Japan’s
Insurance
Market2017

Japan’s Insurance Market 2017
ContentsPage

To Our Clients
Tomoatsu Noguchi
President and Chief Executive, The Toa Reinsurance Company, Limited

1

1. Japan’s Earthquake Insurance System: 50 Years of History and Its SignificanceTsuyoshi Suzuki
Managing Director
General Insurance Association of Japan2

2. Japan’s Individual Life Insurance Industry Confronts Major Changes in the Structure of Society
Hayanari Uchino
Managing Director, Finance & Capital Market Research Dept.
Daiwa Institute of Research Ltd.

7

3. The Evolution of Marine Analytics
David Penfold
Head of Data & Financial Analysis
Willis Re Specialty Analytics

14

4. Japan’s Earthquake Risk and Countermeasures
Takayuki Hayashi
Chief Consultant, Risk Modeling Unit, Property Risk Engineering Department
Tokio Marine & Nichido Risk Consulting Co., Ltd.

21

5. Trends in Japan’s Non-Life Insurance Industry
Underwriting & Planning Department
The Toa Reinsurance Company, Limited

29

6. Trends in Japan’s Life Insurance Industry
Life Underwriting & Planning Department
The Toa Reinsurance Company, Limited

36

Supplemental Data: Results of Japanese Major Non-Life Insurance Companies
for Fiscal 2016, Ended March 31, 2017 (Non-Consolidated Basis)

41©2017 The Toa Reinsurance Company, Limited. All rights reserved. The contents may be reproduced only with the written permission of
The Toa Reinsurance Company, Limited.

To Our Clients
It gives me great pleasure to have the opportunity to welcome you to our brochure, ‘Japan’s
Insurance Market 2017’. It is encouraging to know that over the years our brochures have been wellreceived even beyond our own industry’s boundaries as a source of useful, up-to-date information about
Japan’s insurance market, as well as contributing to a wider interest in and understanding of ourdomestic market.
During fiscal 2016, the year ended 31st March, 2017, the world economy generally remained on amoderate recovery track as the recovery of the U.S. and European economies continued despite
weakness in certain emerging economies.
With the upturn in the world economy, the Japanese economy showed signs of a recovery inexports and production. Supported by firm personal consumption, the moderate recovery of theJapanese economy also continued.
In the non-life insurance industry in Japan, mainstay automobile insurance premiums written
continued to trend upward because of the impact of the revision of products and their premium rates.
On the other hand, fire insurance premiums written trended downward primarily because of a reaction
against the last-minute demand before the revision of products in the previous fiscal year.
In the life insurance industry in Japan, reflecting the movement to curtail sales of single-premium
products, new premiums written for such insurance products trended downward.
The large amount of capital flowing from financial markets into the reinsurance market and the
profitable performance of reinsurance companies contributed to further softening of reinsurance
premium rates and conditions, and competition among reinsurers continued to intensify.
Going forward, fierce competition to win contracts is expected to continue given the abundantcapacity of the reinsurance market. In addition, the need to respond to climate change, the increasing
complexity of risks, and strengthened international regulations and frameworks is becoming more
pronounced. The business environment is expected to continue to be challenging.
By endeavoring to act as an exemplary reinsurance company, we are resolved to fulfill our mission:“Providing Peace of Mind.”
In conclusion, I hope that our brochure will provide a greater insight into the Japanese insurance
market and I would like to express my gratitude to all who kindly contributed so much time and effort
towards its making.

Tomoatsu Noguchi
President and Chief Executive
The Toa Reinsurance Company, Limited1

1.
1. Introduction

2. The Establishmentof Japan’s
Earthquake
Insurance System

Japan’s Earthquake Insurance System:
50 Years of History and Its SignificanceTsuyoshi Suzuki
Managing Director
General Insurance Association of Japan

Japan’s earthquake insurance system for the household sector1 celebrated its 50th
anniversary in 2016. A number of major earthquakes occurred during these 50 years,
but after each one Japan’s non-life insurance industry took responsibility for rebuilding
the lives of victims and reconstructing and restoring the affected regions. The 50-year
history of Japan’s earthquake insurance system is a story of how the combined wisdomof industry, government and academia first created and then improved a system thatgives peace of mind to the residents of earthquake-prone Japan. I would like to express
my deep appreciation for the contribution our predecessors made to this system and tolook back on the history and significance of Japan’s earthquake insurance system.

(1) Before the Establishment of the System
Fire insurance first became available in Japan in 1887 at a time when domestic
industry was developing during the Meiji Era. However, earthquake risk was notcovered by fire insurance even though Japan is one of the most earthquake-prone
countries in the world. The reasons impeding earthquake coverage included 1) the
difficulty of application of the law of large numbers; 2) the massive losses that occur asa result of large-scale earthquakes; and 3) the problem of adverse selection.
The need for earthquake insurance to support swift recovery from disasters was an
ongoing conversation from the Meiji Era onward. The government invited German
economics professor Dr. Paul Mayet, who in 1878 advocated a compulsory national
insurance system. The Ministry of Commerce and Industry outlined a draft of anearthquake insurance system in 1934 taking a cue from the 7.9 magnitude (M7.9)
Great Kanto Earthquake2 in 1923. No earthquake insurance system emerged during
this period, however, due to issues including problems with government funding andinsufficient public understanding of a national and compulsory insurance system.

(2) Establishment of the Earthquake Insurance System
The 7.5 magnitude Niigata Earthquake3 that occurred in June 1964 spurredpublic opinion and the discussion about creating an earthquake insurance system
made significant progress.
When the Niigata Earthquake occurred, the Finance Committee of the House ofRepresentatives was reviewing a bill to partially amend the Insurance Business Act, andadded the following supplementary resolution to the bill.
“As an earthquake-prone country, a problem with Japan’s insurance system is that it
does not pay claims arising from fire damage due to earthquakes. As part of the current
review, we should instruct non-life insurance companies to address earthquake damage,and conduct promptly a fundamental study of an earthquake insurance system, withreference to the recently implemented atomic energy insurance system, to further enhance
the non-life insurance system in Japan, a country that is prone to natural disasters.”
Such were the circumstances and context surrounding the deliberations of the
Insurance Council, which created Japan’s earthquake insurance system by enacting the Act
on Earthquake Insurance in 1966.
The earthquake insurance system was established with 1) a super long-term
perspective that involves the government managing the balance structure; 2)2The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017reinsurance underwritten by the government and maximum payment limits; and3) structures including classification by location in order to develop an insurance
product for earthquake risk, which is difficult to insure.
Initially, the maximum sum insured was 900,000 yen for dwellings and 600,000
yen for household contents. Coverage was limited to 30% of the coverage of themain policy (fire insurance) for the dwelling, with compensation only in the eventof total loss. These benefits were significantly more limited than they are today.

3. A History of
Revisions andEnhancements tothe Earthquake
Insurance System

The earthquake insurance system of today is the result of numerous revisions andenhancements based largely on experience and lessons learned from major
earthquakes and consumer feedback. In particular, enhanced product features
including increased coverage ratio and maximum sum insured were meaningful fromthe standpoint of increased compensation, and revision of the reinsurance scheme wasmeaningful in terms of the stable operation of the system.

(1) Changes in Product Features
The magnitude 7.4 Miyagi-oki Earthquake4 that occurred in June 1978 was theimpetus for changes in 1980 that introduced the half loss damage classification, changed
the dwelling coverage limit range to 30% to 50% of the fire insurance coverage, andraised the maximum sum insured to 10 million yen for dwellings and 5 million yen forhousehold contents.
The 6.7 magnitude Chibaken-Toho-oki Earthquake5 that occurred in December 1987
and the Izu Peninsula offshore earthquakes6 that occurred serially in July and August 1989
spurred the introduction of the partial loss damage category in 1991. The magnitude 7.3
Great Hanshin-Awaji Earthquake7 that occurred in January 1995 was the impetus forfurther changes in 1996 that raised payout of insurance benefits for household contentsfrom 10% to 50% of fire insurance coverage and increased the maximum sum insured tothe current 50 million yen for dwellings and 10 million yen for household contents.
Table 1: Changes in Japan’s Earthquake Insurance System (Significant Earthquakes and System Revisions)
Enforcement of Act on Earthquake Insurance
June 1, 1966

Coverage limit: 30% of Fire insurance
Maximum sum insured: Buildings – 0.9 million yen, Household contents – 0.6 million yen
Damage categories: Total loss only (Payment ratio 100%)

1964
Niigata Earthquake

July 1, 1980

Coverage limit: 30% – 50% of Fire insurance
Maximum sum insured: Buildings – 10 million yen, Household contents – 5 million yen
Damage categories: Total loss (100%), Half loss (Buildings – 50%, Household contents – 10%)1978
Miyagi-oki Earthquake

April 1, 1991

Coverage limit: 30% – 50% of Fire insurance
Maximum sum insured: Buildings – 10 million yen, Household contents – 5 million yen
Damage categories: Total loss (100%), Half loss (Buildings –50%, Household contents –10%), Partial loss (5%)

1987
Chibaken-Toho-oki Earthquake
1989
Izu Peninsula offshore earthquakes

January 1, 1996

Coverage limit: 30% – 50% of Fire insurance
Maximum sum insured: Buildings – 50 million yen, Household contents – 10 million yen
Damage categories: Total loss (100%), Half loss (50%), Partial loss (5%)

1995
Great Hanshin-Awaji
Earthquake

January 1, 2017

Coverage limit: 30% – 50% of Fire insurance
Maximum sum insured: Buildings – 50 million yen, Household contents – 10 million yen
Damage categories: Total loss (100%), Large Half loss (60%), Small Half loss (30%), Partial loss (5%)

2011Great East Japan Earthquake

Note: Underlined parts show the revised conditions.

31. Japan’s Earthquake Insurance System:
50 Years of History and Its SignificanceThe magnitude 9.0 Tohoku Pacific Ocean Earthquake,8 otherwise known as theGreat East Japan Earthquake, that occurred in March 2011 led to recent earthquake
insurance system revisions. Claims paid exceeded 1 trillion yen within three months
following the earthquake. This helped victims rebuild their lives quickly, but themassive outlays also depleted the system’s reserves. This gave rise to concerns about thesystem’s reliability and durability and debate about its viability as an insurance product.
Therefore, the Ministry of Finance formed a project team in 2012 to study issues
including the durability of the earthquake insurance system and its viability as aninsurance product. It followed up with meetings about the project team’s work tocoordinate the direction of future work associated with the system’s viability.
Japan’s earthquake insurance pays claims according to damage categories,
regardless of the actual amount of damage, to ensure quick, fair assessment. In 2012,
the system had three damage categories: total loss, paying 100%; half loss, paying
50%; and partial loss, paying 5%. Some members of the Ministry of Finance’s project
team expressed the opinion that some policyholders were dissatisfied with the current
system because claims paid for partial and half loss differed greatly based on a nominal
difference in damage.
Accordingly, the former three damage categories were further subdivided into four
categories by dividing the former half loss category into the Large Half loss category
paying 60% and the Small Half loss category paying 30%. This approach minimized
the impact on quick damage assessment while aligning the claims payment ratio withactual damage.

