Japan’s Insurance Market

2015

Japan’s Insurance Market 2015
ContentsPage

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

1

1. The Earthquake Insurance System and Japan Earthquake Reinsurance Co., Ltd.
Masamichi Irie
President
Japan Earthquake Reinsurance Co., Ltd.

2

2. General Concepts Applied to a Proprietary View of Risk
Oriol Gaspa Rebull
Catastrophe Management, Aon Benfield
John Moore
Head of International Analytics, Aon Benfield10

3. Preparing for a Japan Typhoon Megadisaster
Milan Simic, Ph.D., SVP
Managing Director of International Operations, AIR Worldwide
Ruilong Li, Ph.D.
Senior Engineer, AIR Worldwide

19

4. Recent Developments in Enterprise Risk Management among Japanese Insurance Companies
Nobuyoshi Yamori
Professor, Research Institute for Economics and Business Administration
Kobe University

25

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

34

Supplemental Data: Results of Japanese Major Non-Life Insurance Groups (Company)
for Fiscal 2014, Ended March 31, 2015 (Non-Consolidated Basis)

40©2015 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 2015. 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 2014, the year ended March 31, 2015, the Japanese economy remained on amoderate recovery track. Although the consumption tax increase weakened personal consumption
somewhat, capital investment trended upward, reflecting an improvement in corporate earnings.
In the non-life insurance industry in Japan, net premium income and profit trended upward
mainly owing to strong sales of fire insurance policies and new types of insurance policies, while
also benefiting from the revision of insurance premium rates and insurance products forautomotive insurance.
In the life insurance industry in Japan, net premium income trended upward supported bybuoyant sales of savings-type insurance products and medical insurance policies.
In the reinsurance market, owing to the large amount of capital flowing from financial markets
into the reinsurance market and the brisk performance of reinsurance companies, reinsurance premium
rates further softened and competition for contracts intensified among reinsurers.
In these circumstances, in accordance with the Forward 2014 medium-term management plan
launched in 2012, the Toa Re Group implemented initiatives to realize the corporate vision articulated
in the plan. Utilizing sophisticated expertise and intelligence, we provide peace of mind with highquality solutions and services with the goal of being a growing, profitable global reinsurance group
trusted by all stakeholders.
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.
Foreword

1. Earthquake
Insurance System
in Japan

The Earthquake Insurance System andJapan Earthquake Reinsurance Co., Ltd.
Masamichi Irie
President
Japan Earthquake Reinsurance Co., Ltd.

Japan’s land area is only 0.25% of Earth’s total land area, but 20.8% ofearthquakes of magnitude 6.0 or greater worldwide have occurred in Japan, and27,271 earthquakes have occurred in Japan over the 10 years since 2005. Japan is
located on the boundary between an oceanic plate and a continental plate. The
oceanic plate moves beneath the continental plate at a rate of several centimeters per
year, which causes large subduction earthquakes and inland earthquakes due to platemovement. Moreover, Japan is located in the Ring of Fire and has about 7% of theworld’s active volcanoes. Japan is therefore prone to earthquakes.
Japan Earthquake Reinsurance Co., Ltd. (JER) is the only reinsurance company
in Japan that exclusively handles earthquake insurance, and will celebrate its 50th
anniversary next year. I would therefore like to provide an overview of our position in
Japan’s earthquake insurance system and discuss JER’s preparation for major
earthquakes.

(1) Specifics and Features of Earthquake Insurance
Insured risk:
Loss or damage due to fire, destruction, burial or flooding caused directly or indirectly
by any earthquake or volcanic eruption, or resulting tsunami (earthquake, etc.)
Insured interests:
Buildings for residential use and/or personal property. Commercial and industrial
risks (extended coverage for earthquake) are not insured.
Underwriting method:
Rider attached to a fire insurance policy. Currently, an earthquake insurance rider is
attached to just under 60% of fire insurance policies.
Sum insured:
30% to 50% of the sum insured by the main policy (fire insurance). However, thesum insured is limited to a maximum of 50 million yen for a building and 10
million yen for personal property.
Payable degrees of loss:
Total loss, half loss, partial loss
Payable benefits:• Total loss – total sum insured• Half loss – 50% of sum insured• Partial loss – 5% of sum insured
Limit of total amount of insurance claims to be paid:
Total amount of insurance claims to be paid is limited to 7,000 billion yen per
earthquake, etc. for all of the non-life insurance market.

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The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

(2) Reinsurance Mechanism
1 Reinsurance Flow

JER concludes a reinsurance treaty (Treaty A) on earthquake risk with each direct
insurance company that sells earthquake insurance. As Figure 1 shows, in accordancewith the Act on Earthquake Insurance, direct insurance companies cede to JER 100%of the sum insured they accept, and JER is obliged to take up the full liability for thisearthquake insurance without question. JER also concludes an earthquake retrocession
treaty (Treaty B) with each direct insurance company, and with Toa Re, to retrocede acertain part of the liabilities accepted under Treaty A in accordance with thepredetermined share for each company. In addition, JER enters into an excess of loss
retrocession treaty (Treaty C) with the government and retrocedes to the government
part of the insurance liability taken up under Treaty A. JER retains the liabilities thatremain after retrocession through Treaty B and Treaty C of insurance liabilities
underwritten under Treaty A.
Figure 1: Reinsurance Flow
Policyholders
Direct insurance

Application for earthquake
insurance policy(Payment of premiums)

Non-Life insurance companies
Reinsurance(Collection andequalization ofrisks at JER)

100% reinsurance(Payment of reinsurance
premiums)

TreatyAJER

Retrocession(Distribution of risks)Retrocession(Payment ofretrocession
premiums)

TreatyC

Retrocession(Payment ofretrocession
premiums)

Government(Earthquake Reinsurance Special Account)

TreatyB
Non-Life insurancecompanies

Retention

JER

2 Reinsurance Scheme

As shown in Figure 2, the current reinsurance scheme consists of three layers. In thefirst layer, JER as a private insurance company pays reinsurance claims up to 100 billion
yen per earthquake, etc. In the second layer, the government and non-life insurancecompanies equally share reinsurance claims for the layer covering 262 billion yen inexcess of 100 billion yen. In the third layer, the government pays a majority ofreinsurance claims (approximately 99.5%) for the portion exceeding 362 billion yen up
to 7,000 billion yen. In portions of insurance claims to be paid by the private sector, JER
pays 100% of reinsurance claims in the first layer. In the second and third layers, nonlife insurance companies pay the lower portion and JER bears the upper portion.

3

1. The Earthquake Insurance System andJapan Earthquake Reinsurance Co., Ltd.

Figure 2: Reinsurance Scheme (As of April 1, 2015)
Reinsurance claims
Up to 100 billion yen

Up to362.0 billion yen

Up to163.6 billion yen

100%

131.0 billion yen

Approx.
1,451.9 billion yen

7,000
billion yen

50%
6,607.6 billion yen

100billion yen
31.8
billion yen

99.2 billion yen

50%
4.9
billion yen

1st layer

Approx.
99.5%

2nd layer

25.5 billion yen

Approx.
0.5%

3rd layer

Liability limits

Direct insurance companies

36.7 billion yen

JER

224.7 billion yen

Private sector total

261.4 billion yen

Government

6,738.6 billion yen

Total

7,000.0 billion yen

3 Accumulation of Reserves

The probability of earthquake loss is extremely low compared with other insured
incidents, but the damage from earthquakes can be massive. Japan’s earthquake
insurance system is therefore predicated on an equilibrium between premiums andpayouts over an extremely long period. The reinsurance premiums that the government
receives from JER are accumulated in a reserve in a separate account, the “Earthquake
Reinsurance Special Account.” The government would first reverse this reserve to pay
out reinsurance claims in the event of a major earthquake, and would then pay from afund, which would be transferred from the general account or debt, to cover a temporary
shortfall should the reserve be insufficient. This fund would be repaid with futurereinsurance premium income, which serves as a mechanism to maintain the equilibrium
between premiums and payouts. At the same time, private insurance companies reserve
net premium income after deducting relevant operating expenses from premium incomein the reserve at the end of each fiscal year. In addition, insurance companies are
obligated to accumulate investment income from these reserves, which is a mechanismthat keeps insurance companies from profiting from this system.

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The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

4 Liability Limit and Reserves

Private non-life insurance companies are supposed to bear as much of the liability
from earthquake insurance as they are able. However, excessive liability would impact
their ability to underwrite other types of insurance. Another problem is that a massive
earthquake could saddle insurance companies with liabilities that threaten their ability
to remain in business. A liability limit has therefore been set based on the reserves of
insurance companies. However, the decrease in reserves among private insurancecompanies as a result of the Great East Japan Earthquake provided the impetus for a
fiscal 2013 change of the liability limit of the private sector to address two consecutive
major earthquakes. This added reliability to insurance benefit payouts and enhanced
trust in the earthquake insurance system.
Table 1: Liability Limit and Reserves
Fiscal year
2010
2011
2012
2013
2014

Private sector
Liability limit
Reserves
1,198.75
913.5
724.45394.2
488.00421.5
240.50450.6
261.40491.7(Billions of yen)

Government
Liability limit
Reserves
4,301.25
1,342.7
4,775.55
886.8
5,712.00
962.3
5,959.50
1,072.7
6,738.60
1,193.4

5 Penetration Ratio and Ratio of Fire Insurance Policies with an Earthquake Rider

Attached
Every area of Japan is exposed to earthquake risk. Japan therefore created anearthquake insurance system with the goal of providing stability in the lives of people
who are affected by major earthquakes. This resulted in a need to increase the numberof policyholders by popularizing earthquake insurance. The General Insurance
Association of Japan (GIAJ) and non-life insurance companies therefore engage in adiverse range of activities to promote understanding of earthquake insurance andincrease the penetration ratio.
Figure 3 shows that the penetration ratio is below 30% even though major
earthquakes in the past have resulted in steady increases in the penetration ratio.
Recent data show that the ratio of fire insurance policies with an earthquake rider
attached is just under 60%. The industry must maintain ongoing initiatives to increase
these ratios.

