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Japans

InsuranceMarket

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To Our Clients

Tomoatsu Noguchi

President and Chie Executive, The Toa Reinsurance Company, Limited 1

1. The Framework and Future o Japans Earthquake Insurance System:The Great East Japan Earthquake in Retrospect

Yasushi Kuriyama

Managing Director, The General Insurance Association o Japan 2

2. The Catastrophe Losses o 2011 and Japans Non-Lie Market:A Modelers Perspective

Patricia Grossi, Robert Muir-Wood, and Craig Van Anne

Risk Management Solutions, Inc. 11

3. Chinas Lie Insurance Market: Current Conditions and Future DirectionYuki Katayama

NLI Research Institute 19

4. Japans Insurance and Reinsurance Market 2011-2012 Resilience in AdversityDominic Christian

Co-CEO, Aon Benield 28

5. Trends in Japans Non-lie Insurance IndustryUnderwriting & Planning Department

The Toa Reinsurance Company, Limited 34

6. Trends in Japans Lie Insurance IndustryLie Underwriting & Planning Department

The Toa Reinsurance Company, Limited 40

Supplemental Data:Results o Japanese major non-lie insurance groups (company)

or iscal 2011, ended March 31, 2012 (Non-Consolidated Basis) 48

Japans Insurance Market 2012

Contents Page

2012 The Toa Reinsurance Company, Limited. All rights reserved. The contents may be reproduced only with the written permission

o The Toa Reinsurance Company, Limited.

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It gives me great pleasure to have the opportunity to welcome you to our brochure, Japans

Insurance Market 2012. It is encouraging to know that over the years our brochures have been well

received even beyond our own industrys boundaries as a source o useul, up-to-date inormation about

Japans insurance market, as well as contributing to a wider interest in and understanding o our

domestic market.

During iscal 2011, the year ended March 31, 2012, the Japanese economy continued to

encounter a generally challenging set o circumstances, although it regained momentum to some

extent, supported by a modest recovery o economic activity and the beneicial impacts o government

policies. In addition to a slowdown o industry owing to the constraints on the supply o electricity as a

result o the Great East Japan Earthquake and the nuclear accident, other actors adversely aecting theJapanese economy included a slowdown o overseas economies brought about by the European

sovereign debt crisis and rising oil prices, as well as luctuation o exchange rates, delationary pressure,

and concerns about the deterioration o the labor market in Japan.

The non-lie insurance industry in Japan saw an increase in premium income because the number

o purchasers o earthquake insurance increased ater the Great East Japan Earthquake and the

governments scheme to provide subsidies to people purchasing environmentally riendly automobiles

boosted sales o automotive insurance. However, the inancial oundation o non-lie insurance

companies in Japan suered rom heavy losses incurred because o the looding in Thailand and other

major natural disasters. The lie insurance industry in Japan also continued to operate in a challenging

business environment. Although the number o new policies trended upward, the total number o

policies in orce has been lat and und management perormance remained lackluster.

The reinsurance market hardened centering on the property ield, relecting the requency o

major natural disasters continuing rom the previous year. In addition, the turmoil in international

inancial markets owing to the European sovereign debt crisis made the outlook even more unclear.

In order to respond switly and precisely to these changes in the operating environment and to

urther enhance corporate value, the Toa Re Group established a new vision and launched a new

medium-term management plan, Forward 2014, in April 2012.

By endeavoring to act as an exemplary reinsurance company, we are resolved to ulill our mission:

Providing Peace o 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 eorttowards its making.

Tomoatsu NoguchiPresident and Chief Executive

The Toa Reinsurance Company, Limited

To Our Clients

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Actual igures or damage rom the Great East Japan Earthquake were announced

one year ater the disaster: a total o 19,009 people dead or missing, and 383,246

buildings completely or partially destroyed.

Ater the Great Eas t Japan Ear thquake occurred on March 11, 2011, all

employees o Japans non-lie insurance companies sympathized deeply with those who

had suered so greatly, and pressed orward with the payment o earthquake insurance

claims as quickly as possible so that those aected by the disaster could rebuild their

lives.

As o March 12, 2012, approximately one year ater the earthquake, victims o

the disaster had received payment on 764,938 claims totaling 1,218.5 billion yen.

This set a record or payment o claims by Japans non-lie insurance companies or asingle incident, and survey results indicate that it had a multiplier eect on the overall

economy exceeding 3 trillion yen.