(2) Changes to the Reinsurance Scheme (Division of Responsibility
between the Public and Private Sectors and Limit on Total
Amount of Insurance Claims to be Paid)
It is difficult to apply the law of large numbers, which is the basic premise of any
insurance system, for earthquake risk. The government therefore underwrites reinsurance
to prepare for the payment of earthquake insurance claims in the future, andaccumulates reinsurance premiums as a policy reserve in the Earthquake Reinsurance
Special Account. Private insurance companies also underwrite a portion of thereinsurance of earthquake insurance to an extent that will not interfere with the paymentof claims from other classes of business, and accumulate the reinsurance premiums in areserve. However, the government’s ability to assume liabilities has limits, so the system
has a predetermined cap on the total amount of insurance claims to be paid per
earthquake (the total payment limit).
The total payment limit was originally 300 billion yen when the system wasestablished. It has been raised periodically in earthquake insurance system enhancementsin accordance with increased risk. Earthquake insurance penetration increased rapidly
after the Great Hanshin-Awaji Earthquake. Claims paid for this earthquake depleted thecontingency reserves of private insurance companies, but the insurance liability rose
because the total payment limit increased. Consequently, the contingency reserve deficits
of private insurance companies expanded. Given these circumstances, contingency
reserves became the criterion for private insurance company liability.
Subsequently, payment of claims associated with the Great East Japan Earthquakeand other factors caused the contingency reserve deficit of private insurance companies
4The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

to expand to 780 billion yen. Private insurance company liability did not automaticallydecrease if contingency reserves for earthquake insurance declined due to payment ofclaims. This mechanism exposed private insurance companies to the risk of massive
losses should a series of earthquakes occur in quick succession.
The Ministry of Finance’s project team addressed this situation in its report, whichplaced priority on reviewing system durability. Accordingly, the 2013 review of thereinsurance scheme set the liability per earthquake of private insurance companies below
their contingency reserves, and introduced a system that gives private insurancecompanies capacity to pay claims even if a massive earthquake follows one that has
already reduced contingency reserves. This review contributed significantly to the
durability and reliability of the earthquake insurance system because it resolved the issue
of private company liability in excess of contingency reserves and eliminated excessive
private company liability in the event of a series of earthquakes.
The total payment limit has been 11.3 trillion yen since April 2016.
Table 2: Public and Private Liability and Total Payment Limit (As of April 2017)
Small

Insurance claims per earthquake

88.4 billion yen

Large
11.3 trillion yen

224.4 billion yen

68.0 billion yen

50%

88.4
billion yen

99.8%

11.0588 trillion yen
68.0 billion yen

50%

16.8 billion yen
1st layer

2nd layer

Liability limits

Private sector

173.2 billion yen

Government

11.1268 trillion yen

Total

4. The Kumamoto
Earthquake andthe Earthquake
Insurance System

0.2%

3rd layer

11.3 trillion yen

On April 14, 2016, a magnitude 6.5 earthquake (foreshock) occurred in the
Kumamoto area, followed by an April 16 second earthquake (main shock) with thesame hypocenter in the Kumamoto area, with a magnitude of 7.3.9
Non-life insurance companies collaborated to pay claims so that victims
could rebuild their lives quickly. The insurance companies completed paymentof claims totaling 301.9 billion yen as of June 13, 2016, about two months after
the earthquakes. Payment of claims subsequently increased to 377.3 billion yen
as of March 31, 2017, the second largest sum of claims paid after the Great East
Japan Earthquake.

5

1. Japan’s Earthquake Insurance System:
50 Years of History and Its Significance

Table 3: Major Earthquakes and Earthquake Insurance Claims Paid
Earthquake

Date of Occurrence

Claims Paid (Billions of yen)

1

Great East Japan Earthquake

March 11, 2011

1,270.6

2

Kumamoto Earthquake

April 14, 2016

377.3

3

Great Hanshin-Awaji Earthquake

January 17, 1995

78.3

4

Miyagi-oki Earthquake

April 7, 2011

32.4

5

Western Fukuoka-oki Earthquake

March 20, 2005

17.0

Note: Insurance claims paid for the Kumamoto Earthquake were surveyed by the General Insurance
Association of Japan (as of March 31, 2017). Regarding other earthquakes, the figures are basedon the survey of the Japan Earthquake Reinsurance Co., Ltd. (as of March 31, 2016). Insurance
claims paid are rounded to the nearest hundred million yen.

5. Conclusion

The earthquake insurance system has helped many victims rebuild their lives and has
become stronger and more stable by employing lessons learned. Increasing the penetration
rate is essential for the system to work more effectively.
Currently, the earthquake insurance system has a household penetration rate of
29.5%10 and the ratio of fire insurance policies with an earthquake rider attached11 is
60.2%. Potential disasters such as an earthquake beneath metropolitan Tokyo or a massive
earthquake in the Nankai Trough are serious concerns. The General Insurance Associationof Japan will contribute to secure, safe lives for the people of Japan by further promoting
the penetration of earthquake insurance to help disaster victims rebuild their lives.
Notes: 1. In this document, “earthquake insurance system” refers to household earthquake insurance.
Household earthquake insurance covers dwellings (specifically for residential or partialresidential use) and fixtures and fittings (household contents). It does not coverearthquake-related losses in the corporate sector.
2. This earthquake resulted in over 105,000 people dead or missing, over 211,000 buildings
completely or partially destroyed, and more than 212,000 residences destroyed by fire.
3. This earthquake resulted in 26 people dead, 447 people injured, 1,960 buildings
completely destroyed, 6,640 buildings partially destroyed, 15,297 buildings flooded, and67,825 buildings damaged.
4. This earthquake resulted in 28 people dead or missing, 1,183 buildings completely
destroyed, 5,574 buildings partially destroyed, and numerous buildings damaged.
5. This earthquake completely destroyed 10 buildings and damaged over 60,000 buildings.
6. This earthquake damaged a large number of buildings.
7. This earthquake resulted in 6,437 people dead or missing, over 40,000 people injured, over
240,000 buildings completely or partially destroyed, and over 6,000 buildings completely
or partially destroyed by fire.
8. According to the Fire and Disaster Management Agency, as of September 1, 2016, thisearthquake resulted in 19,475 people dead, 2,587 people missing, 6,221 people injured,
121,744 residential buildings completely destroyed, and more than 1,158,000 buildings
partially destroyed, damaged, or damaged by above- or below-floor flooding.
9. According to the Fire and Disaster Management Agency, as of December 27, 2016, thisseries of earthquakes caused damages primarily in Kumamoto Prefecture and resulted in
178 people dead, 2,699 people injured, 8,388 residential buildings completely destroyed,
and more than 187,000 buildings partially destroyed or damaged.
10. Figure obtained by dividing the number of earthquake insurance policies at the end of2015 by the number of households as per the Basic Resident Register as of January 1,
2016. Source: General Insurance Rating Organization of Japan materials.
11. Percentage of residential property fire insurance policies with an earthquake insurance rider
attached during fiscal 2015. Source: General Insurance Rating Organization of Japan
materials.

6Japan’s Individual Life Insurance Industry Confronts
Major Changes in the Structure of Society

2.

Hayanari Uchino
Managing Director, Finance & Capital Market Research Dept.
Daiwa Institute of Research Ltd.

Reflecting the peak in the working population ratio in Japan in fiscal 1997, theindividual life insurance market in Japan peaked at 1,496 trillion yen in fiscal 1996 on
the basis of total amount of business in force, but then decreased by about 40% to 859
trillion yen in fiscal 2015 (Figure 1). The working population ratio and total amount ofbusiness in force are highly correlated. The working population ratio is forecast to
remain at current levels until fiscal 2030, so total amount of business in force is not likely
to decrease significantly. Subsequently, the working population ratio is forecast to
decrease again to 50% or less in fiscal 2038, so total amount of business in force isforecast to fall to the level of fiscal 1988, or about 30 years before fiscal 2017. The longterm outlook is that opportunities to underwrite risk in the life insurance market will
decrease in a changing operating environment because individual life insurance products,
which are currently predominant for life insurers, will no longer sell at the same levels.

1. Market Size
(In-Force Policy
Basis) Contracting as
Working Population
Ratio Decreases

Figure 1: Trends in Total Amount of Business In Force of Individual Life Insurance and the Working Population Ratio(Trillions of yen)
1,600

53.5%
1,496

Forecast to be less than 50% in ﬁscal 2038

1,400

53%

1,200

52%

1,000

51.0%

844
800

50%

50.4%

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

48%

1984

48.4%

1983

49%

1982

384

1981

0

49.9%

1980

200

51%

859

744

600
400

54%

47%

(Fiscal year)
Total amount of business in force

Working population ratio (right scale)

Source: Created by Daiwa Institute of Research using data from the National Institute of Population and Social Security Research, Statistics
Bureau of the Ministry of Internal Affairs and Communications, and the Life Insurance Association of Japan.

However, Figure 2 (left) shows the current situation. The total amount ofbusiness in force increased slightly in fiscal 2015 after decreasing for more than 10
years. This was due to large, ongoing increases in the number of policies in force andthe slowing decrease in average sum insured.
Over the past several years, the number of policies has trended upward while theaverage sum insured (death benefit per policy) has trended downward in individual
insurance (excluding individual annuity insurance) as a whole. Thus, insurance
products have become simple and discrete and the sum insured per policy has
decreased. Specifically, the number of policies has increased supported by the higher
demand for health insurance such as medical and cancer insurance, and the trend
toward policyholders purchasing individual products. These products have been
decoupled and combine only the desired benefits from premade comprehensive large
packages. At the same time, the structure of the market has evolved, with average sum
insured decreasing due to weakness in sales of death protection products.

7

2. Japan’s Individual Life Insurance Industry Confronts
Major Changes in the Structure of Society

Figure 2: Trends in Sum Insured and Number of Individual Life Insurance Policies in Force (Left) and Breakdown of
Change in Sum Insured of Policies in Force (Right)(Millions of policies)
170(Trillions of yen)
1,200
Sum insured (left scale)
1,150

Policies (right scale)

1,153

160.1

160

(Trillions of yen)
80
Change in average sum insured (Breakdown)
Change in number of policies (Breakdown)
Change in sum insured in force (YoY)

60

1,112
151.7

1,100
1,071
1,026

20
140

136.0

0
127.2

-20

(Fiscal year)

2015

2014

2013

2012

-80

2011

100

2010

-60

2009

-40

110

2008

2015

2014

865 862 858 857 859

2013

2010

2009

2008

2007

2006

2005

2004

800

2003

850 109.3 109.6 110.0 109.8 110.0

880

2012

117.1
113.0

2011

900

120

2007

121.9
903

2006

940

950

130

2005

981

2004

1,000

40

2003

1,050

150

143.9

(Fiscal year)

Source: Created by Daiwa Institute of Research from Life Insurance Business in Japan, the Life Insurance Association of Japan

2. Diversification ofIndividual Life
Insurance Needs:
Response to New Life
Insurance Risk

8

The future expansion of the individual life insurance market is contingent upon
the ability of life insurance companies to address diversifying life insurance needs andidentify potential needs. Generally, however, the diversification of individual life
insurance needs really means the compartmentalization of needs, in that consumers
who understand the risks to themselves that life insurance protects against, such asmortality risk or longevity risk, actively select the products that correspond to risks
relevant to them. Apparently, however, the number of consumers who actively selectinsurance products relevant to their needs has not increased significantly. What thenexplains this phenomenon of a market that is expanding due to diversification?
One explanation is that the elderly demographic is increasing even though thetotal population is decreasing. Deaths exceeded births in 2005, so the total population
started to decrease, and the percentage of people age 60 or older has continued toincrease compared to the total population decrease. This demographic may be moreconcerned with longevity risk than with mortality risk, which would explain growthfrom life insurance products geared to seniors. In addition, products geared to seniors
such as single-premium whole life policies have relatively high premiums, which may
explain growth in premium income of life insurance companies.
Another explanation is that the number of households is trending upward eventhough the population is decreasing. The primary factor behind this trend is the risein the number of one-person households and nuclear family households. Yet thebenefits of this expanding base of needs that relates to the growth in the number ofhouseholds will not be available for long, because the number of households is
forecast to peak at 53.1 million in 2020 and then start to decrease.
The number of female policyholders is also increasing. Since fiscal 2010, thenumber of female policyholders has generally been greater than the number of malepolicyholders on a new business basis (Figure 3). This trend is driven by the changing
social environment as illustrated by greater diversity in family composition, including

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

the increase in the number of households headed by a single mother, the trend toward
later marriage and the growing number of working women, as indicated by theincrease in the number of households mentioned in the previous paragraph.
Figure 3: Policyholders by Gender on a New Business Basis(Trillions of yen)
120

(Millions of policies)
9

Male (sum insured, left scale)
Female (sum insured, left scale)

8100

Male (policies, right scale)
Female (policies, right scale)

2015

2014

2013

2012

2011

3
2010

0
2009

4

2008

20

2007

5

2006

40

2005

6

2004

60

2003

7

2002

80

(Fiscal year)

Source: Created by Daiwa Institute of Research from Life Insurance Business in Japan, the Life Insurance
Association of Japan

These factors suggest the hypothesis that the diversification of needs today is an
expansion in latent needs brought about by changes in the composition of Japan’s
population and the social environment along with the increase in the number of households.
Ongoing development of advanced fintech will enable the analysis of massive
amounts of medical claims data and the acquisition and analysis of detailed data
through the use of sensors for individuals. This in turn will enable the developmentof life insurance products attuned to diverse latent needs. Currently, the Act on theProtection of Personal Information restricts the use of information by privatecompanies, including medical claims data (medical payment statements) andmedical examination data. However, Japanese life insurance companies areenergetically turning to fintech, using artificial intelligence (AI) to calculate healthy
life expectancy for individuals, using available databases, in order to sell life
insurance products with variable premiums.