51. The Earthquake Insurance System andJapan Earthquake Reinsurance Co., Ltd.

Figure 3: Household Earthquake Insurance Coverage Ratio and Ratio of Fire
Insurance Policies with an Earthquake Rider Attached(Thousands)
18,000(%)
70

16,0002013

60

14,00050

12,00010,000

40

8,000

30

6,000

20

4,000
10

2,000
0

0
1995
Policies (left scale)

2000

2005

(Fiscal years)
Household coverage ratio (right scale)

2010

2014

Earthquake rider ratio (right scale)Note: The household coverage ratio for fiscal 2014 is a provisional figure calculated using thenumber of households for fiscal 2013. The earthquake rider ratio had not been publicly
announced when this article was being written.

2. JER’s History andCurrent Status(1) History of JER
The frequency and magnitude of earthquakes are difficult to determine
statistically. The irregular timing of earthquakes and risk that they can be massive
creates various issues for risk coverage by the conventional insurance system. However,
the massive damage caused by the Niigata Earthquake of 1964 added momentum tothe movement to create an earthquake insurance system, which was established inJune 1966 along with JER.
Japan’s earthquake insurance system was created with the assumption that it
would be supported by the government and would be managed according to therelevant laws. These laws are the basis for JER’s role as a company that reinsures theliabilities assumed by insurance companies. JER is a completely private company
funded by Japan’s non-life insurance companies to serve as the government’s
counterparty in reinsurance contracts for earthquake risk, and is therefore a centralcomponent of a reinsurance system designed to strengthen the core of the earthquake
insurance system provided by a public-private partnership.

(2) JER’s Operations
JER’s management philosophy is to be a company that society broadly trusts bycontributing to the continuity and development of a well-funded and reliable social
system through the sound management of a system for providing earthquake insurance.
Our mission is to financially support the swift payout of insurance benefits bydirect non-life insurance companies by paying out reinsurance claims in order toimmediately stabilize policyholders’ lives in the event of a massive earthquake.

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The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

JER administers and manages the reserves of direct insurance companies
collectively with its own reserves to ensure the rapid availability of capital if massive
earthquake damage occurs. Our approach to asset management focuses first andforemost on soundness and liquidity because we may have to dispose of all assets tohandle massive reinsurance claims payouts. The profitability of asset management isimportant for us, but as an additional consideration to soundness and liquidity. We
primarily invest in highly liquid, highly rated financial instruments including
government bonds, and do not invest in riskier assets such as equities.
JER is a small company with about 30 employees, but is concentrating intensely
on strengthening and raising the sophistication of its business continuity management(BCM) in the event of a massive earthquake. Our compact organization requires all
employees to enhance their performance, and we emphasize employee development as
a key management priority.

(3) Key Performance Indicators
Our key performance indicators for the past five years follow below. Net premiumincome has increased by 50% over the past five years. On the other hand, net claims
paid after recovery of reinsurance claims increased to nearly 200 billion yen in fiscal
2011, but has been trending downward in tandem with payout of insurance benefits
by direct insurance companies resulting from the Great East Japan Earthquake.
Total assets decreased by more than half to the 500 billion yen range as a result of
payment for the Great East Japan Earthquake, but currently have recovered to the 600
billion yen range. Return on investment was nearly one-third the level five years ago
because interest rates have remained low amid persistent deflationary conditions andhave been further impacted by the ultra-low interest rates that have become the norm
worldwide.
Table 2: Key Performance Indicators of JER(Millions of yen)

Fiscal year
Net premium income
Net claims paid
Total assets

2010
71,532
1,033
1,154,108

2011
83,671
196,625
509,498

2012
92,996
31,607536,8082013
92,24815,010577,305

2014
108,994
9,563
640,137

Return on investment
Number of employees

1.20%
25

1.18%
26

0.89%
27

0.70%
26

0.42%
29

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1. The Earthquake Insurance System andJapan Earthquake Reinsurance Co., Ltd.

3. JER’s Role after theGreat East Japan
Earthquake

4. Preparing for
Future Earthquakes:
Specific Initiatives
in Anticipation of
an Inland
Earthquake
in the Tokyo
Metropolitan Area

8

On March 11, 2011, the non-life insurance industry established the Earthquake
Insurance Central Command at GIAJ after the Great East Japan Earthquake occurred.
Rapid payment of a large number of claims to policyholders ensued, with the industry
paying out more than 1,200 billion yen for 780 thousand claims within about threemonths.
The payout of estimated reinsurance claims was an initiative that was the first of
its kind since Japan’s earthquake insurance system was established. In a typicalreinsurance transaction, the direct insurance company first pays claims topolicyholders and then submits a statement of account for a reinsurance claim to thereinsurer. However, the advance payments to policyholders by direct insurancecompanies could run into trillions of yen if a massive earthquake occurs. The
earthquake insurance system therefore created a procedure for paying estimatedreinsurance claims. As a result of this procedure, JER had provided a total of nearly 1
trillion yen in four payments to direct insurance companies by May 25, 2011, or 75
days after the earthquake occurred on March 11, 2011.

The experience of the Great East Japan Earthquake reaffirmed the importance ofbusiness continuation at JER because we are infrastructure that secures the cash flowof non-life direct insurance companies. JER functioned effectively after theearthquake, but Tokyo did not suffer significant damage and our normal businessactivities resumed soon after the earthquake occurred. We have been upgrading
various aspects of our operations environment including IT system infrastructure to
maintain highly precise operations even in the high-pressure situation of an inland
earthquake in the Tokyo metropolitan area.
Specifically, in fiscal 2012 we renovated internal IT system infrastructure andestablished a virtual IT platform at data centers in Tokyo. At the same time, weestablished a backup data center in Okinawa because it does not rely on the Tokyo
electric power grid, which experienced electricity shortages as a result of problems at
nuclear power plants after the Great East Japan Earthquake, and the probability that it
will experience a disaster at the same time as Tokyo is low. We also constructed aframework for synchronizing data in Tokyo and Okinawa using telecommunicationlines. In addition, we installed thin client terminals and consolidated data in thevirtual platform to introduce a remote access framework that allows employees todirectly access data center systems via the Internet from their homes or other offsite
locations. Moreover, in fiscal 2014 we established a provisional office in Saitama
Prefecture to secure space we can use if a disaster renders the head office unusable. We
completed the installation of terminals and other equipment needed to conduct
operations, thus constructing a system that enables operations to continue within thesame IT system infrastructure as the head office through the use of remote access.
We have conducted repeated training and drills from employee homes and theprovisional office using the environment we have prepared so that we can conductvarious crucial operations such as the payout of estimated reinsurance claims if an
emergency occurs. These initiatives do not have an endpoint because they are an
important ongoing effort to improve our capabilities.

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

Figure 4: IT System Infrastructure in Anticipation of an Inland Earthquake in the Tokyo Metropolitan Area
Remote Access

Remote Access

Temporary Oﬃce

Head Oﬃce(Home)(Out of the oﬃce)(Saitama City)(Tokyo)Thin Client
ActiveStandby

WAN

Internet

Internet(KDDI)(USEN)
ActiveFirewall
Active/Standby

StandbyStandbyVirtual Platform

L3 Switch(An environment in[Redundancy]
anticipation of disasters)

ActiveL3 Switch[Redundancy]

Virtual Platform(Main)

Data Synchronization

Surveillance
Surv

Okinawa Data Center

Conclusion

SurveillanceTokyo Data Center

In 2013, the government’s Central Disaster Management Council estimated theprobability of a magnitude 7 class inland earthquake in metropolitan Tokyo within thenext 30 years at approximately 70%, and predicted the probability of a magnitude 8
to 9 class Nankai Trough earthquake at 70% as well.
The government’s Disaster Management Basic Plan advocates that the earthquake
insurance system should be strengthened as a means for citizens to enhance their own
efforts to prepare for an earthquake. Rapid, reliable insurance benefit payouts from theearthquake insurance system when an emergency occurs will become even more
important.
Given these circumstances, JER’s role and mission are to function reliably in theevent of a massive earthquake and to contribute to the earthquake insurance system’s
evolution and development as a company that specializes in earthquake reinsurance.
JER initiated a three-year medium-term management plan in fiscal 2015 as a step
toward its next 50 years. The subtitle of the plan is “Strengthening Our Ability to Pay
Earthquake Reinsurance Claims,” and implementing these initiatives is a top priority.
Japan’s earthquake insurance system is an excellent public-private partnershipwithin an outstanding framework, and the system functioned effectively after theGreat East Japan Earthquake. JER has an important role as the only company in Japanthat exclusively handles earthquake reinsurance. We have reaffirmed the importance ofour responsibility to society and will fulfill our role and mission.

9General Concepts Applied toa Proprietary View of Risk

2.
Introduction

1. International
Approach to
Risk Management

Oriol Gaspa Rebull
Catastrophe Management, Aon Benfield

John Moore
Head of International Analytics, Aon BenfieldIn recent years, owning a view of risk has become a crucial part of a goodEnterprise Risk Management (ERM), but having a proprietary view of risk can be
subject to strong requirements, such as those set by Solvency II and the Own Risk
and Solvency Assessment (ORSA) in Europe.
Throughout this article we will try to provide some guidance on general concepts
involved in a “proprietary” view of risk, together with examples of tools and processes
used to accurately assess and manage risk, with a view to shedding light on how toface and respond to present and future regulatory requests.

At the heart of the prudential Solvency II directive, the ORSA is defined as a setof processes constituting a tool for decision-making and strategic analysis. It aims toassess, in a continuous and prospective way, the overall solvency needs related to thespecific risk profile of the insurance company.
The second pillar of Solvency II plans to complement the quantitative capitalrequirements with qualitative ones and a global and appropriate risk management
system. The reform provides measures on governance, internal control and internal
audit in order to ensure sound and prudent management practices from insurers.
Impacts in terms of risk and solvency should feed into upstream strategic decisions.
The internal assessment process of risks and solvency, known as the ORSA, is thecentrepiece of this plan.
In an operational way, the ORSA is part of the global process of Enterprise Risk
Management (ERM).
Figure 1: Potential Stakeholders of the Insurance Industry

Insurers

Investors

Regulators
ORSA
Solvency II

Policyholders

RatingAgencies

It is part of a cyclical and iterative system involving the board of directors,
internal audit, senior management, internal control and all employees of thecompany. It aims to provide a reasonable assurance of compliance with the strategy of
the company against risks.