(1) Organizational Framework

When the earthquake occurred on March 11, 2011, the General Insurance

Association o Japan (GIAJ) decided or the irst time in its history to apply a

ramework or processing large-scale damages in accordance with its predetermined

Master Plan or Processing Earthquake Insurance Damages. Incidentally, theramework or processing small- and medium-scale damage was applied to the Great

Hanshin-Awaji Earthquake.

The key eature o the ramework or processing large-scale damages was the

Earthquake Insurance Central Command that the GIAJ established at its headquarters

in Tokyo. The Earthquake Insurance Central Command was responsible or 1)

centrally organizing the various initiatives o the non-lie insurance industry and 2)

uniying the response to key related government bodies, administrators and mass

media. The Earthquake Insurance Central Command then worked together with the

Earthquake Insurance Local Headquarters in Sendai in implementing various

coordinated responses.

(2) Claims Paid

According to aggregate GIAJ data one year ater the earthquake as o March 12,

2012, earthquake insurance claims associated with the Great East Japan Earthquake

totaled 764,938, claims paid totaled 1,218.5 billion yen, and 99.0 percent o reported

claims had been either settled or investigated. The number o buildings destroyed was

similar to the Great Hanshin-Awaji Earthquake, or which earthquake insurance

claims paid totaled 78.3 billion yen, the previous record. This underscores the scale o

the earthquake insurance claims paid to the many victims o the Great East Japan

Earthquake. The main reason or the dierence is the expansion o earthquake

insurance coverage since the Great Hanshin-Awaji Earthquake.

1. Yasushi Kuriyama Managing Director, The General Insurance Association of JapanThe Framework and Future of JapansEarthquake Insurance System:The Great East Japan Earthquake in Retrospect

Introduction

The Non-LifeInsurance IndustrysResponse to the Great

East Japan Earthquake

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(3) Non-Life Insurance Industry Response

The non-lie insurance industrys response to the Great East Japan Earthquake

can be broadly categorized as consultation, damage investigation, and provision o

inormation.

A. Consultation

Immediately ollowing the earthquake, non-lie insurance companies and the

GIAJ both consulted with a huge number o people, primarily regarding claims by

earthquake insurance policyholders and requests rom people throughout Japan or

immediate earthquake insurance coverage. Courteous, respectul responses ormed the

core o these consultations.

Non-lie insurance companies and the GIAJ expanded their call centers in

preparation or a substantially larger number o consultations than usual. However,

the volume was so large that callers regularly had to wait on hold. The most important

o these consultations was responding to questions rom earthquake insurance

policyholders in the aected area regarding the procedure or iling insurance claims.

Concurrently, another key issue was preparing the ramework or encouraging claims

among policyholders who were unable to ile claims because o the chaos caused by

the disaster and among the many policyholders who did not realize they could ile a

claim.

The GIAJ printed 80,000 posters and 546,000 lealets, and cooperated withnon-lie insurance companies and insurance agencies to display or distribute them,

primarily at evacuation centers. It also encouraged claims using mass media such as

newspapers and radio. This publicity made policyholders aected by the disaster aware

o how to handle earthquake insurance claims despite the serious ambient chaos.

The next requirement that emerged was creating a system or smoothly handling

earthquake insurance claims even in cases where, or reasons including loss o the

insurance policy due to the tsunami or the death o the policyholder, it was not clear

which company had underwritten the ear thquake insurance. Shortl y ater the

earthquake on March 19, 2011, the GIAJ collaborated with non-lie insurance

companies to establish the System or Searching or Earthquake Insurance Contracts

on Dwelling Risks, an internal insurance industry system or cross-reerencing

earthquake insurance policies and companies to create a ramework or answering

inquiries rom policyholders, regardless o which company they called. Next, on

March 28, 2011 the GIAJ established a dedicated call center and enabled handling o

inquiries via its website.

The Toa Reinsurance Company, Limited Japans Insurance Market 2012

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B. Damage Investigation

Damage investigation was the second core component o the non-lie insurance

industrys response. The GIAJ introduced a number o new approaches, including the

use o aerial and satellite photographs to approve total loss areas or payment o claims.

Although rules or approving total loss areas with aerial photographs in order to

process earthquake insurance losses were already in place, this approach was actually

used or the irst time ollowing the Great East Japan Earthquake. The process

involved three main steps. First, 23,000 satellite and aerial photographs were used in

transposing photos o tsunami damage to maps. Next, addresses and lot numbers were

then added to the maps, and then inally correlated with the dwellings covered by

earthquake insurance. While this process was raught with unoreseen diiculties, itdramatically accelerated payment o claims by enabling all payments in total loss areas

without building-by-building damage approval.