3. Lower Consumer
Income Is Reducing
Premiums

In addition to the above review of the number of life insurance policies, I would
like to analyze the relationship between the premiums policyholders pay to life
insurance companies and consumer household income. Real consumer income anddisposable consumer income decreased after the financial crisis of 2008 and havebasically remained flat since then, according to the Family Income and Expenditure
Survey of the Ministry of Internal Affairs and Communications. However, the ratioof social insurance premiums to real income has increased while the ratio ofpremiums paid, including non-life insurance premiums, to real income has
consistently decreased (Figure 4).
92. Japan’s Individual Life Insurance Industry Confronts
Major Changes in the Structure of Society

The burden of social insurance premiums will inevitably continue to increase due
to structural issues if the birthrate continues to decline and society continues to age.
The impact on premiums paid will be significant, suggesting that conditions willremain challenging for life insurance companies, both in the amount of premiumincome and in terms of the number of life insurance policies as discussed above.
Figure 4: Ratio of Social Insurance Premiums and Life and Non-Life Insurance Premiums to Monthly
Average Real Household Income(Millions of yen)
0.6

12%
11%

0.5

10%
0.4
9%
0.3

8%
7%

0.2

6%
0.1
5%
4%

2003

2004

2005

2006

2007

2008

2009
2010
(Fiscal year)

2011

2012

Real income (right scale)

Ratio of social insurance premiums to real income (left scale)

Disposable income (right scale)

Ratio of life and non-life insurance premiums to real income (left scale)

2013

2014

2015

2016

0

Notes: 1. Refers to households in which the head of the household gains a salary from a company, public office, school, or other source.
2. Real income is the sum of cash income of all household members. Disposable income is real income less non-consumption expenditures
including taxes and social insurance premiums. Insurance premiums include individual annuity insurance premiums and corporate pension
plan contributions.
Source: Created by Daiwa Institute of Research from Statistics Bureau of the Ministry of Internal Affairs and Communications
Family Income and Expenditure Survey

4. Changes in Underwriting
Risk: Increasing Need forLongevity Risk Insurance,in particular Medical
Insurance

10

As discussed above, it appears consumer needs are transitioning from death
benefit cover to longevity cover because the proportion of people age 60 and overis increasing.
Every three years, the Japan Institute of Life Insurance conducts its National
Survey on Life Insurance, which includes investigations of the reasons consumers
purchase life insurance (Figure 5). Death benefit was the reason for more than 60
percent of people who purchased life insurance in the fiscal 2000 survey. In thefiscal 2006 survey, however, the ranking of purpose for policyholders whopurchased insurance for medical and hospitalization expenses, and those whopurchased insurance for death benefit to protect bereaved family lifestyle inemergencies had reversed. Rising patient burden for medical expenses amid
deteriorating health insurance finances backed this shift. In 2002, revisions to the
Health Insurance Act and other regulations increased the health insurance burden(expenses paid to hospitals) of employees to 30% from 10%, and the system of
fixed health insurance expenses for the elderly was revised to increase theirburden. Regarding the reason for purchasing insurance, the rising public health

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

insurance burden is believed to be the reason behind the change from death
benefit to medical and hospitalization expense coverage.
The number of policyholders who purchased insurance as a savings vehicle
decreased significantly to 1.8% in the fiscal 2015 survey, from 6.7% in the fiscal
2012 survey. The incentive for policyholders to purchase insurance for savings andinvestment has apparently decreased, because the expected interest rate has fallen
and premiums have increased.
Figure 5: Survey of Reasons Policyholders Purchased Insurance
2.4 2.5
Fiscal 2000
(policies purchased 1995-2000)

60.3

11.1

Fiscal 2003
(policies purchased 1998-2003)

60.5

12.5

54.6

3.3 3.9

24.4

12.2

19.4

8.9

11.3

2.9
56.3

1.8 2.7

4.4
2.6

Fiscal 2006
(policies purchased 2001-2006)

54.4

12.8

59.5

3.3

Fiscal 2009(policies purchased 2004-2009)

53.8

13.1

59.7

2.8

Fiscal 2012(policies purchased 2007-2012)

51.7

13.7

59.6

3.1

Fiscal 2015
(policies purchased 2010-2015)

53.1

13.0

58.5

2.9

7.9

10.9

7.1

1.9
14.1

7.9

7.2 4.9 4.7

2.7

1.9
12.0

8.2

9.2

1.9

4.6 4.1
1.4

8.8

8.6

7.7

7.7

8.6

1.9

6.7 4.0

1.8 0.4
7.9
1.2

(%)
Protect bereaved family lifestyle in emergencies

Funeral expenses in an emergency

Medical and hospitalization expenses

Prepare against disasters and traﬃc accidents

Prepare ﬁnancially for old age

Prepare for children’s education expenses and marriage

Nursing care expenses

Repay loans or other liabilities in an emergency

Savings vehicle

Reduce taxes

OthersNote: Survey of general households with two or more members. Percentages do not add up to 100% because multiple answers are allowed.
Source: Created by Daiwa Institute of Research from National Survey on Life Insurance, Japan Institute of Life Insurance

5. Increased Sales
Channel Access
Options

The Japan Institute of Life Insurance also looked at the channels used topurchase life insurance in the National Survey on Life Insurance mentioned earlier(Figure 6). Sales personnel of life insurance companies were the sales channel fornearly 80% of policyholders’ life insurance product purchases from the mid-1990s
through fiscal 2000. Sales channels subsequently became more diverse, however,with that figure decreasing to less than 70% in the fiscal 2006 survey and less than
60% in the fiscal 2015 survey. Insurance agencies stand out as a sales channel thatis steadily gaining share. This channel’s share rose substantially to 13.7% in thefiscal 2015 survey from 8.8% in the fiscal 2000 survey. In addition, all restrictions
on bancassurance, insurance products sold by banks and securities companies,
were lifted in December 2007, and this channel’s share increased to 5.5% in themost recent fiscal 2015 survey from 1.3% in the fiscal 2000 survey.
Of particular note, the Internet channel surged to 4.5% in the fiscal 2012
survey from 0.2% in the fiscal 2000 survey, but then plummeted to 2.2% in thefiscal 2015 survey. The Internet was expected to be an excellent sales channel
because web-based life insurance companies had been newly launched, but thischannel has not received consumer support.
As discussed above, life insurance company sales personnel are still responsible
for nearly 60% of insurance purchases. Sales personnel are apparently a highly
appropriate sales channel given the unique characteristics of life insurance products.
11

2. Japan’s Individual Life Insurance Industry Confronts
Major Changes in the Structure of Society

Figure 6: Insurance Policy Sales Channels
0.0
Fiscal 2000
(Policies purchased 1995-2000)

77.6

Fiscal 2003
(Policies purchased 1998-2003)

2.9 0.2 3.1 1.3

71.8

Fiscal 2006
(Policies purchased 2001-2006)

2.7 0.8 4.9

66.3

2.1 1.8

7.3

Fiscal 2009
(Policies purchased 2004-2009)68.1

1.9 2.9

Fiscal 2012
(Policies purchased 2007-2012)

68.2

2.5

Fiscal 2015
(Policies purchased 2010-2015)
0%

59.4
10%

20%

Insurance company sales personnel
Banks and securities companies

30%

3.1 2.2 3.4 3.0
40%

Insurance company sales counters
Insurance agencies

50%

60%
Internet

Workplace and labor unions

1.7

3.3

5.7

4.5

70%

6.7

4.3 2.1 4.3

5.7

6.4

7.0

2.9 2.6

5.5

8.8

5.2

6.4

Television, newspapers, magazines, etc.

7.0

3.0

6.9

13.7
80%

4.7

6.2

3.2

4.0

4.8

4.1

90%

100%

Post oﬃces

Others (including unknown)

Source: Created by Daiwa Institute of Research from National Survey on Life Insurance, Japan Institute of Life Insurance

6. Life Insurance
Company
Strategies andTheir Impact on
Earnings

12

The management type of life insurance companies is essentially stock-typemanagement. As the scale of total amount of business in force expands, core profit
increases and therefore the revenue base becomes stable due to the nature of life
insurance company businesses. This paper classifies insurance companies into fivecategories 1 – traditional life insurance companies, insurance companies withstrong medical and health insurance products, direct sales insurance companies
through the Internet, Japan Post Insurance Co., Ltd., and other insurancecompanies – and analyzes their core profits. Excluding direct sales insurancecompanies through the Internet, total core profits have been relatively stable,
because mortality (morbidity) gains have been a buffer against the negative spreadthat results from incidents such as the financial crisis of 2008 (Figure 7).
Stable mortality (morbidity) gains are therefore essential for improving
corporate value, because they are the basis for core profits for life insurancecompanies. At present, growth in medical and health insurance policies has
enabled companies to secure morbidity gains that have compensated for lower
mortality gains, due to the decrease in total amount of business in force. However,new policy trends indicate that the decrease in the amount of death benefit
policies in force will continue in the future and the decline in mortality gains is
unavoidable. Moreover, new policy trends in the medical and health insurance
sector indicate that strong growth in the future is unlikely. Downward pressure on
mortality (morbidity) gains is therefore expected to continue in the future. Life
insurance companies must therefore reduce expenses2 even more than they have,in order to compensate for the projected decrease in mortality (morbidity) gains
and ensure administrative expense margins. At the same time, the operating
environment is changing, and the approach life insurance companies use fortaking asset management risks and setting the expected interest rate could alter

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

positive spreads, which would be a factor altering the corporate value of life
insurance companies. More than ever, Japan’s life insurance companies will needto devise various strategies, including business model reform and restructuringthat go beyond the industry, as well as expanding global business operations.
Figure 7: Core Profits by Category for Japan’s Life Insurance Companies(%)(Trillions of yen)
4.0

100

3.5

85

3.0

70

2.5
55
2.0
40
1.5
25

1.0

10
0

0.5

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0.0

(Fiscal year)
Traditional life insurance companies1

Insurance companies with strong medical and health insurance products1

Direct sales insurance companies through the Internet1
Other insurance companies1

Japan Post Insurance1(Total)Source: Created by Daiwa Institute of Research from National Survey on Life Insurance, Japan Instituteof Life Insurance
Notes: 1. This analysis categorizes 41 life insurance companies (2016) into five categories by business typeand characteristics:
1) Nine traditional life insurance companies (Asahi, Sumitomo, Dai-ichi, Daido, Taiyo, Nippon(Nissay), Fukoku, Mitsui, Meiji Yasuda );2) Ten life insurance companies with strong medical and health insurance products (AXA,
American Family (Aflac), Sompo Japan Nipponkoa Himawari, ORIX, Zurich, Tokio Marine& Nichido, AIG Fuji, Mitsui Sumitomo Aioi, Met Life, Medicare);3) Three direct sales insurance companies through the Internet (AXA Direct, Neo First (former
Sompo Japan DIY), Lifenet);
4) Japan Post Insurance; and5) Eighteen other life insurance companies (NN – formerly ING Life, Allianz, Cardif, Crédit
Agricole, Gibraltar, Sony, AEGON Sony, Dai-ichi Frontier, T&D Financial, SBI – formerly
PCA, Fukokushinrai, Prudential, Prudential Gibraltar Financial, MassMutual, Manulife, Mitsui
Sumitomo Primary, Midori, Rakuten).
Note: Company names are abbreviated and as of May 16, 2017. Data for merged companies are
retroactive totals for convenience. Reference: Toyo Keizai Weekly, Special edition for Life
Insurance and Non-life Insurance.
2. Expenses including those required to sell new insurance policies, to administer policies inforce and for procedures related to claims payment.