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The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

The General conditions in the guidelines on ORSA described by European
Insurance and Occupational Pensions Authority EIOPA (EIOPA-CP-11/008) state
that: “The undertaking should develop its own processes for the ORSA, tailored to fit
into its organisational structure and risk management system with appropriate andadequate techniques to assess its overall solvency needs, taking into consideration thenature, scale and complexity of the risks inherent to the business.”
But what are these “appropriate” and “adequate” techniques to assess thesolvency needs?

2. General Concepts
Involved ina “View of Risk”

Although there are many ways to achieve a specific view of risk, it is possible togroup them in three main areas.
• Data Quality & Benchmarking• Modelling• Adjustments(1) Data Quality & Benchmarking
The first stage towards achieving a consistent view of risk is to have good quality
data and reliable quality control procedures on this data. Regardless of the line ofbusiness, it is very difficult to have an accurate understanding of modelling outputs
without knowing the inputs provided.
The concept of GIGO (Garbage In Garbage Out) is as applicable in the computing
world as it is in the insurance sector. No model or tool will deliver an accurate andreliable output unless the inputs provided have a minimum standard of quality.
It is very complicated to have a clear and defined risk strategy when there is nocontrol on the exposure underwritten. The higher the resolution and granularity of
the insurance portfolios, the lesser the uncertainty around the assessment of the risk.
Standards of quality can vary by region, peril and line of business, but anyone
aiming to have their own view of risk should strive towards the highest quality
exposure data possible.
Data quality control alone is sometimes not enough. To achieve a comprehensive
view of risk, a second process is often required.
Data benchmarking provides an objective perspective towards the consistency
and accuracy of the data. Regardless of the quality of the records and procedures used
to compile them, it is important to have an opinion on how that data looks, and tocompare it against data from other sources.
For example an insurance company might have gone through an intense processof increasing the quality of its portfolio risk types (occupancies and construction types
within the exposure). Although this guarantees a high standard of data quality, it isequally important to compare this data set against a general market view. If that
insurance company has a 90% portfolio weighting of industrial exposures versus a
50% average in the market, we can assume that their property diversification is low,hence heavily biased towards a single line of business, which would not be considered
best risk management practice.

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2. General Concepts Applied toa Proprietary View of Risk

(2) Modelling
Modelling is a valuable (but not the only) way to assess the risk a company might
be subject to, and entails a large number of disciplines and products available for risk
assessment.
From catastrophe to capital models they all share the same core idea: “Theprocess of using computer-assisted calculations to estimate the expected loss
associated to events with a distinct frequency and severity”.
All models are based on a historical catalogue of events and the completeness ofsuch catalogues is key when assessing the quality and suitability of the models.
Once the historical catalogue has been settled, each model will treat the historical
data in the most appropriate way possible depending on the purpose of the model.
Although models used in different areas of the insurance company may use very
diverse sources of data, they all strongly rely on them.
For example, a catalogue in a catastrophe model will be implemented in thehazard module, but there are other components as important as the hazard, mostly thevulnerability and financial modules which have as much relevance in the calculation of
the losses as the hazard. Vulnerability and Financial modules are separate andindependent elements of a catastrophe model and fulfil very specific functions,designed to be able to assess losses due to natural and man-made catastrophes.
In general users do not have access to the component parts of such models,
especially if they have been provided by a third party, but they can work onunderstanding the different constituent parts of such models.
Reaching an understanding of these parts is a step towards fulfilling what regulators
see as “owning a view of risk” when they refer to modelling. Being able to identify thestrengths and weaknesses of these models through a thorough study of their component
parts and outputs, provides extremely valuable information on the reliability of the tools
and their suitability to be able to represent an accurate view of risk.

(3) Adjustments
There is a different kind of modelling also available which does not rely on
historical catalogues of events, but rather on loss experience.
This approach has the advantage of being independent of the mathematicalmodels, but is still linked to the events suffered in a region and the lines of businessrelevant to each company.
The largest benefit of this approach is that it allows adjustments reflecting thereal loss history suffered by a company based on the actual claims collected, rather
than estimating physical properties of the events and then estimating a loss from it.
The main disadvantage is that is very dependent on the time span covered by
the loss experience and subject to exposure variation, claims collection uncertainty,
policy condition changes and other factors which can sometimes be very hard tocontrol and quantify.
There is of course the possibility of combining both approaches. When the loss
records do not provide a complete or partial picture, the results from the models canbe blended with the data to achieve a more accurate (or less uncertain) result.

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The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015(4) Reaching a View of Risk
As we have seen, there are several ways to reach a “view of risk” and each of themfeeds from the others, but there is a basic hierarchy to it (Figure 2).
Figure 2: Basic Components of a Proprietary View of Risk

Adjustments

02

03
Data
Quality &BenchmarkView of
Risk

Using &
Understanding
Models01

Companies should not address Adjustments without a clear picture of the models
and the data used, and companies should not blindly take the modelling results
without a critical examination of their constituent parts and a strong control of the
exposures modelled.
Under Solvency II and ORSA requirements, any technique or tool capable ofproviding a clear picture and addressing any of the issues involved in the aforementioned
components’ view of risk, should be accepted as an appropriate and adequate one.

3. State of the Art
Products for Risk
Assessment

Insurers, reinsurers and brokers on behalf of their clients, all use a wide variety oftools, procedures and models to best estimate the risk their portfolios are subject to.
The range of complexity is quite wide, but there is always a tool which will suitthe purpose set by a company to reach a higher level of understanding of their risks,
which is by all means and purposes a step forward towards reaching their own view.
Here we will show a couple of examples which hopefully illustrate the variety andflexibility of tools available to anyone in the insurance sector with a basic analyticalknowledge.

(1) Exposure Data Control
One of the inherent issues always present in insurance and reinsurance is lack ofknowledge, regardless of the potential hazard affecting a book of business.
The concerns of companies are sometimes limited to the regions and perils
available in the catastrophe models, based on the assumption that commercial models
cover the main liabilities in the globe, but there are many countries and perils in theworld that have not been implemented in catastrophe models so far, and yet havecaused large losses at the time of their occurrence (for example, the Thai floods).

13

2. General Concepts Applied toa Proprietary View of Risk

The idea behind exposure data control tools is a very basic and old one. Whathazards are my portfolios exposed to? And can they cause large losses?
There are several tools available in the market that allow companies to overlay
exposure information with hazard maps. These are known as Mapping or
Geographical Information Systems (GIS) and their ultimate goal is to provide areference (either visual or numerical) capable to help underwriters and risk managers
to better control their exposure and risk (Figure 3).
Figure 3: A hypothetical exposure overlaid on top of a seismic hazard map (left).
On the right, the same seismic hazard map from the Global Seismic
Hazard Assessment Program (GSHAP) showing areas exposed to earthquake in Asia. Such simple exhibits are very useful for risk management
purposes as they provide a clear picture between the risk underwritten
and the perils they are exposed to.

Some of the commercial software available is highly innovative and runs on very
versatile platforms that enable users to visualize and quantify their exposures to agiven risk, in addition to performing sophisticated, detailed data analysis capable ofdriving insightful business decisions.
Such packages can assist users in global or individual risk mapping, pre-binding
underwriting analysis, risk driver analysis, claims planning and preparedness, postcatastrophe analysis, identifying exposure accumulations around terrorist targets, anda host of other functions.
Some of them even enable users to view and track exposures worldwide byproviding global mapping capabilities and portfolio analysis as well as up-to-date (realtime) information on catastrophes including earthquakes, hurricanes, wildfires,
tornados and hail events, volcanic eruptions, and other ad hoc events.
Sometimes, such level of complexity is not really needed. Commercially available
GIS software is capable of plotting maps like the ones in Figure 3 and can provide
equally powerful insights to support making underwriting decisions and growth
exposure management.

14

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015(2) Models and Adjustments
Although catastrophe models are very powerful tools, they lack the capabilities toassess some lines of business, for example life and motor, outside the natural
catastrophe world.
So, how is a company supposed to manage the risk linked to a line of businessnot covered by catastrophe models?
One way is to use a Dynamic Financial Analysis (DFA) tool to create loss
distributions representative of the loss experience suffered by a company.
A good example is a process followed by insurance companies or brokers withaccess to a significant loss history record of the risks exposed.
The first step is to assess the quality of the loss data and establish the assumptions
to be applied. Transparency is a paramount feature in these kinds of procedures andalthough such techniques are not always replicable they have to be at least caveated.
Knowing the limitations of a model or a tool is as important as understanding its
results.
Once the data quality control is done, the second step is to fit a statistical
distribution to the loss history. The mathematics behind are not straight forward, but
the concept is. From a suite of available mathematical distributions, we have to findthe best match to the experienced loss (Figure 4). The match is never perfect and theconvergence in the tail can sometimes be poor, but actuaries and catastrophe
modellers who work on a daily basis with such methods, will reach the most adequate
compromise between data and modelling.
Figure 4: Loss frequency distribution of historical losses and the best fitting distributions. In our example a distribution (Pareto2 (MLE)) was chosen as the best
fit for severity distribution.
100%

80%

60%

40%

20%

0%
Original Set

Pareto 2

LogNormal

15

2. General Concepts Applied toa Proprietary View of Risk

Once a distribution is found, the last step is to use a probabilistic tool (as in a
DFA model) to simulate losses based on some basic parameters like an underwriting
limit or attachment. The events experienced in the loss data need to be assigned a rateof occurrence. Most of the data related to insurance losses follows a random
behaviour, which can be represented by a Poisson distribution with a mean based on
the time span of the historical data.
Figure 5: Per Risk Aggregate Ground-up Loss Curve Comparing the Historical
Records with the Modelled Records Using a DFA

Loss

0

10
Experienced Loss

20
Return Period (years)

30

40

Modelled Loss

The final output is a distribution of modelled losses matching the historical dataand capable to forecast losses for further return periods than the ones in the loss
records (Figure 5).
But as mentioned already, there are several things to be considered in such ananalysis if it has to be used as an adjustment tool. For example the original loss data
might have to be compensated by indexation, loss records completeness, loss
thresholds and changing financial conditions or other factors, but as long as there is agood understanding of the raw data (loss records benchmark), the data inputs to themodel (rectified loss data) and the processes behind the tools used (model evaluation),such an exercise is extremely useful for underwriting purposes.