In addition, clariication o standards or tsunami, looding and liqueaction

damage; introduction o written investigations based on sel-submitted reports by

policyholders; implementation o a scheme or agencies to provide support or damage

investigation; and written investigations based on sel-submitted reports or areas such

as the exclusion zone related to the accident at the Fukushima Daiichi Nuclear Power

Plant were all policies introduced or the irst time ollowing the Great East Japan

Earthquake. The rapid progress o claims between late April and early May 2011 was

due to the introduction o these new policies.

C. Provision of Information

Inormation was the third core component o the non-lie insurance industrys

response. In dealing with the mass media in the initial period o the response to the

earthquake, the industry realized that people were ocusing on earthquake insurance,

and that they were uncomortable with and mistrustul o the insurance industry. In

other words, the people o Japan held a critical view o the industry, wondering i the

domestic non-lie insurance industry was suiciently solvent to pay the claims rom

the major earthquake, i it could deploy the people needed to respond to the

earthquake, and i it would repeat its past ailures to pay insurance claims. The people

o Japan expected the entire non-lie industry to be accountable or its response.Given these conditions, the industry set three basic principles or providing

inormation. One, it would by all means agree to all interviews. Two, it would respond

as quickly as possible. Three, it absolutely would not cover up unpleasant inormation.

With ast, open and unlinching responsiveness as a base, the industry issued a large

volume o news releases, including releases that communicated inormation overseas.

The mass media did not quite become an ally because o the inormation the non-lie

insurance industry provided, but it did demonstrate a deinite understanding o the

non-lie insurance industrys actions without mistrust. This became an important

element smoothing the response to the earthquake.

1. The Framework and Future of Japans Earthquake Insurance System:The Great East Japan Earthquake in Retrospect

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Three key points emerge rom the above discussion o the industrys response.

One, cooperation between the Earthquake Insurance Central Command and the

Earthquake Insurance Local Headquarters enabled rapid, unhesitating support when

managers on the ground called out or help. Two, companies in the industry

collaborated in setting standards rather than causing conusion by setting standards

individually, and competed to pay claims quickly and courteously. Three, the industry

appropriately communicated inormation about its responsiveness to the public. These

three points were key reasons or the deinitely positive assessment o the industrys

response rom the world at large.

(1) Overview and History of the Earthquake Insurance System

Following the Niigata Earthquake o 1964, household earthquake insurance

became available on June 1, 1966. Initially, maximum insured amounts were 900,000

yen or dwellings and 600,000 yen or household contents. Coverage was limited to

30% o the ire insurance coverage or the dwelling, with compensation only in the

event o total loss.

Subsequent revisions included several increases in policy limits. A major revision

in 1980 made earthquake insurance a rider that was automatically attached to a ire

insurance policy in principle, unless deleted at the option o the policyholder; it alsoraised the 30% dwelling coverage limit to 50% o the ire insurance coverage,

broadened compensation to a hal loss event, and substantially increased maximum

insured amounts to 10 million yen or dwellings and 5 million yen or household

contents. In 1991, partial loss was covered, and in 1996 the maximum insured

amount increased to the current 50 million yen or dwellings and 10 million yen or

household contents. No revisions have been made since 1996, aside rom minor

changes. Rates have changed, but the underlying basic two classes or dwelling

structures and our classes or location (preecture) have remained in place since the

program began.

The Structure ofJapans EarthquakeInsurance System

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(2) Features of the Earthquake Insurance System

A. Government Reinsurance Underwriting

Earthquake insurance in Japan operates under a sel-help principle in which

individual citizens take steps to protect their own assets. Thereore, premiums paid by

policyholders ultimately und insurance claims. However, the unique characteristics o

earthquake risk gave rise to the establishment o a system in which the government

underwrites reinsurance. The point here is that the government is responsible as a

reinsurer to pay reinsurance claims in the event o an earthquake based on reinsurance

premiums ultimately unded by earthquake insurance premiums, but must not make

the mistake o conusing this role with its responsibility to provide a social saety net

unded by taxes. In sum, the system is structured so that all earthquake insurance

premiums paid by policyholders are entirely separate rom other types o insurance,

and private-sector non-lie insurance companies, including those specializing in

reinsuring earthquake risk such as the Japan Earthquake Reinsurance Co., Ltd. (JER),

and the government reinsurance with the special account or earthquake insurance as

its reserve, pay claims rom their reserves in the event o an earthquake.

However, the system has one problem. Earthquake risk is unique in that it

materializes inrequently, but can cause massive losses when it does materialize. The

resulting problem is that reserves will not have the resources or payment o claims i

they are not suiciently unded prior to the occurrence o an earthquake. A simple

description o the earthquake insurance system that prepares against this eventualityollows. The scope o private sector responsibility or insurance is based on its reserves.