13

3.

The Evolution of Marine Analytics
David Penfold
Head of Data & Financial Analysis
Willis Re Specialty Analytics

As one of the oldest forms of insurance, marine insurance has seen manychanges in the world around it. It has pressed ahead, steadfast and focussed on thestandards and practices established by generations of underwriters, steering througha multitude of underwriting cycles. Whilst the emergence of natural catastrophe
modelling firms such as RMS, AIR and RQE have dramatically shifted thelandscape in the property insurance market, their impact in the marine environmenthas been much less significant to date. However, as models become more prevalent
in the operation of insurance companies — and recent loss activity reminds us of thepotential for the unexpected to destabilise broader business strategies — focus isbeginning to turn towards the relative analytical infancy of marine insurance as anarea ripe for expansion.
The establishment of catastrophe modelling in the underwriting of property
insurance has created a framework for capturing key pieces of information at the
point of underwriting the original risk. The rigor in which the data is captured
provides an additional element of knowledge of the underlying risk over and above
the probabilistic loss estimates a catastrophe model will generate. Aggregated sum
insured in key regions and movements in annual figures provide high-level
management information to assess underwriting at a basic, and yet informative, level.
Until now the challenges facing marine insurers have prevented a significant
foray into the modelling arena. These challenges include considerations such as: thecomplexity of the coverages offered (or indeed excluded) under the original policy;
unstructured data capture and storage; fluidity of exposure movement and unknown
concentrations; and limited extreme loss activity with consistent characteristics, toname but a few.
Actuarial and catastrophe modelling teams have developed techniques andapproaches to create pricing and capital models for their own internal use, enabling
integration of marine exposures into the models already established for the more
capital intensive property classes. Unlike the property classes, however, these marine
models rely upon subjective opinion and interaction with the underwriting teams as
much as they do upon the core data provided. As a result, a standardised
quantification of marine risk has not been established and as such, pricing in thereinsurance market represents a relatively volatile exercise where consensus of a fair
price may require significant (and potentially repetitive) discussion. This has
restricted the engagement with Insurance Linked Security (“ILS”) markets, withtrading in the secondary markets being almost non-existent.
However, looking forward there are a number of positive developments thathave the potential to enable marine models to make big leaps forward.
Whilst the underlying marine hull insurance policy has not dramaticallychanged in concept, the design and engineering associated with the insured risk (thevessel) has adapted to the economic and environmental pressures that the marine
market has faced. In a similar fashion, information capture relating to the vesselsthat make up the world fleet has become standardised with companies such as IHS
Fairplay™ and Clarksons Research™ providing on-line portals recording core pieces
of information that may support the underwriting of a vessel or fleet. This

14

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

information extends beyond gross tonnage (“GT”), vessel type, and year of build, toinclude additional information such as flag, equipment, yard of build, and casualty
activity. Whilst an insurance loss is not explicitly recorded within these casualty
listings, the circumstances surrounding the incident provide a strong foundation
upon which underlying trends can be investigated.
Figure 1: Clarksons World Fleet Register

Source: Clarkson Research

In addition to recording the underlying vessel characteristics, the live movementof vessels can now be captured in on-line sites such as MarineTraffic.com,
VesselFinder.com, IHS Sea-web and Clarksons SeaNet. These sites rely on thetransmitted on-board Automatic Identification System (“AIS”) information being
captured by land based receivers and satellites, with a regular stream of positional
information being fed into them. As the number of vessels that must have their AIS
transmitters turned on increases due the legal requirements, the global capture ofvessel movements will also expand. Some platforms go so far as to provide thehistoric movement of vessels, which can be exported, allowing underwriters toestablish more extensive patterns of behaviour, thereby introducing new exposure
measurements to supplement the traditional rating factors such as GT or age.
Numbers of port calls or vessel miles can then become potentially credible measures,provided the underlying data is consistently recorded and utilised.

15

3. The Evolution of Marine Analytics

Figure 2: Real-time Vessel Movement (Centred on Japan)

Source: Clarksons SeaNet

The impact of satellite imagery has also revolutionised how the aggregation of
exposures can be managed and visualised. Tools such as SpatialKey provide usefulmeans by which deterministic scenarios can be overlaid against insured exposures andassist in reporting the potential impact post event, which can be time critical.
Figure 3 provides a visualisation of exposures captured in the recent Industry
Exposure Database (“IED”) created by RMS as part of their review of marine exposures in version 16 of their RiskLink model for the Port of Tokyo (part of the 150
global ports captured in the RMS IED).

16

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

Figure 3: Port of Tokyo RMS IED Visualised through SpatialKey

Source: RMS, SpatialKey, Willis Re

As part of this review, RMS extended the set of exposures that can be captured
within their model with new vulnerability distributions associated with this moregranular exposure resolution. Previously, marine cargo exposure was coded as “warehouse
contents” with a singular distribution describing the loss potential for this generic
exposure. Analysts would then assess the validity of the figures produced against actual
loss experience and scale accordingly. The impact of the more extensive set of exposures
can be seen in the Willis Re model sensitivity analysis of nominal exposure levels foreach exposure code available in the updated RMS model (Figure 4 below). The
previous generic coding is illustrated in the exhibit by the thick black line, compared tothe other exposure types available in the model, as illustrated by the other curved lines.

173. The Evolution of Marine Analytics

Figure 4: RMS RiskLink v16 Additional Exposure Vulnerability

Source: RMS, Willis Re Model Sensitivity Analysis (Port of Nagoya)

The underlying peril model itself has not changed; merely different exposures andassociated damage functions have been incorporated within it, meaning that thepotential gaps previously present in the model’s event set — such as the storm surge
associated with a windstorm in Japan — still remain. However, this represents a positive
step forward. It should be noted that AIR established marine-specific exposure for
their Japanese models in 2008.
Similarly, the peril coverage captured within the vendor models is supplemented byacademic studies such as the tsunami risk assessment, which was a collaborative effort
between Tohoku University and the Willis Research Network conducted in 2013.
18

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

Figure 5: Japan Tsunami Risk Visualised through SpatialKey

Source: Tohoku University, Willlis Research Network, SpatialKey

The fact remains, however, that the quantification of the level of risk still relies
heavily on the calibre of the exposure information captured. Storage locations, withinsured limits and capacity utilisation estimates, only tell a portion of the story.
Transient exposures (those awaiting trans-shipment or removal by road or rail)
represent a challenging element that is difficult to tie down when considering exposurein or around a port facility. Historical loss records with splits between losses fromexposure in known storage and those from incidental build-up will provide a betterview of the miss factor we see in modelled catastrophe losses. However, obtaining thisinformation has proved challenging when trying to back-test historical events againstmodelled results, given the relative infrequency of events and the global reach of an
insured risk.
Following Superstorm Sandy, Willis Re canvassed 6 large multinational marine
insurance companies to assess how their cargo event loss split down into theunderlying risk losses. Whilst this did not explicitly answer the question of transient
exposure vs static, it did provide useful insight into how an event loss is driven bylarge individual risk losses. In Figure 6 below each bar represents the gross loss ratio(% cargo premium income) of the top 15 risk losses (with the top bar representing
the aggregate loss from the remaining risks outside the top 15).
On average approximately 80% of the event loss for each company was producedby 8 individual risks, which further highlights the potential for large marine insurancecompanies to experience mixed fortunes in large market events.

19

3. The Evolution of Marine Analytics

Figure 6: Superstorm Sandy – Individual Risk Loss

Source: Willis Re Superstorm Sandy Cargo Loss Ratio for 6 insurance companies

It is interesting to note that the ILS market has also turned its attention tomarine and energy exposure, with PCS Global Marine and Energy™ a new nonelemental industry insured loss index. In addition to those non-elemental event losses
stemming from hull and cargo insured risk, this index encompasses both Protection
and Indemnity and Offshore Energy classes of business, which have not beenaddressed explicitly in this report.
Looking ahead, as more and more information becomes digital in nature,applications that can trawl through the mass of data — picking out the pertinent
pieces, sanitising, standardising, and storing this information as it goes — will
inevitably improve our understanding of transient exposures. Technologicaladvancement means that not only how data is captured is changing but also the“who” and “what” is changing too. The Internet of Things and Smart Ships have thepotential to revolutionise what data can be accessed, to better assess risk. Whilst they
are not necessarily in place today, they are certainly on the horizon.
The contents herein are provided for informational purposes only and do not constituteand should not be construed as professional advice. Any and all examples used herein are
for illustrative purposes only, are purely hypothetical in nature, and offered merely todescribe concepts or ideas. They are not offered as solutions to produce specific results andare not to be relied upon. The reader is cautioned to consult independent professional
advisors of his/her choice and formulate independent conclusions and opinions regarding
the subject matter discussed herein. Willis Towers Watson is not responsible for the accuracy
or completeness of the contents herein and expressly disclaims any responsibility or liability
for the reader’s application of any of the contents herein to any analysis or other matter, nor
do the contents herein guarantee, and should not be construed to guarantee, any particular
result or outcome.

20

4.
1. Introduction

2. Earthquake
Damage andCountermeasures inJapan in Recent Years

Japan’s Earthquake Risk and Countermeasures
Takayuki Hayashi
Chief Consultant, Risk Modeling Unit, Property Risk Engineering Department
Tokio Marine & Nichido Risk Consulting Co., Ltd.

Many earthquake disasters have occurred in Japan in recent years, including the
Tohoku Earthquake off the Pacific coast (The 2011 Great East Japan Earthquake),
which left both damage and lessons to be learned. Today, many regions are engaged indisaster prevention and mitigation activities as a result of these disasters. This paper
will explain recent earthquake damage and countermeasures in Japan. It will also
cover the current state of earthquake risk in Japan and damage expected from futuremajor earthquakes.

Japan is earthquake prone. About 10% of earthquakes worldwide each year
occur in or near Japan. While only large earthquakes cause significant damage, therecent frequency of these larger earthquakes seems to be every few years, and they
have thus brought about major changes to Japanese society.
The Southern Hyogo Prefecture Earthquake (Great Hanshin-Awaji
Earthquake) that occurred in Kobe in 1995 was the first to bring about such majorchanges. Early in the morning of January 15, 1995, a magnitude 7.3 (M7.3)
earthquake occurred within the Rokko-Awaji fault zone. The full extent of thedamage was not immediately apparent because the earthquake struck while the area
was still in darkness, and the earthquake observation network and seismic intensity
bulletin were not as well developed as they are today. The rising sun revealed theseriousness of the damage, stunning the country as buildings, expressways andother structures had collapsed and fires raged throughout the city. The fault thatcaused the earthquake ran through the center of Kobe City. Consequently, massive
damage occurred because the strong ground motion hit the area in which many
people and assets were concentrated. This was the first earthquake disaster to strikea big city in modern-day Japan. Unlike the well-recognized risks of an earthquake
in the Tokai region or under metropolitan Tokyo, a major earthquake occurring ina large city in the Kinki region was not considered a concern. This earthquake
disaster dramatically changed the way Japan thinks about disaster prevention, withoutcomes that have included the revision and enforcement of various disasterprevention laws. Complete disaster prevention is not possible, but Japan has
embraced a mindset of disaster mitigation that can reduce the magnitude ofdamage. Japan now recognizes that earthquake disasters can occur anywhere in the
country, and is promoting countermeasures. The government has established a
network of seismic intensity meters throughout the country. In the event of anearthquake, these meters immediately identify the areas where large tremors haveoccurred and where relief activities need to be carried out. Other multiple measures
include the establishment of the Headquarters for Earthquake Research Promotion
within the government through collaboration between several ministries to conduct
strategic earthquake research for disaster prevention and mitigation. These
measures are the cornerstone of current earthquake disaster prevention andmitigation strategies.
Subsequent to the Great Hanshin-Awaji Earthquake, several medium-scale
earthquake disasters occurred, including the Tokachi-oki Earthquake in 2003, theNiigata Chuetsu Earthquake in 2004 and the Niigata Chuetsu-oki Earthquake in21