4. Japan Perspective

16

How can all these tools and concepts benefit the Japanese market?
The Japanese insurance market does not yet have a disclosed schedule of
implementation of a strict regulatory framework like Solvency II, but many Japanese
insurance companies, aware of the work carried on in Europe and the US, havestarted to address their risk management strategies in a more comprehensive androbust way.
The larger Japanese insurance groups have a significant contribution of risk
coming from international exposures, mainly in Asia, the US and Western Europe.
These groups are aware of international regulatory demands, ERM procedures andthe importance of a healthy risk management strategy.

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

The General Insurance Rating Organisation of Japan (GIROJ), through its workin data collection, statistical analysis and modelling, has a significant role in solvency
and the capital requirement in Japan. The treatment of cat reserves and the criteria
driving them have been evolving in Japan for several decades and more recently there
is a movement towards implementing a more ERM driven perspective.
In a different approach to Solvency II’s Standard Formula in Europe, insurancecompanies use GIROJ probabilistic model outputs to meet the solvency requirements
in Japan, but they are not universally benchmarked against other catastrophe models
to assess internal views of risk.
Generally speaking, the probabilistic nature of the GIROJ models may makethem a more accurate regulatory tool to assess the risk insurance companies are
exposed to than the Standard Formula. Effectively, what GIROJ does is to bring its
own view of risk to the meeting of capital requirements in Japan.
This approach creates a dichotomy between Solvency needs and the internal viewof risk, which can lead a Japanese insurance company to have two very different viewsof risk: one complying with the Solvency requirements established by GIROJ, andanother one poles apart, as an internal interpretation of risk based on internal models,
but both views are equally valid.
A meticulous capital management strategy requires a balance between capital andrisk as well as a sustainable growth approach, but how is it possible to have a soundstrategy when there is such an apparent contrast between the capital required by the
Solvency regulation and the internal capital requirements estimated by the internal
models (Figure 6)?
Figure 6: Hypothetical Gap Between an Internal View of Risk and the Solvency
Requirements

Capital buffer

Capital requirement
based on solvency
regulations

Capital requirement
based on an internal
model

How is an insurance company supposed to apply a sustainable growth strategy
without a tight control of the capital buffer between different views of risk or without
a fitted regulation around them both?
If, for example, GIROJ became the reference for solvency and internal risk
management requirements in Japan, Japanese insurers might face a tougher test thanthe Solvency II Standard Formula when justifying a different view of risk from theone established by GIROJ.
Suddenly that capital buffer would disappear, with a cascade effect on other fields
involved in the whole ERM framework.

172. General Concepts Applied toa Proprietary View of Risk

One must consider the fact that proactive pre-emptive measures towards
achieving a sound proprietary view of risk will help in the future to face tougher andstricter regulatory requirements.
Here is where the international experience and all the tools available in themarket can help those who are ready to face such a challenge.
No insurance company is the same, and they all have very different internal andexternal risk management strategies in place, but the sooner they get familiar with all
the general concepts applied to “a proprietary” view of risk, the better prepared will
they be to establish the “appropriate and adequate techniques” to assess their own
solvency and risk prerequisites.

Conclusions

18

Risk management is a very complex field, which involves many different
disciplines and large amounts of uncertainty.
In this paper, we have only described a handful of concepts and tools available inthe market used to create a “view of risk”. Whenever an insurance or reinsurancecompany takes on the task to create such a view, they will face many challenges, fromunderstanding their exposures to how best to diversify their risk while following asuitable growth strategy.
But like any large and complex operation, once the constituent parts and largest
drivers are identified, then the main issues can be tackled using the right tools in
hand. Such tools are already available and have been used for several years in theinternational environment.
Every day the insurance market is becoming more and more technical anddemanding. Everyone has a need to allocate key people or resources towards
understanding the inputs and outputs of the tools and processes used in the creationof a view of risk. They also need to make sure that knowledge is well communicatedand no information is lost in translation when shared among all the stakeholders.
A good ERM plan requires for all stakeholders to be aware of the main issues
faced so a sound strategy can be placed for both internal and external purposes.

Preparing fora Japan Typhoon Megadisaster3.
Foreword

1. Event Overview

Milan Simic, Ph.D., SVP
Managing Director of International Operations, AIR Worldwide

Ruilong Li, Ph.D.
Senior Engineer, AIR Worldwide

Using model scenarios to probe your portfolio’s strengths and weaknesses is
responsible risk management practice. It is important to prepare for a wide range of
scenarios in order to respond effectively when disaster strikes. The scenario describedin this article is just one example of the extensive and widespread damage a typhoon
could produce in Japan and around Tokyo. The insured loss for this event has amodeled annual exceedance probability of about 1.3% (a 75-year return period) for
all of Japan, and about 1.3% (75-year return period) for Tokyo. This is not an
extreme tail event; far greater losses are possible.

It is well into December when a Category 4 typhoon, the seventh typhoon
landfall of the year, slams into Japan. The slow-moving storm brings fierce winds,some in excess of 160 km/h, to the coastal regions of Mie, Aichi, and Shizuoka
prefectures. A high storm surge plows into the levees surrounding Ise Bay, testingflood defenses. Weakening as it moves inland over colder and more mountainous
terrain, the storm passes north and west of Tokyo, causing extensive wind damage tothe low-lying coastal areas around Tokyo Bay and higher elevations west of the city.
The storm, which makes a total of five landfalls in Japan, continues to weaken as it
moves across northern Honshu and Hokkaido.
Strong winds disrupt surface transportation, cause the cancellation of hundreds offlights, and prompt officials to issue evacuation orders or advisories to hundreds ofthousands of residents. Heavy precipitation increases the risk of landslides. In Tokyo,
officials suspend public transit and close down schools. Production along the highly
industrialized southern coast is halted as vulnerable light metal roofing and siding areeither heavily damaged or destroyed.
AIR estimates that if such an event were to actually happen today, insured losses
would be 2.8 trillion yen (23.2 billion U.S. dollars)* for all of Japan and 630.7 billion
yen (5.2 billion U.S. dollars) for the Tokyo metropolitan area. The heaviest losses arefound in Shizuoka Prefecture and result from damage to industrial assets. Figure 1
shows the wind intensity footprint for this simulated storm.
*All U.S. dollar amounts are based on an exchange rate of JPY 1 = USD 0.00829, current as of
May 1, 2015.

19

3. Preparing fora Japan Typhoon MegadisasterFigure 1: Wind Intensity Footprint (1-Minute Maximum Sustained Winds) of
the Typhoon Megadisaster Scenario from the AIR Typhoon Model for Japan

Source: AIR

2. Japan’s Typhoon
Setting and History

20

The Northwest Pacific Basin produces more tropical cyclones than anywhere elsein the world. Since 1951, an average of four typhoons per year have made landfall on
one of Japan’s four islands – and another five come within 500 km of the coastline.
While typhoons can occur during any month of the year, most strike Japan between
May and October, with July through September being peak season.

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

Wind drives most typhoon-related loss in Japan, but flooding is also a significant
threat because of Japan’s orientation, location, and terrain. After the destruction caused
in 1959 by Typhoon Vera – the costliest weather-related disaster in Japan’s history – thegovernment undertook a massive effort to strengthen coastal and inland defenses, andmost major cities are now protected by sophisticated flood defense systems.
Typhoon Vera was accompanied by an exceptionally destructive storm surge that
destroyed a levee and dyke system and inundated the city of Nagoya. More than 5,000
people were killed, and more than 834,000 buildings were damaged or destroyed inJapan. Other significant historical storms include Typhoon Kathleen (1947) andTyphoon Ida (1958). A more recent storm, Typhoon Tokage (2004), affected some ofthe same areas as our Megadisaster scenario, but was far less powerful.

3. Affected Exposure

Throughout Japan, building codes are stringent and reflect the country’s exposure
to both wind and earthquake hazards, but many existing structures predate theexistence of these codes. Wood construction dominates residential exposures in Japan,
and modern wood-frame houses exhibit good lateral resistance to wind loads; thus,
major structural damage is expected to be limited at the wind speeds of the modeled
storm. However, damage to roof coverings and windows can allow wind-driven rain toenter a building’s interior and cause extensive damage to building contents.
Furthermore, dislodged external components can become wind-borne debris that cancause extensive damage to surrounding structures.
Larger multi-family apartment buildings and commercial and industrial structures
are generally engineered and made of reinforced concrete or steel. Damage is usuallyconfined to nonstructural components, such as mechanical equipment, roofing,
cladding, and windows.
A significant portion of Japan’s industrial stock is of non-engineered light metal
construction, which is one of the construction types most vulnerable to high winds.
These buildings can experience extensive structural damage, and even collapse.
Figure 2: Japan’s Insurable Exposure by Construction Type
Agricultural
Apartment Unit
Commercial
Industrial
Single-Family
Homes
0%

10%

20%

30%

40%

Concrete

Masonry

Steel

Wood

50%

60%

70%

80%

90%

100%

Source: AIR

21

3. Preparing fora Japan Typhoon Megadisaster4. Estimating the
ImpactAIR estimates that the simulated event featured here would cause insured losses of
2.8 trillion yen (23.2 billion U.S. dollars) for all of Japan. Figure 3 shows the
distribution of modeled loss by municipality.
Figure 3: Insured Loss by Municipality(Billions of yen)

Source: AIR

The coast from Mie to Shizuoka is hit hardest. A storm surge, similar in heightand size to the storm surge generated by Typhoon Vera, flows into Ise Bay, causing
moderate flood damage. However, the levees protecting Nagoya, which failed in 1959,
hold this time. Powerful winds rake the coasts of Aichi, Mie, and Shizuoka prefectures.
Together these three prefectures account for almost two thirds of all insured loss fromthe modeled storm. Figure 4 shows insured losses in the most heavily affected
prefectures.

