total amount of insurance claims to be paid is set at 11.3 trillion yen. This is thereinsurance scheme that shows how JER, non-life insurance companies and the government
share and limit insurance liabilities within the limit of the total amount of insurance claims
to be paid per earthquake.
Reinsurance scheme (applicable to earthquake, etc. thattake place after April 1, 2017)
Small

Amount of damage per earthquake, etc.

Large

(Payable insurance claims)
Up to
Up toUp to
Up to approx.
88.4 billion yen 126.8 billion yen 224.4 billion yen 2,268.1 billion yen

68.0 billion
88.4billion

11.3 trillion yen

50%
11,058.8 billion

19.2 48.8
billion billion

1st layer
JER

50%
3.1 billion

13.7 billion

Approx. 0.2%

3rd layer

2nd layer
Non-life insurance companies

Approx. 99.8%

The government

Liability limit
150.9 billion yen
22.3 billion yen
11,126.8 billion yen

JER
Non-life insurance companies
The government

JER pays insurance claims up to 88.4 billion yen (1st layer) per earthquake, etc. The governmentand others (non-life insurance companies and JER) share equally insurance claims for theportion exceeding 88.4 billion yen, up to 224.4 billion yen (2nd layer). The government pays
a majority of insurance claims (approximately 99.8%) for the portion exceeding 224.4 billion
yen (3rd layer). In portions of insurance claims to be paid by non-life insurance companies
in the 2nd and 3rd layers, the first part represents insurance claims to be paid by non-life
insurance companies and the second part by JER.
In this way, in cases where insurance claims per earthquake, etc. exceed a certain amount,excess liabilities are shared by the relevant organizations. This is called the excess of the loss
reinsurance.

Japan Earthquake Reinsurance Co., Ltd. Annual Report 201823

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)
Portion up to
88.4 billion yen

Portion over
88.4 billion yen,
and up to224.4 billion yen

88.4

68.0

About 2.7

About 159.1—68.0

About 1,772.9

About 1,840.9

88.4

136.0

1,775.6

2,000.0

Claims paid

A person of burden

JER and Non-life
insurance companies
The government
Total

Portion over224.4 billion yen,
and up to
2,000 billion yen

Total

The balance of risk reserves at JER and non-life insurancecompanies and the government liability reserves at the endof fiscal 201 7
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 reinsurance special account under law. Additionally, it is necessary for all investment profits fromthese accumulated liability reserves to also be accumulated as liability reserves. In the eventthat an earthquake occurs and causes losses or damages, each of JER, non-life insurancecompanies and the government pays an insurance claim according to each liability as stipulated in the reinsurance scheme by withdrawing from reserves.
JER
Non-life insurance companies
The government

303.9 billion yen
47.7 billion yen
1,520.1 billion yen

Total

1,871.8 billion yen

Note 1:	The risk reserves by the non-life insurance companies include the amount equivalent to deferred tax assets due
to tax effect accounting.
2: Government reserves will be finalized when the settlement for fiscal 2017 is approved by the Diet.

24Japan Earthquake Reinsurance Co., Ltd. Annual Report 2018