4. Japan’s Earthquake Risk and Countermeasures2007. However, earthquake countermeasures introduced after 1995 proved
effective in containing the damage, and restoration and reconstruction was swift.
Japan felt that it was fully employing the lessons of the 1995 Great Hanshin-Awaji
Earthquake and was making good progress in countering potential major
earthquakes in the future.
Then came the Great East Japan Earthquake off the Pacific coast on March 11,2011 at 2:46 pm. M7-class earthquakes with their hypocenter off the coast of
Miyagi Prefecture had been occurring about every 40 years. Numerous
countermeasures against the likelihood of such earthquakes were therefore alreadybeing implemented in areas near the hypocenter. However, the M9 earthquake that
actually occurred far exceeded expectations. This exceptionally powerful earthquake
heavily jolted the Tohoku and Kanto regions, causing extensive damage and creating
a tsunami with a maximum height over 20 meters that reached the Pacific coast.
Extensive liquefaction occurred in the Tokyo Bay area, causing houses to sink andtilt and other damage. The tsunami, which exceeded the design assumption of thenuclear power plant on the coast of Fukushima, caused a nuclear accident. This
earthquake certainly demonstrated to Japan that its assumptions andcountermeasures left much to be desired.
A committee was subsequently set up in the Cabinet Office to utilize the lessons
learned from the earthquake, and to restructure overall disaster prevention policy
based on the recognition that assumptions to date were insufficient. Damage
estimates and countermeasures for large earthquakes in the vicinity of the Nankai
Trough and Sagami Trough are being reviewed again, and local governments are also
taking measures against earthquakes that may occur in their regions.

3. The Recent Risein Earthquake
Risk in JapanHow do the people of Japan feel about earthquake risk over the past few years?
Many may believe that Japan is at higher risk of earthquake disasters than before.
And all wonder, whether abstractly or informed by data from the Japanese
government, where the next major earthquake disaster like the Great East Japan
Earthquake of 2011 or the Kumamoto Earthquake of 2016 will strike. I will
therefore explain from three perspectives why Japanese society believes thatearthquake risk is rising year by year.

(1) Earthquakes Seem Increasingly Imminent
Japan is now concerned about a number of potential earthquake disasters, none
more so than a major earthquake in or near the Nankai Trough or the Sagami Trough.
The Kumamoto Earthquake of 2016 has also heightened awareness of the risk ofearthquakes occurring on active inland faults, similar to the earthquake that occurred
directly beneath Kobe in 1995. Before explaining this type of earthquake, I will
discuss the plates surrounding Japan that cause earthquakes.
The surface of the Earth is covered by about a dozen plates, and four of themsurround Japan (Figure 1). Northeastern Japan is on the North American Plate andsouthwestern Japan is on the Eurasian Plate. The Pacific Plate and the Philippine Sea
Plate are subducted beneath these continental plates. The Japan Trench is located on

22

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

the Pacific coast of northeast Japan where the Pacific Plate is subducted. The PacificPlate moves toward the west at a rate of about 8 cm per year. The motion of this plate
causes earthquake phenomena when the strain that builds on this plate is released.
Many earthquakes occur in the area around the Japan Trench, and the hypocenter of
the Great East Japan Earthquake of 2011 was along this trench.
In the southwestern part of the Japanese archipelago, the Philippine Sea Platemoves at a rate of 3 to 4 cm per year from south to north, and is subductedbeneath the continental plate. This subduction area is called a trough because it is
not as deep as a trench. The subduction zone of the Philippine Sea Plate in thevicinity of the Kanto region is called the Sagami Trough, and the subduction zone
along the Pacific coast areas including the Tokai, Chubu, and Shikoku regions iscalled the Nankai Trough.
The subducted plate to the Sagami Trough is situated under the Kanto Plain; thatis, directly below Japan’s capital, Tokyo. This area of Japan experiences frequent
earthquakes, with M8 class earthquakes occurring at intervals of about 200 to 300
years. The last such earthquake was the Great Kanto Earthquake in 1923. Only about
100 years have elapsed since that earthquake, so at this point the probability of an M8class earthquake is low. Historically, however, M7 class earthquakes frequently occur
about 100 years before an M8 class earthquake. For example, the 1855 Ansei Edo
Earthquake with a magnitude of about 7.0 occurred about 70 years before the Great
Kanto Earthquake. The government’s Headquarters for Earthquake Research
Promotion estimates the probability that a similar M7 earthquake will occur within
30 years at about 70%. This earthquake would occur directly beneath Tokyo, one of
the world’s leading metropolises, and therefore would most likely cause major
damage. The unsettling prospect is that such damage would paralyze the politics andeconomy of Japan and significantly influence the global economy.
At the same time, the Sagami Trough leads southward to the Nankai Trough. M8class earthquakes occur in the vicinity of the Nankai Trough at intervals of about 100
to 150 years. The last such earthquakes were the M7.9 Tonankai Earthquake in 1944
and the M8.0 Nankai Earthquake in 1946. About 70 years have elapsed since thoseearthquakes occurred, so at this point the occurrence of the next M8 class earthquake
is increasingly likely. Furthermore, one school of thought is that the next earthquake
will occur at a shortened average interval of about 90 years because the lastearthquake did not release all the strain accumulated at the plate boundary. The
government’s Headquarters for Earthquake Research Promotion therefore estimates
the probability of a major earthquake in the vicinity of the Nankai Trough within thenext 30 years at around 70%. Such an earthquake, which would also feature strong
ground motion waves and tsunami in widespread areas of western Japan, is considered
to pose the greatest threat to the country because the likelihood of such an earthquake
is high and the damage would be enormous.

23

4. Japan’s Earthquake Risk and Countermeasures

Figure 1: Plates Surrounding Japan
Continental Plate
J Kuril-Kamchatkaap TrenchanContinental Plate

Oceanic Plate

T
r
e
n
c
h

Nankai TroughSagami Trough(Pacific Plate)

Izu-Ogasawara
TrenchOceanic Plate(Philippine Sea Plate)
Nansei Islands
TrenchActive inland faults also pose risks. The inland parts of the Japanese archipelago
have about 2,000 active faults. Major earthquakes occur on these active faults atintervals of several thousand to tens of thousands of years, so the probability of anearthquake would seem small compared to the probability of earthquakes in the
trenches and troughs discussed above. However, the number of active inland faults is
so great that a large earthquake occurs on one of these faults somewhere in Japan every
few years. The Uemachi fault zone is considered the most dangerous of these active
inland faults. The Uemachi fault zone is about 42 km long and traverses the Osakaplain from north to south. An earthquake with a maximum magnitude of 7.5 may
occur on this fault zone. Metropolitan Osaka would likely suffer catastrophic damage
if such an earthquake occurred. The probability of an earthquake occurring on the
Uemachi fault zone within the next 30 years is 2% to 3%, and the fault is among thegroup of active faults in Japan with the greatest likelihood of an earthquake.
The likelihood that these earthquakes will occur increases with time because thestrain on the plates that cause them similarly increases. This is one of the reasons forincreased earthquake risk in recent years.

(2) Urbanization Increases Vulnerability
People increasingly congregate in modern cities because of their convenience.
Buildings are therefore increasingly taller to accommodate the constantly growing
population. Floors in taller buildings generally shake more. While the BuildingStandards Law of Japan prescribes seismic design to ensure adequate aseismic
performance, even if they don’t collapse, the occupants of tall buildings are subject toincreased risk of injury from falling ceiling panels, furniture, fixtures and the like.
Elevators also stop if an earthquake occurs, which means evacuation to the first floor
would take a long time. The higher the living environment, the more vulnerable it is
to an earthquake.

24

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

Figure 2: Uemachi Fault Zone

Shin-Osaka Sta.
Osaka Sta.
Namba
Sta.

Tennoji Sta.

Uemachifault zone

Major earthquakes
around the Sagami
TroughMajor earthquakes around the Nankai TroughMajor cities with a large population also rely on well-developed transportation
networks. Tokyo is representative, as dozens of railway lines serve millions of people
in a complicated network above and below ground that operates with a frequency
measured in minutes. This network is very efficient under normal circumstances, but
an earthquake would cause damage and bring it to an extended halt. This would
paralyze traffic, strand people and lead to much congestion. Many businesspeople
have long commutes from their homes to central Tokyo, and people would not beable to return home through the congestion if an earthquake occurred on a weekday
during working hours. This is also a serious issue to be solved.
Electricity is absolutely essential to keep large cities running. Life support
functions in urban areas such as computers, communication equipment, electric
lights, trains, traffic lights, and elevators are paralyzed when electricity stops. The timeand effort required to restore these amenities increases with the level of urban density.
Population and important infrastructure are increasingly concentrated in Japan’s
cities, which continue to expand. This situation probably makes society more
vulnerable to earthquakes, and the ensuing damage and disruption.

(3) New Knowledge
The government established the Headquarters for Earthquake Research
Promotion after the Great Hanshin-Awaji Earthquake in 1995. It researches
earthquakes to enhance earthquake disaster prevention measures and earthquake
damage mitigation, and it has released various research results. Examples of its
research include evaluating the probability of earthquakes in the vicinity of the troughand trench zones and along active inland faults, and the scale and likelihood ofdamage should an earthquake occur. The headquarters also predicts tremors in theevent of an earthquake. Furthermore, the headquarters has evaluated the probabilistic
seismic hazard map that indicates the probability of an earthquake with a seismic
intensity of 6 or higher occurring in the next 30 years. These surveys and studies haveincreased knowledge of earthquake risk.

25

4. Japan’s Earthquake Risk and Countermeasures

Since 2011, the Central Disaster Management Council of the Cabinet Officehas reviewed the evaluations of earthquakes occurring around the Nankai Troughbased on the lessons of the Great East Japan Earthquake. Previously, the Council
had estimated the largest possible earthquake to be of a magnitude of 8.6 byreferencing the 1707 earthquake that occurred in the vicinity of the Nankai Trougharea. However, the maximum possible earthquake was revised to be magnitude 9.1
after all possibilities regardless of the maximum magnitude of past earthquakes
were examined.
Various government, university and other research institutes are currently
involved in earthquake surveys and research. This suggests that new discoveries will
emerge that draw on recent lessons from earthquakes including the Kumamoto
Earthquake of 2016. This new knowledge will likely continue to heighten people’s
perception that earthquake risk is increasing.