22

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

Figure 4: Insured Loss in the Most Heavily Affected Prefectures(Billions of yen)
1,000
900
800

Insured Loss

700
600
500
400
300
200
100
0
Shizuoka

Aichi

Mie

Kanagawa

Tokyo

Saitama

Chiba

Source: AIR

Much of this loss is industrial because this region is a manufacturing hub andhome to companies like Toyota, Brother Industries, Makita, Yamaha, and Suzuki.
Note that insurance penetration for industrial and commercial lines is typically muchhigher than for residential lines, which is another contributing factor to high insured
industrial losses. On an insurable loss basis, residential losses exceed industrial losses.
Shizuoka Prefecture alone sustains over 891.6 billion yen (7.4 billion U.S. dollars)
in insured loss. Most of this loss is to industrial exposures in Hamamatsu and aroundthe northern portions of Suruga Bay. Shizuoka’s residential loss, at 257.5 billion yen(2.8 billion U.S. dollars), is also the highest of any prefecture. To the west, most of the529.6 billion yen (5.8 billion U.S. dollars) in Aichi prefecture is to industrial
exposures on Atsumi Peninsula and in and around the city of Toyota.
With 630.7 billion yen (5.2 billion U.S. dollars) in insured loss, the densely
populated Tokyo metropolitan area (consisting of the prefectures of Chiba, Kanagawa,
Saitama, and Tokyo Metropolis) accounts for 22% of the event’s total insured loss,
most of which is to residential properties. Strong winds affect all areas around Tokyo
Bay and areas to the west, such as Hachioji, Machida, Suginami, and Nerima, but
Edogawa and Ota are hit especially hard.
Figure 5: Insured Loss by Line of Business for Japan

Automobile
Commercial
Industrial
Residential

Source: AIR

23

3. Preparing fora Japan Typhoon Megadisaster5. Are You Prepared?

A few modeling best practices can help ensure that your model produces the most
realistic loss estimates:• Building response to potentially damaging winds is highly dependent on its
location and attributes. Accordingly, collect accurate, detailed information for theproperties that make up your portfolio – including location and all primarybuilding characteristics such as construction type, occupancy, building age, height– and a true replacement value. Relying solely on coarse resolution address data
can lead to significant over- or underestimations of risk.
• Be aware that typhoons in Japan can result in high flood losses. While
precipitation was not a significant source of loss in this Megadisaster scenario, theAIR model provides the ability to separate wind and flood losses, which havedifferent policy conditions in Japan.
• Note that losses from extra cleanup expenses and debris removal can be asignificant source of additional insured losses (more than 30% for some policies).
While not included in the industry losses in this scenario, clients can explicitly
model these losses for their own portfolios.
• Consider the potential for business interruption losses. While not included in this
scenario, clients can use the AIR model to calculate business interruption losses asa function of downtime, the level of damage sustained, the size of the building,and its architectural complexity.
• Note that highly concentrated losses can trigger demand surge, which is anincrease in the cost of materials and labor after a large catastrophe due to limited
supply. This event triggers demand surge of about 10% for building damage,which is included in the industry modeled losses.
• Finally, consider your loss ratio, or how your estimated losses compare to the“total insured value” in each affected area. While your losses may at first appear tobe high, the loss ratio they reflect (typically less than 10% even in the worst
affected region of this Megadisaster analysis) should be entirely consistent with an
infrequent but thoroughly plausible catastrophic event.
Extreme Disaster Scenarios
To help risk managers think about events that are unlikely to be captured by traditional catastrophe
modeling techniques, AIR has created Extreme Disaster Scenarios (EDS) that can be analyzed using
AIR’s Touchstone® platform. These events are plausible but highly uncertain, and no attempt has
been made to assign them loss exceedance probabilities. Two EDS are available for the AIR Typhoon
Model for Japan that affect an area similar to the one in this Megadisaster scenario.

6. Closing Comments

24

AIR’s models capture the behavior of physical phenomena and how thosephenomena impact the built environment. They have been thoroughly validated using
data from a wide variety of sources.
But no model can predict what the next megadisaster will actually be or when it
will occur. This fundamental uncertainty makes it all the more important forcompanies to use catastrophe models to prepare for such losses. The full range of
scenarios the models generate – simulating so many perils that impact so many places– provide a unique and important global perspective on an organization’s overall risk.
The careful analysis of model results can help risk managers prepare for many
contingencies – thus ensuring that scenarios like the one presented here will not be
entirely unexpected.

4.
1. The Importance ofERM

2. The Current
Situation of Japanese
Non-Life Insurance
Companies

Recent Developments in Enterprise
Risk Management among JapaneseInsurance Companies
Nobuyoshi Yamori
Professor, Research Institute for Economics and Business Administration
Kobe University

Many large financial institutions in the United States and Europe experienced
difficulties following the financial crisis in autumn 2008, forcing national
governments to provide large amounts of financial support in order to stabilize thefinancial system. Naturally, people in each country rebelled against government
decisions to rescue the very financial institutions that had caused the crisis.
Governments therefore strengthened financial institution regulation and supervision
to preclude similar crises in the future. While Japan’s financial system was not
disrupted significantly, Japanese regulatory authorities revamped the financial
regulation framework in step with international trends.
Strengthening risk management and limiting the amount of risk in accordancewith the tightened regulations, however, does not equate to “management” of financial
institutions. Rather than limiting risk, financial institutions are now required to
manage the types and amounts of risk they bear in accordance with their capacities
and management philosophies in order to consistently increase corporate value overthe long term. Given this perspective, Enterprise Risk Management (ERM) has
naturally gained currency among Japanese insurance companies.

(1) The Challenging Environment of the Non-Life Insurance Business
Underwriting profit and investment profit are the primary sources of earnings for
non-life insurance companies. Figure 1 shows profit and loss for Japan’s non-life
insurance companies according to each type of profit. Surprisingly, the industry
experienced underwriting losses in seven of the twelve fiscal years from fiscal 2002
through fiscal 2013, and notably had underwriting losses for the four consecutive
fiscal years from fiscal 2010.1 In particular, underwriting losses were a significant
339.1 billion yen for fiscal 2011.
Analysis of the deterioration of underwriting profits in terms of the three main
factors of premium income, insurance claims, and operating expenses (operating andadministrative expenses associated with underwriting) is instructive. Insurancecompanies reduced operating expenses by improving efficiency, but lower premiumincome obviated these efforts.2 In addition, insurance claims increased. Fiscal 2011
exemplifies this analysis. As a result of unexpected large-scale natural disasters
including the Great East Japan Earthquake in March 2011 and floods in Thailand insummer 2011, the amount of net claims paid increased 1.2 trillion yen to 5.5 trillion
yen from 4.3 trillion yen in the previous fiscal year. Notably, greater weather-related
uncertainty resulting from climate change such as global warming is not the only
factor increasing risk for Japan’s insurance companies. The flooding in Thailand clearly
showed that Japan’s insurance companies are subject to global risks beyond the bordersof Japan, because the activities of non-life insurance companies and their clients havebecome international. This shows that management of insurance risk has becomemuch more difficult than ever before.
Notes: 1. In fiscal 2014, underwriting is expected to become profitable because automobile insurance
cash flow improved, due largely to the revision of automobile insurance premiums.
2. Premium income totaled 9.3 trillion yen for fiscal 2002, but decreased to 8.7 trillion yen
in fiscal 2013.

25

4. Recent Developments in Enterprise
Risk Management among JapaneseInsurance Companies

Nonetheless, non-life insurance companies have recorded positive pretax net
earnings in all but one of the past twelve fiscal years. This was due to the contribution
from investment income. Figure 1 shows that investment profit has averaged about
500 billion yen annually, which has compensated for reduced underwriting profits.
However, there is still the risk of significant swings in investment income, as the direct
impact of the financial crisis resulted in investment losses in 2008. Financial market
volatility has increased amid structural changes in the global economy. It is obviousthat management of investment risk has become increasingly difficult as a result.
Figure 1: Underwriting Profit and Investment Profit of Japanese Non-Life
Insurance Companies*(Billions of yen)
800
600
400
200
0
-200
-400
FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013(Fiscal years)
Underwriting proﬁt

Investment proﬁt* Based on data available from the General Insurance Association of Japan (GIAJ; aggregate nonconsolidated data for GIAJ members).
Underwriting profit = underwriting income – underwriting expense – operating, general andadministrative expenses associated with underwriting ± other income (expenses).
Investment profit = investment income – investment expenses.

(2) Pressure from Capital Markets to Increase Profitability
In the past, shareholders rarely pressured management of insurance companies
under the system of cross-shareholdings among closely related banks and companies
within the same financial group. The shareholder composition of Japan’s large non-life
insurance groups, however, shows that foreigners have come to account for about 40%
of shareholders over the past several years. Foreign institutional investors with larger
stakes are insisting on profitability and dividends to shareholders. In addition,
Japanese institutional investors such as life insurance companies and pension funds
have come to aggressively demand improvement in management from their investees
because they need to improve their own performance.

26

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

These changes in shareholder composition and behavior have put intense pressure
on insurance company executives for strong profitability. The management targets ofall the major insurance groups include increased return on equity (ROE)3. For
example, Sompo Japan Nipponkoa Holdings, Inc. (SJNK) announced at an investor
relations meeting in May 2014 that a target for fiscal 2015 was to increase ROE to 7%
or more from 4.3% in fiscal 2013. MS&AD Insurance Group Holdings, Inc.
(MS&AD) has the goal of increasing ROE from 4.5% in fiscal 2013 to 7% in fiscal
2017, the final year of its new medium-term management plan, “Next Challenge
2017.” Similarly, Tokio Marine Holdings, Inc. set an ROE target of 7% or higher in
its medium-term management plan, “Innovation and Execution 2014;” ROE was
7.6% for fiscal 2013.
Note: 3. Simple comparison of percentages of ROE is not appropriate as insurance companies havedifferent ROE targets according to their strategies and circumstances.