The government serves as the reinsurer responsible or paying amounts in excess o

private sector reserves rom the special account. I the special account is insuicient,

the government temporarily borrows rom general account tax revenue and repays the

borrowed unds using subsequent earthquake insurance premiums. This structure is

central to the system. While the government may temporarily draw on tax revenue,

the system maintains the institutional sel-help ramework by requiring repayment

rom earthquake insurance premiums.

B. Earthquake Insurance Cash Flow Structure

Long periods o time are the key to the earthquake insurance system. The GIAJ

and JER jointly prepared study materials or a September 8, 2011 working group on

the governments earthquake special account. The ollowing model o changes over

time in earthquake insurance reserves draws on these materials or certain

assumptions, such as continued annual payment o premiums into the reserves at the

level o 100 billion yen per year, the same as in the year prior to the Great East Japan

Earthquake.


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As a result o the Great East Japan Earthquake, government and private sector

reserves decreased to a combined 1.2 trillion yen in 2011. According to the model, the

reserves will subsequently recover to 3.9 trillion yen in 2041 with the addition o

earthquake insurance premiums. However, an earthquake in the interlinked Tokai,

Tonankai or Nankai areas will cause a deicit o 300 billion yen. Subsequently, the

reserves will recover to 1.5 trillion yen in 2061, but then all back into a 1.5 trillion

yen deicit due to an earthquake with its epicenter in Tokyo. Thereater, the reserves

will recover to 5.9 trillion yen in 2143, but then a major earthquake in the Kanto area

will cause them to decrease to 400 billion yen. The graph below covering the period

through 2491 indicates substantial decreases in reserves due to major earthquakes

ollowed by recovery. Needless to say, this graph is only a representation based onnumerous estimates and guesses. However, it does show that the earthquake insurance

system relies in principle on premium payments rom policyholders, making it a

system that operates over very long periods under the sel-help principle.

The law o large numbers does not apply to earthquake risk. The only choice in

creating an earthquake insurance system is building a ramework based on balanced

cash low over the long term with the crucial assumption that the government will

serve as reinsurance underwriter.

C. Setting Maximum Payment Limits

Japans earthquake insurance sets a maximum limit or payment o claims rom a

single earthquake, and allocates payment obligations between the private sector and

government. This payment limit was determined based on estimated payment o

claims resulting rom the projected maximum loss should a single earthquake as

powerul as the Great Kanto Earthquake occur again. The maximum payment limit

when the earthquake insurance system was created in 1966 was 300 billion yen, with

the private sector responsible or 30 billion yen and the government (reinsurance)

responsible or 270 billion yen. The maximum payment limit increased steadily in

tandem with expanded coverage and indemnity. It was 5,500 billion yen immediately

prior to the Great East Japan Earthquake, with the private sector responsible or

1,198.75 billion yen and the government responsible or 4,301.25 billion yen.

The maximum payment limit increased to 6,200 billion yen rom April 6, 2012because o the substantial increase in the number o new policies as a result o the

Great East Japan Earthquake. Also, private sector reserves decreased signiicantly

because o recent payments. The allocation o responsibility changed as a result, with

private-sector responsibility decreasing substantially to 488 billion yen and

government responsibility increasing to 5,712 billion yen based on the notion that

private-sector responsibility should correspond to its reserves.

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D. Calculation of Earthquake Insurance Premiums

The Non-Lie Insurance Rating Organization o Japan uses the ollowing process

or calculating premium rates. First, the government predicts earthquakes by creating a

model encompassing 730,000 earthquakes based on the probabilistic seismic hazard

map published by the Headquarters or Earthquake Research Promotion, a special

government organization or earthquake prediction. Next, the land area o Japan is

divided into a grid o square kilometers in which insured building risk is quantiied.

These two components are then used together to quantiy Japans total earthquake

risk. Finally, insurance premium rates are calculated according to eight risk classes

derived rom the our regions and the two types o building structures.

The major reason necessitating this detailed calculation o premiums is that whilethe system certainly requires government reinsurance underwriting, it is ultimately a

sel-help system predicated on maintaining the governments core reinsurance

underwriting role based on the economic rationality o this responsibility. Human

limitations notwithstanding, premium calculation must be ree o any sense o utility

in employing the greatest possible rigor and detail.

I would like to share my opinions on availability and aordability, which are two

major issues in considering the uture o the earthquake insurance system.