4. Damage froma Large Earthquake
Projected in the
Near Future

26

Earthquakes around the Sagami Trough, the Nankai Trough, and the Uemachi
fault zone were explained earlier. Such earthquakes would likely cause major damage
to the three major metropolitan areas of Japan: the Tokyo metropolitan area, theChukyo area around Nagoya, and the Kinki area around Osaka. More than 65
million people, or over half the population of Japan, live in these three metropolitan
areas. A large earthquake would directly damage buildings and injure people, andwould also immeasurably damage Japan’s politics and economy. Moreover, it would
affect the entire world.
The Central Disaster Management Council of the Cabinet Office is estimating
the damage that would result from a variety of earthquakes and formulating
countermeasures. The Council has significantly revised predictions about such
earthquakes based on the lessons from the Great East Japan Earthquake of 2011. At
this point, I would like to compare damage projections for earthquakes around the
Sagami Trough, the Nankai Trough, and the Uemachi fault zone.
Table 1 outlines projected direct and indirect damage from earthquakes in thesethree areas. Data for the Nankai Trough and the Uemachi fault zone assume thelargest possible earthquake. Data for the Sagami Trough assume an M7-class
earthquake because of the high probability that such an earthquake will occur. The
table also presents data for the Great Hanshin-Awaji Earthquake of 1995 and theGreat East Japan Earthquake of 2011 for comparison.
A Nankai Trough earthquake is projected to cause the most damage. The strong
ground motion and tsunami caused by this earthquake are projected to bring major
damage all along the Pacific coast west of the Kanto region, from Kanto itself and
the Chubu region to the Kinki, Chugoku and Kyushu areas. A Nankai Troughearthquake would likely damage about 18 times more buildings and cause about 20
times more deaths compared to the Great East Japan Earthquake of 2011, the strong
ground motion and tsunami of which caused damage all along the Pacific coast eastof the Kanto region. Support for restoration and reconstruction might not be fully
available because many regions of western Japan would be damaged at the same

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

time. In addition, the tsunami may well disrupt transportation by damaging thehigh-speed railways and expressways connecting the cities of Japan along the Pacificcoast and flooding some airports. A particular concern is that large tremors andtsunami would cause massive damage in the Chukyo area, which is Japan’s industrial
heartland. The impact on Japan’s economy would be enormous because damage
could equal as much as 40% of the nation’s GDP.
An M7-class earthquake around the Sagami Trough would occur directly
beneath the Tokyo metropolitan area. While the magnitude of this hypotheticalearthquake would be less than the Great East Japan Earthquake of 2011, the damage
would be massive because it would occur in the most prosperous urban area,
containing a large percentage of Japan’s population. This earthquake would likely
damage about 5 times more buildings and cause about 1.5 times more deaths
compared to the Great East Japan Earthquake of 2011. The institutions that are
central to Japan’s politics, administration and economy are concentrated in theTokyo metropolitan area, so an earthquake that impairs their functions would likely
negatively impact people’s lives and economic activity throughout Japan. Manybuildings would collapse, fires would rage, and the road transportation network
would be paralyzed. The earthquake would create a vast number of evacuees andvictims, who would overwhelm the insufficient number of evacuation centers in allareas. Shortages of food, fuel and other supplies would result from the disruption to
distribution in the afflicted areas. Moreover, damage to thermal power plants in thevicinity of Tokyo Bay would destabilize the supply of electricity. Presumably, theflow of information would also be disrupted immediately after the earthquake andinto some point in the future. Restoration and reconstruction after damaging
earthquakes has typically involved the construction of temporary housing in open
spaces, but the lack of such space in urban areas would present an array ofdifficulties. While damage from this earthquake would be more localized thandamage from an earthquake located in the Nankai Trough, it would have a serious
and negative impact on Japan.
Also, the earthquake risk of the Uemachi fault zone should not be forgotten.
The probability of an earthquake there is lower than for the other areas, but would
devastate Osaka if it occurred. Unlike an earthquake in the vicinity of the Sagami
Trough, the tremors at the hypocenter would be severe because this earthquake
would be due to an active fault just below an urban area. Building damage andhuman casualties are therefore projected to be greater than from an earthquake inthe vicinity of the Sagami Trough.
Japan’s three major metropolitan areas are thus exposed to the risk of major
earthquakes. Various countermeasures are a priority in the relevant regions.

27

4. Japan’s Earthquake Risk and Countermeasures

Japan learned much from the damaging earthquakes that have occurred in recent
years, and has implemented additional countermeasures to mitigate the damage fromthe next earthquake disaster and speed restoration and reconstruction. Major
earthquakes are thought likely in the near future in the vicinity of the Sagami Troughand the Nankai Trough, which is also an issue of concern for the global economy,
requiring preparation for these disasters on a global scale.

5. Conclusion

Table 1: Comparison of Damage from Future Large Earthquakes and from Recent Earthquakes
M7 Class Earthquake
around the Sagami
TroughLarge Earthquake aroundthe Nankai TroughEarthquake in the
Uemachi Fault Zone

Southern Hyogo Prefecture
Earthquake (Great HanshinAwaji Earthquake)

Date and Time of
Occurrence

–

–

–

1995/1/17, 5:46

2011/3/11, 14:46

Hypocenter

Southern part of central
Tokyo

–

–

Awajicho, Hyogo
Prefecture

Offshore Sanriku

Magnitude

M7.3

M9.1

M7.6

M7.3

M9.0

Maximum Seismic
Intensity

Seismic intensity 7

Seismic intensity 7

Seismic intensity 7

Seismic intensity 7
Seismic intensity 7(Kobe, Ashiya, Nishinomiya,(Kurihara, Miyagi
Takarazuka, Hokudancho,
Prefecture)
Ichinomiyacho, Tsunacho)

Tsunami–Tsunami with maximum
height over 30 m

–

Minor

Buildings
DamagedTotally Destroyed
Maximum 610,000+ Burned Downbuildings+ Washed Away

Maximum 2,390,000
buildings

About 970,000 buildings

About 100,000 buildings

About 130,000 buildings

Dead

Maximum 23,000 people

Maximum 323,000 people

Maximum 42,000 people

6,434 people

15,896 people

InjuredMaximum 123,000 people

Maximum 623,000 people

Maximum 220,000 people

43,792 people

6,125 people

Kanto region

From the Kanto region to
the Pacific Coast of the
Kyushu region

Kinki region

Kinki region

Iwate, Miyagi,
Fukushima and Ibaraki
prefectures(Projected or Actual)Casualties

Main Areas Damaged(Tokyo area)(Osaka area)(especially the Chukyo area)

28

Tohoku Earthquake(Great East Japan
Earthquake)

Economic Damage

Approximately 110 trillion Up to 214 trillion yenyen (physical and indirect (physical and indirect
damage)damage)Main Features

Urban disaster that would
degrade Japan’s core
Disaster affecting a broad
Urban disaster
political, economic andareaother functions(70 km east of Sendai)

More than 9.3 m (Soma
Harbor)Maximum run-up of
40.1 m (Ryori Bay)

Approximately 74 trillion
Approximately 16.9 trilApproximately 10 trillion
yen (physical and indirectlion yen (only physicalyen (only physical damage)damage)damage)Urban disaster

Caused the accident at
the Fukushima Nuclear
Power Station

5.
1. The Operating
Environment of
the Non-Life
Insurance Industry

2. Overview of the
Non-Life
Insurance Industry

Trends in Japan’s Non-Life Insurance Industry
Underwriting & Planning Department
The Toa Reinsurance Company, Limited

The GDP of Japan ranks third in the world and its economy has continued to
grow moderately in recent years. The Bank of Japan and several think tanks estimatethat Japan’s real growth rate in fiscal 2017 will be around 1%, and expect the Japanese
economy to recover gradually in the short term.
At the same time, Japan is confronting the medium-term issue of a declining
birthrate and aging society. The Cabinet Office estimates that if the fertility rate
remains unchanged, the population will drop by about a third from its current levelto 86.74 million in 2060, which will lead to a decrease in productivity due to thedecline in the working population. As a result, the Japanese economy is expected to
face negative growth from fiscal 2040.
The rapidly decreasing population and the migration of mainly young people
from regional areas to the Greater Tokyo area are causing serious concerns about thepossibility of a downward economic spiral. The Japanese government is therefore
promoting “Regional Revitalization” to ensure the sustainable and steady growth of
the Japanese economy, and is implementing focused initiatives with the long-termgoal of overcoming population decline and ensuring Japan’s ability to grow.
The non-life insurance market is concerned that the automobile insurance
market, which accounts for about half of the net premium income of Japanese direct
insurance companies, may decrease due to factors including the trend of young people
turning away from driving and technological advances such as autonomous driving.
On the other hand, the advance of autonomous driving technologies isbroadening the need for product liability insurance. The industry also needs to
respond with non-life insurance products that address new risks, including the spreadof sophisticated equipment such as drones.
Japan’s non-life insurance companies are developing markets by providing new
products and services based on changes in customer needs in the mature domestic
non-life insurance market.

(1) Trends in Business Results of Non-Life Insurance Companies for
Fiscal 2016
Fiscal 2016 results for Japan’s non-life insurance companies were solid. An
overview of the results of the 26 non-life insurers that are members of the General
Insurance Association of Japan (GIAJ) is as follows:
Net premium income in all lines of business decreased to 8,243.9 billion yen,down 115.8 billion yen from the previous fiscal year. This decrease was a reaction to
the previous fiscal year’s exceptional demand surge following revision of the long-term
fire insurance product in October 2015.
In addition, net claims paid (paid basis) increased by 198.7 billion yen to 4,767.5
billion yen. This was due to the payment by the Kumamoto Earthquake. As a result,the loss ratio for fiscal 2016 worsened by 3.5 percentage points to 63.4%.
Expenses decreased by 31.3 billion yen to 2,650.2 billion yen year on year. Net
expense ratio was unchanged at 32.1%.
Underwriting profit (earned/incurred basis) increased by 225.5 billion yen to340.2 billion yen due to factors including the reversal of the contingency reserve.
29

5. Trends in Japan’s Non-Life Insurance Industry

On the other hand, interest and dividend income decreased 104.1 billion yen to512.7 billion yen because of factors including lower dividends from subsidiaries.
As a result, ordinary profits, calculated as the sum of underwriting profit andinvestment profit, increased 48.4 billion yen to 843.1 billion yen. After deducting tax
expense, net income increased 45.5 billion yen to 615.5 billion yen.
On a group basis, all of the top three non-life insurance groups achieved record net
income due to factors including the impact of the acquisition of overseas subsidiaries.

(2) Status of Non-Life Insurance Companies
Japan’s non-life insurance industry comprises 26 Japanese non-life insurancecompanies that are members of the General Insurance Association of Japan (GIAJ)
and 20 companies that are members of the Foreign Non-Life Insurance Association ofJapan, Inc. (FNLIA). Currently, Japan’s non-life insurance market is an oligopoly inwhich the top three non-life insurance groups (MS&AD Insurance Group Holdings,
Inc., Sompo Holdings, Inc. and Tokio Marine Holdings, Inc.) account for more than
85% of net premium income written by the 26 GIAJ members as a whole.
Japan’s non-life insurance companies have increased operating efficiency sinceliberalization in 1996, and have conducted mergers and business integration since 2000.
As a result, the underwriting expense ratio (other than commission and brokerage) for
the five largest companies in fiscal 2016 decreased to 15%, compared with 21% for all
non-life companies in the industry for fiscal 1995, prior to liberalization.
Recent trends among the top three non-life insurance groups are as follows.
MS&AD Holdings operates under a framework of two core non-life insurancecompanies consisting of Mitsui Sumitomo Insurance Co., Ltd. and Aioi Nissay Dowa
Insurance Co., Ltd., which was created through the merger of Aioi Insurance Co.,
Ltd. and Nissay Dowa General Insurance Co., Ltd. in October 2010.
With respect to Sompo Holdings, Sompo Japan Insurance Inc. and
NIPPONKOA Insurance Co., Ltd., were merged into Sompo Japan Nipponkoa
Insurance Inc. in September 2014.
With respect to Tokio Marine Holdings, Tokio Marine & Nichido Fire InsuranceCo., Ltd was created through the October 2004 merger of The Tokio Marine andFire Insurance Co., Ltd. and The Nichido Fire and Marine Insurance Co., Ltd. Tokio
Marine Holdings subsequently integrated its management with Nisshin Fire &Marine Insurance Co., Ltd. in September 2006.
In addition to the above, AIG Japan Holdings announced the merger of its wholly
owned subsidiaries, AIU Insurance Company, Ltd. and The Fuji Fire and Marine
Insurance Company, Ltd. to create a new company, AIG General Insurance Co., Ltd.
The completion date of the merger is set for January 1, 2018, but consolidated
operations began under a pre-merger structure from April 1, 2017.

(3) Response to the Kumamoto Earthquake
Two large-scale earthquakes struck Kumamoto Prefecture on April 14 and 16,
2016, with the second earthquake having a magnitude exceeding 7.0.
Damage extended from Kumamoto Prefecture into Oita Prefecture, across thecenter of the Kyushu region. The Cabinet Office reported that 161 people died and30

The Toa Reinsurance Company, Limited — Japan’s Insurance M
Marketarket 20
2017
0117
7

8,369 buildings were destroyed. Estimated insured loss for the non-life businessranged from 500 to 600 billion yen.
Japan’s earthquake insurance system is a public-private partnership that has thegoal of “helping to contribute to the stability of the lives of disaster victims of anearthquake.” Non-life insurance companies have strengthened the claims service
system by dispatching personnel to handle payments immediately following anearthquake and have also simplified payment procedures. Those initiatives enabled
them to pay claims promptly, and have done much to aid victims.