3. Issues in theSophistication of
ERM

The author has conducted joint research with ERM managers from Japan’s major
insurance companies since 2013. Through the joint research, the author concluded
that the ERM that Japanese insurance companies aim to achieve is managementtargeting consistent increases in corporate value to ensure soundness while
maintaining and increasing profitability by determining the risks they should take andthe losses they could accept, premised on their own management philosophies andmissions.
Actually, the use of ERM as a key term in medium-term management plans has
become the norm for Japan’s major insurance companies. These companies havetransitioned from building the ERM system to fully employing it in management.
Many small and medium-sized insurance companies, however, are still building their
ERM systems. Moreover, even major insurance companies still have issues they must
resolve to raise the sophistication of their ERM.
The first issue is identifying and measuring risk. Each company is enhancing thesophistication of its methods for identifying and measuring risk. However, companies
must constantly raise the sophistication of risk measurement because risk has become
more complicated and new types of risk have emerged.
The second issue is enhancing risk control technology. If management cannot
control risk appropriately, measuring risk is worthless to management.
The third issue is structuring ERM in terms of each company’s management
philosophy and mission. Soundness and profitability involve a trade-off that must bebalanced, but the desirable balance must be determined in accordance with eachcompany’s management philosophy and mission, rather than ad hoc. For example,
Japan is integrally subject to accumulated earthquake risk. It would be inappropriate
and against its mission for a Japanese insurance company to refuse to underwrite
earthquake risk from a risk management perspective. Japanese insurance companies
are expected to consider how to handle earthquake risk in a manner that ensures peaceof mind for the people of Japan, and then follow through.

27

4. Recent Developments in Enterprise
Risk Management among JapaneseInsurance Companies

The fourth issue is the strong determination of management executives to actuallyemploy ERM in their management. For modern Japanese management executives,
corporate management is tantamount to the extreme difficulty of driving a car at nightin torrential rain. With the risk model as the headlights, risk control as the steering
wheel, and the management philosophy as the map, the management executive is the
person who actually uses all of these to navigate the deplorable roads that symbolize
risk. Risk control sometimes involves painful reforms such as business portfolio
restructuring. Companies need management executives who have the ability and thewill to implement such reforms.
The final issue is the need for an ERM culture. All employees, not justmanagement executives, must share an understanding of ERM for it to truly take root.
For example, ERM would be ineffective if a company cannot develop a large numberof employees who think and operate in terms of risk-based underwriting andinvestment in their daily activities. Moreover, companies must construct a frameworkthat enables the continuity of ERM even if the top management changes.

4. Conclusions

28

When an emphasis on profitability was not as necessary because of low pressure
from shareholders, management executives could succeed by keeping the ratio of risk
to equity (= risk/equity) low to avoid risk. These days, however, the number ofshareholders who emphasize ROE (= earnings/equity) is increasing.
Management executives cannot be allowed to manage inefficiently, but at thesame time, an excessive emphasis on earnings by powerful shareholders cancompromise soundness and damage the interests of policyholders. Insurance company
management has a greater need for balance in the trade-off between soundness andprofitability than corporate management in general. Insurance company management
executives are now responsible for ensuring an appropriate return on risk (= earnings/risk) in order to achieve higher ROE by balancing capital and risk.
Establishing ERM in accordance with a company’s management philosophy andmission involves clarifying the risks the company should take and engendering a deep,
shared understanding of the company’s risk appetite among shareholders, management
executives, policyholders, regulatory authorities, and other stakeholders. Thisapproach enables an insurance company to keep its management strategy including
risk management without accepting inappropriate pressure from shareholders with ashort-term perspective. This means that management executives of insurancecompanies must use ERM as a tool for communicating with stakeholders.
While ERM certainly evolved in response to international regulatory trends,
Japanese insurance companies are expected to proactively employ the ERM framework
to enhance their management capabilities.

5.
1. Trends in BusinessResults of Non-Life
Insurance
Companies for
Fiscal 2014

2. Trends in the NonLife Insurance
Industry

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

Fiscal 2014 results for Japan’s non-life insurance companies were solid. An
overview of the results of the 26 non-life insurers follows.
Net premium income in all lines of business increased to 8,083.1 billion yen, up
311.8 billion yen from the previous fiscal year, due to factors including higher
premium income from automobile insurance due to the effect of revised premium
rates and also the increase of household insurance premium. On the other hand, theloss ratio improved by 1.8 percentage points to 62.3%. Despite an increase in payoutof claims associated with heavy snowfall in the Kanto region, claims paid due tonatural disasters decreased in fiscal 2014 and automobile claims paid decreased as aresult of fewer automobile accident claims. Expenses rose by 96.8 billion yen to2,605.8 billion yen because higher premium income increased agency commissions.
Net expense ratio decreased slightly by 0.1 percentage points to 32.2%. The
underwriting result improved by 277.7 billion yen to an underwriting profit of 143.3
billion yen, because premium income increased and loss ratio improved. Major nonlife companies enjoyed better combined ratios compared with the previous year,
reflecting profit for the year.
Investment profit was solid, increasing 48.9 billion yen to 644.0 billion yen.
Although an environment of low interest rates continued, a weaker yen and high stock
prices contributed to the solid investment profit.
As a result of the above, results for both underwriting and investment were strong,
supporting an increase in ordinary profits of 332.2 billion yen to 746.8 billion yen.
While the reduction of the corporate tax rate resulted in the reversal of deferred
tax assets, net income increased 164.5 billion yen year on year to 378.8 billion yen.

(1) Overview of the Non-Life Insurance Industry
The integration of four companies in 2010 – Mitsui Sumitomo Insurance Co.,
Ltd. with Aioi Nissay Dowa Insurance Co., Ltd., and Sompo Japan Insurance Inc.
with NIPPONKOA Insurance Co., Ltd. – began a cycle of business integration that
established an oligopoly in Japan’s non-life insurance market. As of March 31, 2015,
the top three non-life insurance groups (MS&AD Insurance Group Holdings, Inc.,
Tokio Marine Holdings, Inc., and Sompo Japan Nipponkoa Holdings, Inc.
(hereinafter abbreviated to “SOMPO HOLDINGS”)) account for approximately
85% of net premium income for the industry as a whole.
In addition, AIU Insurance Company, Ltd. and The Fuji Fire and Marine
Insurance Company, Ltd. of the American International Group, Inc. are integrating
their businesses through a merger that will establish a new company, AIG General
Insurance Co., Ltd., in July 2016 or later.
Thus, the non-life insurance industry is promoting increased operating efficiency
through mergers, functional consolidation and cost reductions. At the same time, theindustry is seeing initiatives to secure profits from new sources through businesscollaboration with non-insurance companies. In addition, non-life insurers aretargeting increased earnings by investing in growth areas other than domestic non-life
insurance, including the life insurance business and overseas operations such as those
discussed below.
29

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

Changes and trends among the top three non-life insurance groups are as follows.
MS&AD Holdings was created through the 2010 business integration of two
companies, Mitsui Sumitomo Insurance and Aioi Nissay Dowa Insurance. Since fiscal
2014, MS&AD Holdings has been implementing full-scale reorganization byfunction. For example, Mitsui Sumitomo Insurance is handling the Group’s aviationand marine insurance. While maintaining the framework of two core non-life
insurance companies, MS&AD Holdings is promoting growth and enhanced
efficiency by taking full advantage of their unique characteristics.
Tokio Marine Holdings did not execute major mergers in Japan after Tokio
Marine & Nichido Fire Insurance Co., Ltd. and Nisshin Fire & Marine InsuranceCo., Ltd. integrated their businesses in 2006. More recently, in 2013 the Tokio
Marine Group reached on an alliance agreement with National Mutual Insurance
Federation of Agricultural Cooperatives (Zenkyoren). This alliance is pursuing
opportunities through broad business ties that go beyond the boundaries of themutual aid business and the insurance business, such as business collaboration in thefield of agricultural risk.
With respect to SOMPO HOLDINGS, Sompo Japan Insurance and Nipponkoa
Insurance, both of which focus on the non-life insurance business in Japan, weremerged into Sompo Japan Nipponkoa Insurance Inc., on September 1, 2014, forming
the largest non-life insurance company in Japan in terms of non-consolidated
premium income.

(2) Expansion of Overseas Business
The Japanese non-life insurance market is not likely to expand significantly due tothe low birth rate and aging of society. Non-life insurance companies are therefore
expanding their business base in overseas markets that are expected to grow. The top
three non-life insurance groups have positioned overseas business as a group growth
driver, and are aggressively implementing initiatives such as forming business allianceswith local insurance companies and engaging in M&A.
Figure 1 shows overseas premium income for each of the groups. Since 2012,
overseas net premium income1 for the top three non-life insurance groups has been
trending upward, and fiscal 2014 overseas net premium income was over twice that of
fiscal 2010. In addition, the overseas businesses of the top three groups are now
reaching close to 20% of total net premium income.
The medium-term management plans of the top three non-life insurance groups
target overseas business expansion through M&A and organic growth, giving rise to
expectations for further growth overseas.

30

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

Figure 1: Overseas Net Premium Income1 for the Top Three Non-Life Insurance Groups(Compiled by Toa Re from financial results for each company)(Billions of yen)
2,000

1,500

MS&AD Holdings
Tokio Marine Holdings
SOMPO HOLDINGS
Percentage of overseas net premium income(Percentage of overseas net premium income)20%*(Total of the three groups including life insurance)

15%

1,000

10%

500

5%

0

2010

2011

2012
(Fiscal years)

2013

2014

0%

Note: 1. The total of net premium income from non-life insurance and life insurance premiums.

Key overseas business developments among the top three non-life insurancegroups and recent trends follow below.
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 April 2015 MS&AD Group acquired the shares of Box
Innovation Group Limited, a major company in the United Kingdom’s telematics
automobile insurance2 market, as a means to expand its business base and acquire
expertise in the European retail business.
Note: 2. Telematics automobile insurance has premiums that reflect analysis of driver behavior andmeasurement of driving distance.

Tokio Marine Holdings has developed its overseas operations particularly inEurope and the United States. It acquired UK company Kiln Ltd. and U.S. company
Philadelphia Consolidated Holding Corporation in 2008, then acquired U.S.
company Delphi Financial Group, Inc. in 2012. Moreover, in June 2015 it announced
acquisition of U.S. specialty insurer HCC Holdings.
SOMPO HOLDINGS acquired leading U.K. specialty insurer Canopius Group
Limited in May 2014, thus expanding its international business significantly during
fiscal 2014. In addition, in March 2015 it determined capital participation in French
reinsurer SCOR SE to further expand its overseas business.

31

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

Table 1: Overseas Business Development among Japan’s Top Three Non-Life
Insurance Groups (2014-2015)
Month/Year

Name of Holding Company

February 2014

Tokio Marine Holdings

May 2014

SOMPO HOLDINGSMay 2014

Tokio Marine Holdings

July 2014

SOMPO HOLDINGS

November 2014

MS&AD Holdings

November 2014

Tokio Marine Holdings

January 2015

SOMPO HOLDINGS

February 2015

Tokio Marine Holdings

March 2015

SOMPO HOLDINGS

April 2015

MS&AD Holdings

June 2015

Tokio Marine Holdings

Contents
Investment in U.S.-based Managing General
Agent via Tokio Marine Kiln Group Limited
Completed acquisition of Canopius Group
Limited shares
Acquired shares in CITIC Group Corporation
Entered the automotive repair and maintenancebusiness in China
Established operation companies (brokers) in
Russia and Kazakhstan
Increased shareholdings in Malayan Insurance
Company. Inc.
Restructured Canopius Group holding
companyEntered a business relationship agreement with
South African company Hollard InsuranceGroup
Determined capital participation in French
reinsurer SCOR SE
Acquired shares of major U.K. telematics auto
insurance company Box Innovation Group
Agreement to acquire HCC Insurance
Holdings, Inc.

Source: Press releases and other sources available from the three holding companies

3. Product andRegulatory Trends

32(1) Automobile Insurance
As a continuous trend of the Japanese market, profits in Japan’s automobile
insurance business had decreased due to factors including an increase in accidents
among the elder drivers and lower automobile use among the young.
Non-life insurers have therefore moved to improve profits since 2008 through rateincreases. These rate increases enhanced the profitability of automobile insurance andcontributed to the solid results of non-life insurers in fiscal 2014.
In recent years, competition in the existing automobile insurance customer sales
cycle has intensified because of the growth of direct automobile insurance sold withlower premiums via the Internet. Under these circumstances, some major non-life
insurers have announced plans to introduce new discount products this fall thatspecifically target young drivers. Each company is expected to leverage its uniquefeatures in ongoing initiatives to secure stable profits.

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

(2) Revision of Household Earthquake Insurance Rates
The Japanese government and non-life insurance companies jointly maintain thehousehold earthquake insurance3 system. Rates for this insurance increased an averageof 15.5% nationwide in July 2014 to accommodate the increasing risk of a major
earthquake in the aftermath of the Great East Japan Earthquake.
Note: 3. Household earthquake insurance in Japan is included in fire insurance policies as an
optional addition, and covers catastrophe losses from earthquakes, volcanic eruptions andresulting tsunami. The system limits the liability of the government and non-life insurancecompanies to 7 trillion yen per incident in light of the limits on the ability of non-life
insurance companies to pay claims.

However, the latest risk assessment has indicated the need to increase rates again.
General Insurance Rating Organization of Japan, which comprises non-life insurers,
and the Japanese government are currently implementing a rate increase so that the
government and non-life insurers can secure a sufficient fund to cover the latest
estimation of earthquake losses.

(3) Sophistication of ERM Promoted by the Regulatory Authorities
In the revised Insurance Core Principles (ICPs) adopted by the International
Association of Insurance Supervisors (IAIS) in October 2011, one of the provisions
introduced requires the authorities to supervise insurance companies and groups toensure they implement enterprise risk management (ERM) and their own risk andsolvency assessment (ORSA) practices. The Japanese Financial Service Agency (FSA)in February 2014 revised its Comprehensive Guidelines for the Supervision of
Insurance Companies and aligned enterprise risk management system guidance, which
formed the basis for conducting enterprise risk management system hearings.
At these hearings, the regulatory authority requested 25 life and non-life
insurance companies to prepare and submit an ORSA report on a trial basis. Then,ORSA went into effect from 2015 onwards. Insurers are required to submit an ORSA
report once a year.
Greater sophistication in risk management was a key component of the financial
monitoring policy the FSA announced in September 2014. The introduction of an
economic value-based solvency regime, which is an issue for the international
insurance system, is another key component alongside the promotion of ERM.
In 2014, the field tests, in which insurance companies calculated the economic
value of insurance liabilities and other items on a trial basis, were conducted for thesecond time since their initial implementation in 2010. The calculation method andconfidence level (VaR 99.5%) are being fundamentally coordinated with studies byorganizations including the IAIS and the European Union. The construction of aregulatory and supervisory framework for enhancing the sophistication of risk
management among insurance companies is steadily proceeding based on the directionof international studies.

33

6.
1. General Topics
Related to the Life
Insurance Market

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

Historically Low Long-Term Interest Rates
Massive purchases of Japanese government bonds by the Bank of Japan (BOJ)
caused the annual yield on newly issued 10-year government bonds, the benchmark
for long-term interest rates, to fall below 0.2% to a record low of 0.195% in January
2015. Subsequently, a favorable economic outlook for the U.S. economy and stronger
sentiment for monetary tightening at the Federal Reserve Board in the United Statescaused long-term rates in Japan to trend temporarily upward toward 0.4%, but they
have remained at a low level.
Historically low long-term interest rates have also affected life insurancecompanies. Life insurance companies fund and invest the premiums paid bypolicyholders to prepare for insurance claims, but continued low interest rates on
government bonds, their principal investment, have impeded high-yield asset
management. Consequently, some life insurers, mainly major companies, havestopped selling certain savings-type products and have reduced assumed interest rates.
Given these circumstances, life insurance companies have broadened theirinvestment portfolios to include investments such as foreign government bonds andreal estate in order to secure higher investment income. For example, The Dai-ichi
Life Insurance Company, Limited invested in rental condominiums, and Sumitomo
Life Insurance Company invested in what it termed “growth markets” such as
healthcare and energy. Further investment portfolio diversification in life insurers’
assets is expected.

The fiscal 2014 business results for 42 life insurance companies were as follows:

2. Overview ofBusiness Results for
Fiscal 2014

(1) Total Amount of New BusinessIn the fiscal year ended March 31, 2014, the total insured amount of new businessdeclined for both individual life and health and individual annuity due to the effect ofhigher premiums for insurance products on which the assumed interest rate was reduced
because of the standard prospective yield reduction implemented in April 2013.
However, in the fiscal year ended March 31, 2015, the total insured amount increased
by 0.9% to 67.4 trillion yen for individual life and health, while it increased by 7.9% to
8.6 trillion yen for individual annuity compared with the previous fiscal year.

(2) Total Amount of In-force Business
The total insured amount of in-force business for individual life and health is857.4 trillion yen, which is almost same as the amount in the previous fiscal year, as it
declined among major life insurance companies while remaining steady amongsubsidiaries of non-life insurance companies and foreign life insurance companies. For
individual annuity, the amount increased for the twelfth consecutive year to 104.1
trillion yen, up 0.3% from the previous fiscal year, mainly due to steady growthamong major life insurance companies.

34

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015(3) Premium Revenues and Total Assets
Total premium revenues increased to 38.7 trillion yen, up 8.1% from the previous
fiscal year, due to the popularity of insurance products denominated in foreign
currencies. Total assets rose to 367.3 trillion yen, up 4.8% from the previous fiscal
year, due to a rise in the value of investment assets aided by higher stock prices and thedepreciation of the yen.

3. Trends in the Life
Insurance Industry(1) Nippon Life Insurance Company and The Dai-ichi Life Insurance
Company Battling for Industry Leadership
Since World War II, Nippon Life had remained the leader of Japan’s life insurance
industry in premium income. However, for the first time in the post-war period
Dai-ichi Life’s premium and other income topped those of Nippon Life for the six
months ended September 30, 2014. Dai-ichi Life also became the top company in theindustry in premium income for the fiscal year ended March 31, 2015.
A key factor driving Dai-ichi Life’s results was subsidiary The Dai-ichi FrontierLife Insurance Co., Ltd.’s focus on bancassurance. Interest rates remained low due toquantitative easing by the BOJ, which increased the popularity of savings productswith favorable returns, particularly individual annuity products. Single-premium
individual annuity products denominated in foreign currencies such as the Australian
dollar that target higher returns than on yen deposits were popular, which drove
growth in Dai-ichi Frontier Life’s bancassurance sales and supported higher earnings
for the Dai-ichi Life Group. Dai-ichi Frontier Life is strong in bancassurance, taking
top industry share for savings-type single-premium policies in new business and the
top spot among companies that specialize in bancassurance for policies in force.
Bancassurance accounted for around 40% of Dai-ichi Life’s total premium income,compared to about 10% for Nippon Life. Bancassurance was the factor that widened
the gap between these two major companies.
While Dai-ichi Life may have led the industry in premium income, it still lags
Nippon Life in earnings. The medium-term management plan for fiscal years 20152017 that Dai-ichi Life announced in March 2015 therefore sets the target of
doubling consolidated adjusted net profit to 200 billion yen. Its plans for doing so
include growth strategies for the three growth engines of domestic life insurance,overseas life insurance and asset management; making U.S. company Protective Life
Corporation, which Dai-ichi Life acquired for 575 billion yen in 2015, into a wholly
owned subsidiary; and making Dai-ichi Frontier Life profitable.