3. Recent Non-Life
Insurance Industry
Trends(1) New Product Development
Japan’s non-life insurance companies are developing new products aligned withsocial changes as outlined below.
(a) Automobile Insurancei) Telematics Automobile Insurance
In recent years, telematics automobile insurance with premiums that reflect analysis
of driver behavior and measurement of actual driving distance has attracted muchattention in Europe and the United States. In Japan, an increasing number of insurancecompanies are offering telematics automobile insurance. This market is projected todevelop fully because more insurance companies are expected to follow this trend andoffer telematics products in the future. Technological advances are likely in the telematics
automobile insurance market. Non-life insurance companies are researching emerging
technologies and investigating a proactive shift to more sophisticated accident response
services and other offerings such as accident reduction services.
ii) Autonomous Driving Technologies
Autonomous driving technologies are now gaining traction, and are expected todevelop further toward completely autonomous driving. Non-life insurancecompanies are therefore paying close attention to the evolving environment
surrounding automobile insurance and developing insurance products aligned withthe relevant societal changes to help achieve automotive safety and security.
(b) Bicycle Insurance
In recent years, Japan’s society is increasingly concerned about traffic accidents
involving bicyclists, due to the rising number of such accidents and the greaternumber of cases in which bicyclists are responsible for larger amounts ofcompensation.
However, recognition of bicycle insurance and penetration rates are still low.
These circumstances have led the non-life insurance industry to publicize the need forbicycle insurance for cyclists and to increase penetration rates.

31

5. Trends in Japan’s Non-Life Insurance Industry(c) Inbound Travel Insurance
More foreign tourists have been coming to Japan recently, which has increased
the need for support during their visit. Japan’s non-life insurance companies havetherefore become key providers of travel insurance that gives tourists visiting Japanenhanced security and safety. This type of insurance enables tourists to purchaseinsurance after entering Japan in languages including English, Chinese and Korean
via smartphone and the Internet, and provides services such as multilingualinterpreting and cashless payment at medical facilities.
(d) Cyber Insurance
The number of malicious cyberattacks has been increasing worldwide year after year,
so cybersecurity measures have become an urgent issue for organizations ranging fromlarge companies and administrative agencies to small and medium-sized enterprises.
In response, Japan’s major non-life insurance companies have become coreproviders of cyber insurance while also expanding support services including
consulting to support cyber security, such as services that facilitate the simplified
simulation of estimated damages from cyberattacks and drills against targeted e-mailcyberattacks for companies considering the purchase of cyber insurance.

(2) Innovation
The term “fintech,” which has recently become common, is also used in theinsurance industry. The insurance industry has also embraced the term “insurtech” torefer to the fusion of insurance and information technology for the development of
the insurance products mentioned earlier and to encourage innovation in theoperations of non-life insurance companies.
The collection of big data and its application in marketing and pricing is nolonger novel for insurance companies, who utilize statistical data. Moreover, some
non-life insurance companies are accelerating their operations by using AI for thecomplex tasks involved in assessing claims payment and for customer service
functions such as call centers. Moreover, in the near future, it is expected that
insurance sales and primary decisions about underwriting will be carried out by AI.
Insurance companies are also applying blockchain (distributed ledger) technology toinsurance policies. As a result, in addition to accelerated procedures, breakthroughs
are expected in enhanced security, the distribution of insurance policies with related
information attached, and trade operations in areas such as broadly distributed
overseas cargo policies.

(3) Regional Revitalization
The Japanese government is promoting regional revitalization with the long-term
vision of overcoming population decline and ensuring Japan’s ability to grow. The
government has therefore created a comprehensive regional revitalization strategy
encompassing regional towns, residents and job creation.
Major companies in the non-life insurance industry are leading initiatives tosupport regional revitalization. These initiatives are not simply for the sake ofcorporate responsibility; they are also designed to create the need for insurance by

32

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

helping clients to expand their businesses. In recent years, major non-life insurancecompanies have been central to cooperative regional revitalization agreements withlocal governments. The major purposes of the agreements are to promote industry
and disaster response. Close cooperation with communities to address regional
revitalization issues has the objectives of creating new insurance needs and growing
along with local communities.

(4) Earthquake Insurance
The Japanese earthquake insurance system celebrated its 50th anniversary in
2016, and penetration rates have increased steadily since 1966 when the systemstarted. The Great East Japan Earthquake in 2011 and the Kumamoto Earthquake in2016 reaffirmed the risk of earthquakes in Japan and the importance of theearthquake insurance system, and have also been instrumental in the rise in theearthquake insurance penetration rate over the past several years. The non-life
insurance industry has further promoted understanding of earthquake insurance
through public relations using media including television, commercial messages andposters and by holding various events at which people can gain experience of artificial
earthquakes using simulation machines.
In December 2014, a probabilistic earthquake prediction map was released thatreflected the occurrence of the Great East Japan Earthquake, and the hypocentermodel was revised. Following the review of the hypocenter model, damage categories
and base rates were revised in January 2017. As shown below, damage categories
increased to four from the previous three, which enables claims payment that is betteraligned with actual damage. In addition, base rates will increase in three stages, which
will raise the national average premium by about 5.1%. The timing and details offurther revision of the insurance premium rate are currently undetermined.
Table 1: Segmentalization of Degree of Loss Associated with the Revision of the
Earthquake Insurance System in January 2017
Degree of Loss

Before Revision

Total loss

100% of amount insured

Half loss

50% of amount insured

Partial loss

5% of amount insured

After Revision
100% of amount insured
60% of amount insured (Large half loss)
30% of amount insured (Small half loss)
5% of amount insured

Source: Compiled from materials available on the website of the General Insurance Association of Japan(5) Expanding Overseas Business
The top three non-life insurance groups have all positioned overseas business as a
growth driver, and have aggressively implemented initiatives such as forming businessalliances with local insurance companies and engaging in M&A.
Figure 1 shows overseas net premium income for the top three non-life
insurance groups. Over the past several years, overseas net premium income1 forthese insurance groups has been trending upward, and fiscal 2016 overseas net
premium income was about three times that of fiscal 2012. In fiscal 2016, overseas
business accounted for approximately 20% of premium income for the top three33

5. Trends in Japan’s Non-Life Insurance Industry

non-life insurance groups due to the inclusion of newly consolidated subsidiaries,
which will be discussed shortly.
Note: 1. In this section, “overseas net premium income” shows the total of net premium income from nonlife insurance and life insurance premiums.

Figure 1: Trends in Overseas Net Premium Income for the Top Three Non-Life
Insurance Groups
Percentage of overseas
net premium income(Billions of yen)
3,000

25%

2,500

20%

2,000
15%
1,500
10%
1,000
5%

500

0%

0
2012

2013

Overseas net premium income

2014(Fiscal year)

2015

2016

Percentage of overseas net premium income*(Total of the three groups including life insurance)

Source: Calculated by Toa Re using data compiled from the financial results of each of the three groups

Key overseas business developments among the top three non-life insurancegroups and recent trends are as follows:
MS&AD Holdings acquired the general insurance operations in Asia of U.K.
company Aviva plc in 2004, and used it as its base for advancing into the ASEAN
region. Moreover, in February 2016 MS&AD Group completed its acquisition of
Amlin plc of the United Kingdom, thus strengthening its reinsurance business.
Sompo Holdings acquired leading U.K. specialty (re)insurer Canopius Group
Limited in May 2014. In addition, it significantly expanded its overseas insurance
business by completing the acquisition of Endurance Specialty Holdings Ltd., which
focuses on primary insurance and reinsurance in the United States.
Tokio Marine Holdings has developed its overseas operations particularly inEurope and the United States. It acquired U.K. company Kiln Ltd. and U.S. company
Philadelphia Consolidated Holding Corp. in 2008, then acquired U.S. company
Delphi Financial Group, Inc. in 2012. Moreover, in October 2015 it acquired U.S.
specialty insurer HCC Insurance Holdings, Inc. to further grow its overseas insurance
business through diversification and improve capital efficiency.

34

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

Table 2: Overseas Business Development among Japan’s Top Three Non-Life
Insurance Groups (2016-2017)
Month/Year
February 2016

Name of Company
Mitsui Sumitomo Insurance

Contents
Completed the acquisition of Amlin
Established telematics automobile insurance services
company in the U.S.

April 2016

Aioi Nissay Dowa Insurance

August 2016

Mitsui Sumitomo Insurance

Acquired shares of and strengthened the partnershipwith MAPFRE

March 2017

Sompo Japan Nipponkoa
Insurance

Completed the acquisition of Endurance Specialty
Holdings

June 2017

Tokio Marine Asia

Increased shareholdings in IFFCO-TOKIO General
Insurance

Established a U.S. subsidiary to research and investigate
advanced automobile technology

Source: Compiled from press releases from each company. Company names are abbreviated.

(6) Trends in Regulation by Regulatory Agencies
The revised Insurance Core Principles (ICPs) adopted by the International
Association of Insurance Supervisors (IAIS) in October 2011 specified theimplementation of Own Risk and Solvency Assessment (ORSA) practices. As a result,the introduction of ORSA-related regulations and systems is progressing
internationally. In Japan, the Financial Services Agency (FSA) has been conducting
enterprise risk management (ERM) hearings with certain insurance companies since2011. Moreover, from fiscal 2015 all Japanese insurance companies are obligated tosubmit ORSA reports, which the FSA uses to evaluate the status of ERM, including
ORSA. The FSA announced the results of its evaluation of insurance company ERM
in September 2016.
Another major FSA initiative involves examining economic value-based
evaluation and supervision methods. The FSA prepared for the introduction of an
economic value-based solvency regime. The third field test was conducted in fiscal
2016 and its results were announced in March 2017. FSA says that introducing the
economic solvency ratio into the regulatory regime may have unexpectedconsequences, such as excessively risk-averse behavior among insurance companies,
therefore it is preparing for the introduction of the economic solvency ratio by
considering unintended consequences and international trends, and by continuing its
examination with emphasis on dialogue with relevant parties.

4. Conclusion

Japan’s non-life insurance market is maturing due to factors including thedeclining birthrate and the aging population. However, non-life insurance companies
are targeting sustainable growth by providing products and services made possible bytechnological development, identifying customer needs through means including thecreation of new businesses and regional revitalization, and further expanding theiroverseas business.

35

6.
1. Overview of Economic
and Social Trends

2. Overview of
Bunisiness Results for
Fiscal 2016

36

Trends in Japan’s Life Insurance Industry
Life Underwriting & Planning Department
The Toa Reinsurance Company, Limited

Investment Strategy under the Negative Interest Rate Environment
and Revision of the Standard Valuation Interest Rate
The negative interest rate policy introduced by the Bank of Japan on January 29,
2016 has affected life insurance companies in Japan.
Lower market interest rates have led a number of life insurance companies to stop
selling single-premium insurance products, a typical life insurance savings vehicle.
This lower interest rate also caused the standard valuation interest rate, a rate used to
calculate the standard policy reserve, to move downward in April 2017. Under thesecircumstances, some life insurance companies have been revising their assumed
interest rate, a rate for calculating insurance premiums. However, a number of life
insurance companies are keeping their assumed interest rate revisions within a tighter
range than standard valuation interest rate revisions, and limiting premium increases
in many cases.
The protracted low-interest rate environment has also brought out critical asset
management concerns among life insurance companies. Now a larger proportion of
the higher-yield government bonds in their accounts is gradually reaching maturity,and the proportion of lower-yield bonds is growing. Therefore, life insurancecompanies are about to face the possibility of negative spreads, which means that theassumed interest exceeds the coupon and dividend income earned by life insurers, andtherefore they are reviewing their asset management strategies. Domestic bonds havetraditionally been the largest component of the investment portfolios of life insurancecompanies. With the negative interest rate policy precluding the prospect of higher
interest rates, life insurance companies have been reducing their domestic bondportfolio and increasing their foreign bond portfolio. In particular, U.S., Canadianand Australian government bonds over 10 years with yields of around 1% to 2% havebeen attractive for asset management. At the same time, the more foreign bonds they
invest in, the more foreign exchange risk they inevitably take, which has raised
concerns about the major shift to foreign bonds from domestic bonds given the global
competition to devalue currencies. Under these circumstances, some companies havediversified their portfolios by deploying capital in growth fields such as environmentrelated and infrastructure businesses.
With the negative interest rate policy expected to continue, attention has now
turned to how life insurance companies will adapt.