35

6. Trends in Japan’s Life Insurance Industry

Domestic life insurance business:
Three domestic life insurance companies – Dai-ichi Life, Dai-ichi Frontier Life and
The Neo First Life Insurance Company, Limited – will conduct marketingcustomized for the characteristics of customer and product segments.
Overseas life insurance business:
Operations in three areas, Japan, North America and Asia Pacific, will drive Groupearnings.
Asset management business:
DIAM Asset Management and U.S. company Janus Capital Group Inc. will operatein asset management markets with strong growth potential and expand investment
in new growth markets.
On the other hand, Nippon Life fell to the number two spot in Japan’s life
insurance industry for the first time since World War II and announced its mediumterm management plan for fiscal years 2015-2017 in March 2015. Under the plan,
Nippon Life will strengthen its domestic life insurance business by enhancing existing
channels such as its sales personnel channel and increasing points of contact withcustomers through the use of independent agencies and other channels. Nippon Life
will also strengthen its Group business by aggressively expanding overseas businessthrough ways such as increasing investment in the overseas life insurance business andconsidering the acquisition of overseas life insurers.
Domestic life insurance business:
Deliver attractive products and services that address diversifying customer needs,
and enhance and diversify sales and service channels such as independent agencies
and bancassurance.
Group business:
Increase Group earnings with a focus on the overseas insurance business, asset
management business and businesses that contribute significantly to the domestic life
insurance business.
The domestic life insurance market has become intensely competitive among
domestic, foreign life insurers and subsidiaries of non-life insurance companies
because channels such as banks and independent agencies have become more
important. Given this major industry trend, the competition between industry leaders
Dai-ichi Life and Nippon Life is also likely to intensify.

36

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015

(2) Expanding Sales at Insurance Shops
Sales personnel have been the traditional sales channel for large insurancecompanies. However, decreasing need for the death benefits that are the main productfor sales personnel is posing a challenge for sales in this channel.
At the same time, independent insurance shops that handle the products ofmultiple life insurance companies continue to generate steady growth in sales. Now
numbering more than 1,000 nationwide, these shops are primarily located aroundmajor urban train stations. They mainly offer insurance products that are low-cost andsimple to understand, such as health insurance. Such insurance shops are preferredprimarily by younger generations that tend to select insurance products by themselves.
Large life insurers have tens of thousands of sales personnel, so in the past
supplying products through insurance shops would have created infringement issues
with the sales personnel channel. However, large life insurers are realizing that
customer self-selection needs for insurance products will grow and are therefore
increasing their participation in the insurance shop channel.
Large life insurers are resolving the infringement issue by developing productswith separate corporate branding. For example, Sumitomo Life established Medicare
Life Insurance Co., Ltd., which has developed a full line of products for the insurance
shop channel, and Dai-ichi Life has expanded its product lineups for previously
neglected channels including insurance shops and Internet sales through Group
company Neofirst Life.
Large life insurers are expected to further emphasize insurance shop sales to entercustomer segments that they could not reach in the past via the sales personnel
channel.

4. Product Trends(1) Expansion of Private Long-Term Care Insurance
The number of elderly people who require long-term care is increasing with theaging society. Japan therefore established a public long-term care insurance system in2000 as a social safety net to support the elderly. All people age 40 and older areenrolled in this public long-term care insurance and begin paying premiums. This
performance-in-kind benefit plan involves 10% co-payment for predetermined
nursing care services as they are needed.
On the other hand, private long-term care insurance provided by insurancecompanies involves a cash benefit plan with benefits paid as a lump sum or an annuity.
It supplements co-payment amounts for public long-term care insurance and enables
reimbursement for services not covered by the public long-term care system.

37

6. Trends in Japan’s Life Insurance Industry

The need for nursing care is forecast to rise because of progress in aging. The needfor long-term care insurance is rising because the responsibility of the elderly fornursing care will increase due to the deterioration of Japan’s public finances. Private
long-term care insurance sales volume is therefore expanding.
Japan’s life insurance market is contracting because of the nation’s low birth rate.
Life insurers have positioned long-term care insurance as a growth business because
sales of conventional core products, such as death benefit, have weakened, and arefocusing on developing long-term care products. In addition, companies areenhancing services to address the various concerns of the elderly in order to increase
the number of policyholders. For example, some life insurance companies areoperating elderly care facilities and others are offering in-home consultation services
free of charge through agreements with nursing care companies. Amid competition
among life insurers, services associated with long-term care insurance are therefore
expected to increase.

(2) Higher Age Joining Limits
The number of the elderly purchasing medical and/or other types of insurance isrising year by year because average life expectancy continues to increase in Japan. A
number of life insurers have successively raised age joining limits for medical insurance
into the 80s.
Key Examples
AFLAC (American Family Life Assurance Company of Columbus)
Raised the cancer insurance age joining limit to 85
Mitsui Life Raised the whole life insurance age joining limit to 80
Zurich Life Raised the cancer insurance age joining limit to 80
Conventionally, medical insurance was primarily attached to whole life insurance
as a term medical rider, with many riders maturing at age 80. For subsequent medical
protection, the elderly were required to re-enroll in new medical insurance. However,whole medical insurance typically had an age joining limit in the 70s, meaning thatmany elderly people were unable to re-enroll in medical insurance after their medical
insurance riders matured.
For people 75 and older, the co-payment for medical treatment drops to 10%
because expenses are covered by public health insurance. However, people must pay
the full cost if they receive medical treatment that is not covered by public healthinsurance. This led to increasing demand for private medical insurance to cover theburden of medical expenses, and some life insurers have started to provide policies
with a higher age joining limit.
With average life expectancy estimated to rise further, the trend toward higher age
joining limits is likely to continue.

38

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2015(3) Strong Sales of Medical Insurance for WomenWith women playing a greater role in society, they have become more concerned
about diseases specific to themselves. As a result, insurance companies have focused on
medical insurance products geared to women, and they have enjoyed solid sales.
Medical insurance for women allows policyholders to receive hospitalization
benefits that are greater than standard health insurance if they suffer medical
conditions specific to women, such as uterine cancer, endometriosis and extra-uterine
pregnancy or other diseases that mainly affect women, such as breast cancer. Moreover,some insurers have established companies that provide call centers through which
policyholders can consult on healthcare issues and receive information on obstetrics
and gynecology from hospitals staffed with female doctors.
With the continuing tendency to marry and have children later in life, demand isalso expected to increase for expensive infertility treatments such as in vitro
fertilization. As a result of this situation, insurance companies are projected tocontinue expanding the products and services they develop specifically for women.

5. Developments inRegulation

Living Bequests
The inheritance tax increased as of January 1, 2015, which has increased the
popularity of life insurance that reduces the inheritance tax burden in the future
through living bequests.
The basic mechanism for living bequests using life insurance is gifting the
maximum annual amount of 1.1 million yen that is exempt from the gift tax in cash
each year to fund a life insurance policy. This approach offers the benefit oftransferring assets to descendants without having to pay the gift tax, and also reduces
the inheritance tax burden for people who use it to transfer assets during their lifetime.
The major types of life insurance used for living bequests are individual annuities
and whole life insurance. Relevant products have driven strong growth in new policies
among life insurers.
The low birth rate and less interest in insurance among the younger generations
have weakened demand for life insurance. Life insurers see these trends as a business
opportunity, and have broadened their seminars to promote the merit of using life
insurance for living bequests to uncover additional demand for life insurance. They arelikely to continue enhancing their various initiatives.

39

40

6,790,021

6,098,017
62.2
65.0
31.8
32.0
2.44
2.54

Fiscal 2014

Fiscal 2013

Fiscal 2014

Fiscal 2013

Fiscal 2014

Fiscal 2013

Fiscal 2014
Ratio 3
Yield on Investments (Income) (%) Fiscal 2013

754.0

804.9

3.08

3.04

34.5

35.0

65.0

63.2

3,257,180

3,470,706

13,10739,48027,897

68,973(28,815)

14,793

691,799

677,923

—

716.3

—

3.77

—

2.19

—

31.8

—

65.6

—

7,326,234—

45,059—195,134—

45,232—

1,305,471—

2,181,302

Sompo
Japan
Nipponkoa

713.3

4.04

2.20

31.4

64.6

4,838,707

27,35068,079(32,844)822,285

1,413,818

SOMPO
JAPAN

—

—

—

—

—

—

—

—

—

—

—

653.0

5.54

2.34

34.0

67.8

2,260,231

22,17349,685(29,725)

413,767

668,375

NIPPONKOASOMPO HOLDINGS

Note: Sompo Japan and Nipponkoa merged to become Sompo Japan Nipponkoa Insurance Inc. on September 1, 2014.

Ratio 5
Solvency Margin Ratio (%)

Ratio 4
Yield on Investments(Realised Gains / Losses) (%)

Ratio 2
Expense Ratio (%)

Ratio 1
Loss Ratio (%)

Total Assets

600.3

58,047

Fiscal 2013

Fiscal 201389,114

Fiscal 2014

Net Profit (Loss) for the Year

651.5

101,998

Fiscal 2013

Fiscal 2014

171,328

Fiscal 2014

Ordinary Profit (Loss)

3.95(7,326)

Fiscal 2013

Fiscal 2013

14,000Fiscal 2014

Underwriting Profit (Loss)

4.55

2.55

823,665

Fiscal 2013

Fiscal 2014

2.34

810,853

Fiscal 2014

Net Claims Paid

1,144,629

1,386,533

Fiscal 2013

Net Premiums Written

1,160,867

Aioi Nissay
Dowa

1,444,176

Mitsui
Sumitomo

MS&AD Holdings

837.1

1,064.5

1.57

1.53

1.40

1.42

32.5

32.6

63.9

63.7

418,313431,903

3,350

12,592

4,740

17,674

1,612

14,74878,536

77,516137,286

136,634

Nisshin

782.2

939.9

2.28

2.42

1.50

1.51

35.8

37.6

59.4

54.8

857,372

866,933

5,803

2,014

17,019

4,780

5,705

(5,220)146,641

137,273

273,161

278,898

Fuji

815.1

851.4

3.46

4.83

2.91

4.12

23.2

22.8

91.4

79.4

468,875

489,561

1,722

2,634

(372)

11,569(9,743)(2,231)

134,786

131,377

147,420

165,497

Toa Re(Unit: Millions of yen, %)Sources: Each company’s financial statements of fiscal 2014

685.4

751.7

3.61

4.51

2.45

3.28

30.2

30.2

63.0

61.3

8,374,225

9,078,083

90,823

185,312

146,535

264,085(13,275)

59,917

1,137,545

1,148,370

1,966,380

2,036,790

Tokio
Marine &NichidoTokio Marine Holdings

Results of Japanese Major Non-Life Insurance Groups (Company) for Fiscal 2014, Ended March 31, 2015
(Non-Consolidated Basis)

Fiscal 2014

Supplemental Data:

Printed in Japan