The fiscal 2016 business results for 41 life insurance companies are as follows:(1) Total Amount of New Business
During the fiscal year ended March 31, 2016 (fiscal 2015), the total insured
amount of new business increased for individual life insurance due to the popularity
of products denominated in foreign currencies, but the total insured amount of new
business decreased for individual annuity insurance because of the deterioration of theasset management environment due to negative interest rates.
During the fiscal year ended March 31, 2017 (fiscal 2016), however, the total
insured amount of new business decreased by 1.2% to 68.5 trillion yen for individual

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

life because several companies stopped selling single-premium whole life insurance as
the asset management environment deteriorated. The total insured amount of new
business increased by 32.9% to 11.1 trillion yen for individual annuity insurance
because of the popularity of these products as a substitute for single-premium whole
life insurance.

(2) Total Amount of In-force Business
The total insured amount of in-force business for individual life increased by
0.5% compared with the previous fiscal year to 862.9 trillion yen, despite thedecrease in the total insured amount of new business. For individual annuity
insurance, the amount increased by 4.1% to a record high of 107.9 trillion yen due tothe increase in the total insured amount of new business.

(3) Premium Revenues and Total Assets
Total premium revenues decreased by 9.7% compared with the previous fiscal year
to 35.2 trillion yen due to the decrease in sales of single-premium insurance. Total
assets increased 2.3% to 375.5 trillion yen due to the increase in foreign securities.

3. Trends in the Life
Insurance Industry

More Efficient Underwriting and Claims Assessment through theUse of Artificial Intelligence
Underwriting and claims assessment significantly burden the employees of life
insurance companies, who must determine whether claims are true or false and makedecisions that are subject to their own discretion. Life insurance companies havetherefore been introducing artificial intelligence (AI) to automate underwriting andclaims assessment with the goals of raising employee’s administration efficiency,
improving quality and enhancing customer service.
Many life insurance companies are introducing or considering AI forunderwriting and claims assessment because it can reduce the time required to makedecisions, which should lead to reduced administrative and educational costs. In
addition, it can improve underwriting quality by employing the experience andknowledge embedded in AI.
In a specific example, on March 21, 2017 Japan Post Insurance Co., Ltd. began
using IBM Japan, Ltd.’s IBM Watson Explorer AI to support the decisions ofunderwriters. This is expected to improve the quality of customer service in assessing
claims and raise operating efficiency. Japan Post Insurance’s claims assessment
operations use Watson to help underwriters resolve uncertainties with a high level ofconfidence by providing referential evidence that draws on the more than 5 million
outcomes of past cases. Underwriters can therefore make assessment decisions basedon the content presented by Watson, so even relatively inexperienced personnel canmake claims decisions more accurately and promptly.
Life insurance companies are currently using AI in limited ways, such as toperform certain regular operations using AI, supported by checking by human
employees. However, AI is likely to take over more significant operations in the future.
In fact, some companies have announced plans to reduce personnel in claims divisions.
37

6. Trends in Japan’s Life Insurance Industry

The spread of AI is expected to raise operating efficiency and improve quality. At
the same time, AI’s potential economic impacts are also gathering attention because they
can have negative effects on the employment environment as people lose their jobs.

Disclosure of Bancassurance Commissions
The savings-type products that are sold through bancassurance, such as foreign
currency-denominated insurance and variable insurance, are increasingly popular
because their rates of yield are high, helping individuals manage their assets. They arealso a key source of commission income for banks amid the deteriorating asset
management environment in Japan resulting from the Bank of Japan’s negativeinterest rate policy.
Foreign currency-denominated insurance and variable insurance account for the
majority of bancassurance sales and are generally purchased as investments. These
products are therefore similar to investment trusts, which banks also sell. However,banks must disclose their investment trust commissions, but not their bancassurance
commissions. This has been seen as a problem because bancassurance commissions
are not transparent, and banks are likely to push the bancassurance products withhigher commissions.
Under these circumstances, in October 2016 several major banks began
disclosing the commissions they receive from insurance companies in exchange forthe sale of life insurance savings-type products, and such practice is also spreading
among regional banks. Disclosure of commissions increases the information available
to customers, helping them choose insurance products and improving insurance
product transparency. Disclosure of commissions is also expected to reduce
commissions by stimulating competition.
In terms of “fiduciary duty”, the start of disclosure of bancassurance commissions
is expected to encourage greater transparency in the structure of financial products
and the methods used to sell them.

4. Product Trends

38

More Insurance with Wellness Benefits
In recent years, the life insurance industry has been developing insurance productsthat reward policyholders with benefits for being healthy, so-called “wellness benefits,”
which reflect the state of a policyholder’s health in premiums.
Conventionally, life insurance companies determined premiums using criteria such asage. However, the development of information technology (IT) has enabled companies toacquire health data from individuals using smartphones and wearable terminals, anddetermine the state of their health by analyzing the data collected. Analysis of that dataclarifies its causal relationship with morbidity rates, allowing companies to set premiums
based on the state of policyholder’s health. In fact, The Neo First Life Insurance
Company, Limited of the Dai-Ichi Life Group is collaborating with Japan Medical Data
Center Co., Ltd. to sell health insurance that reflects healthy life expectancy.

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2017

Other products that encourage wellness using premium discounts as an incentive
are also under development. In July 2016, Sumitomo Life Insurance Company,
SoftBank Group Corp. and South African financial services company Discovery
Limited set up a partnership to launch Discovery’s wellness program, Vitality, in theJapanese market as Japan Vitality Project. Vitality is a program that prompts
policyholders to be healthier by providing related knowledge and incentives. The threeplayers plan to create a database to collect health-related information via wearable
devices provided by SoftBank, which will help Sumitomo Life develop insurance
products for which premiums decrease when policyholders lead healthier lives.
These cases exemplify the increasingly active development of insurance products
using personal data acquired through the latest IT.
The development of such products that offer the incentive of reduced insurance
premiums should make healthy people more aware of the importance of good health,but it also raises concerns that more people will not be able to get insurance.
Companies have traditionally set health insurance premiums using groups basedon factors such as age and gender. If companies sell products with premiums that varydepending on an individual’s state of health, healthy people will be able to obtain
insurance more easily but higher-risk individuals will have difficulty in obtaining andmaintaining insurance because of higher premiums.
Wellness products are likely to increase in conjunction with advances in IT. At
the same time, companies must concurrently create mechanisms that enable higherrisk individuals to obtain insurance easily.

5. Regulatory Trends

Revision of the Standard Mortality TableOn March 31, 2017, the Institute of Actuaries of Japan proposed a revision of thestandard mortality table for application after fiscal 2018. The Insurance Business Act
prescribes the standard mortality table as a fundamental component in calculating thestandard policy reserve. This revision will be the first in 11 years since the revision in 2007.
The revision reflects the improvement from 2007 in the insurers’ experienced
mortality rate and the national mortality rate. The mortality table is based on experiential
data from the three observed years of 2008, 2009 and 2011; 2010 was excluded because of
the significant effect of the Great East Japan Earthquake. The previous table used
experiential data from the three observed years of 1999 to 2001. The average life
expectancy as at age zero (0) has risen to 80.77 years from 78.24 years for males and to
86.56 years from 84.94 years for females. In addition, the limiting age (ω) of the mortality
table for death benefit products increased to 109 years from 107 years for males and to
113 years from 110 years for females because of the mortality improvement.
The recent revision 1) revised the 2007 mortality table for death benefit products andhealth insurance benefit products; but 2) continued to use the same mortality table revisedin 2007 for annuity products. The Financial Services Agency of Japan deemed continued
use of the 2007 standard mortality table for annuity products appropriate because it still
ensured soundness.

39

6. Trends in Japan’s Life Insurance Industry

Life insurance companies are projected to reflect the revisions in their life andhealth insurance premium rates for products sold from fiscal 2018. Premiums fordeath benefit products are projected to decrease about 5% to 10% for 10-year term
insurance policies as a reflection of the increased longevity. On the other hand,premiums for certain health insurance products may rise because of the increased
longevity. An issue of interest will be how life insurance companies incorporate thetwo factors: the previous revision of the standard valuation interest rate in fiscal 2017
and the latest revision of the standard mortality table in fiscal 2018, into theirproduct design.
Figure: The Ratio of the 2018 Standard Mortality Table to the 2007 Standard Mortality Table
110%

100%

90%

80%

70%

60%

50%

10

0
Male

20

30

40

50

60

70

80

90

FemaleNote: A discount of approximately 20% is projected when the 2007 standard mortality table is indexed at 100, although the draft revision of the 2018
standard mortality table varies according to gender and age.

40

100

41

Ratio 4
Solvency Margin Ratio (%)

Ratio 3
Yield on Investments (Income) (%)

Ratio 2
Expense Ratio (%)

Ratio 1
Loss Ratio (%)

Total Assets

Net Profit (Loss) for the Year

Ordinary Profit (Loss)

Underwriting Profit (Loss)

Net Claims Paid

Net Premiums Written

1,469,699
1,507,420
811,476
800,899
81,79919,116
215,542
167,896
164,568
113,970
6,777,076
6,786,590
61.2
58.9
31.2
31.0
2.32
2.40
657.9
585.9

Fiscal 2016

Fiscal 2015

Fiscal 2016

Fiscal 2015

Fiscal 2016

Fiscal 2015

Fiscal 2016

Fiscal 2015

Fiscal 2016

Fiscal 2015

Fiscal 2016

Fiscal 2015

Fiscal 2016

Fiscal 2015

Fiscal 2016

Fiscal 2015

Fiscal 2016

Fiscal 2015

Fiscal 2016

Fiscal 2015

Mitsui
Sumitomo

829.3

851.6

2.28

2.12

34.3

33.5

59.2

59.1

3,418,516

3,498,264

31,09850,391

61,77175,18824,881

39,531

644,889

648,618

1,192,089

1,200,525

Aioi Nissay
Dowa

MS&AD Holdings(Non-Consolidated Basis)

746.3

860.9

4.41

2.66

30.6

30.8

60.0

60.7

9,242,545

9,524,466

301,610248,632

377,258

312,436

13,886116,131

1,175,089

1,179,147

2,128,312

2,116,121

Tokio Marine &Nichido

1,127.7

1,325.5

1.41

1.31

32.7

33.1

61.6

59.0

421,690417,919

6,147

6,579

9,715

9,019

7,875

8,121

75,731

72,937

138,671

140,118

NisshinTokio Marine Holdings

919.5

889.7

1.51

1.60

42.3

41.3

55.4

64.2

849,964

824,308(5,446)(28,473)(7,845)(18,414)(12,991)(19,027)

137,498

134,983

279,178

233,655

Fuji

792.0

875.3

4.01

3.26

23.7

24.9

70.6

74.1

491,993

507,469

2,191

11,066

3,275

13,115(8,246)

3,770

122,580

129,569

173,632

174,970

Toa Re(Unit: Millions of yen, %)Sources: Each company’s financial statements of Fiscal 2016

729.3

677.0

2.13

2.20

31.6

32.0

63.7

63.2

7,036,222

7,568,779

126,289

164,401

178,086

230,474

78,284112,474

1,287,493

1,242,843

2,218,425

2,165,694

Sompo
Japan
Nipponkoa

Sompo Holdings

Supplemental Data: Results of Japanese Major Non-Life Insurance Companies for Fiscal 2016, Ended March 31, 2017

Printed in Japan