A. Unavailability

Insurance is not necessarily available or purchase. The phenomenon o insurance

unavailability occurs when insurance companies no longer have the inancial base to

underwrite insurance. For example, an insurance crisis occurred in the United States

in the 1980s and created major social problems.

Insurance unavailability has not been a problem in Japan. Theoretically, however,

it could well occur due to the solvency margin regime or insurance risk management

at particular companies. The point is that insurance underwriting cannot take place

without a inancial base that can accommodate the risks involved.

Conventionally, the earthquake insurance system or earthquake risk in Japanshousehold sector has been predicated on government reinsurance because no non-lie

insurance company would be able to prepare the inancial base including reinsurance.

However, the reinsurance that mutual insurance ederations such as the National

Mutual Insurance Federation o Agricultural Cooperatives obtained in overseas

markets, and new inancial techniques such as earthquake bonds, unctioned

eectively or the Great East Japan Earthquake. As a result, uture studies may once

again debate the need or government reinsurance.


The Future ofthe EarthquakeInsurance System

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My conclusion, however, is that the institution o household sector earthquake

insurance could not exist without government reinsurance, or the ollowing three

reasons.

First, the earthquake insurance system is dierent rom a mutual insurance

ederation because it is available to all Japanese citizens. It must underwrite earthquake

insurance even i 100% o households want it, which is a undamental dierence in

scale compared with the limited markets that mutual insurance ederations serve.

Second, premiums must remain stable. Premium calculation based on

considerations including overseas reinsurance markets and earthquake bonds would

give rise to large annual luctuations in premiums, creating the potential or conusion

among the policyholders who pay the premiums.Third, no entity besides the government can serve as the risk underwriter o last

resort in order to maintain the current system in which insurance companies are

responsible or payments within the scope o their reserves. Does any entity besides

the government have the ability to ully indemniy the probable maximum loss i the

Great Kanto Earthquake were to recur?

Moreover, the Great East Japan Earthquake caused a tsunami that was larger than

expected. Earthquake predictions must thereore incorporate earthquake archaeology,

which was not relected in past predictions. One result could be a signiicant revision

o the earthquake periodicity and scale assumed in conventional prediction, which

could signiicantly increase the probable maximum loss or earthquake insurance.

Furthermore, coverage has expanded substantially because o the Great East Japan

Earthquake, which could also have the same eect. Undeniably, these issues create the

potential or debate on the sustainability o the earthquake insurance system,

including its government underwriting component. Even the government should have

a limit on its maximum reinsurance capacity. All o these considerations must be part

o the overall understanding o the issue o unavailability.

B. Unaffordability

Insurance unaordability reers to premium aordability, or the extent o the

ability o policyholders to pay their premiums.

Revisions to the earthquake insurance system since it was established haveconsistently increased indemnity. Expanded earthquake insurance coverage has

thereore become a signiicant issue. The Great East Japan Earthquake has opened

discussion o various demands. These include increasing the coverage limit rom 50%

o the attached ire insurance policy, creating a new category between hal loss and

partial loss, adding automobile coverage, and adding commercial properties. A major

issue or earthquake insurance is the extent to which indemnity relects these kinds o

demands, which are linked to increased premiums.

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Currently, earthquake insurance is not ull replacement insurance or dwellings

and household contents. However, even though it is not suicient to ully replace

assets accumulated over time, it has great value or disaster victims by giving them the

means to start building their new lie in the uture, whether that means allowing a

disaster victim to bury amily members who have died, or move rom an evacuation

shelter to an apartment, or buy a small used car, or provide simple entertainment that

makes an emotionally traumatized child smile. This approach keeps earthquake

insurance rom becoming ull indemnity property insurance with high premiums that

only the wealthy can aord. It involves close attention to the cost and beneits o

earthquake insurance to keep premiums at a level that as many people as possible can

aord by narrowly limiting the scope o indemnity.Also, the tsunami damage rom the Great East Japan Earthquake has given rise to

the opinion that rate classes should be segmented to relect tsunami risk. The

discussion o increasing premium discounts or earthquake prooing shares this view.

However, a logical outcome o classiying risk is that lower premiums or some groups

will correspond to higher premiums or others, which is an issue that requires prudent

study. Whether studying increased indemnity or risk segmentation, Japan should

remain patient and remember that earthquake insurance involves mutual assistance

and the public good.

The Great East Japan Earthquake has been called a major quake that occurs only

once in a thousand years. I so, earthquake insurance has given Japans non-lie

insurance industry an experience it can only have once in a millennium. We learned

much rom it.

Victims o the disaster demonstrated the great ability o insurance to contribute

to the public good through their words o gratitude. The earthquake also provided an

opportunity to reconsider insurance industry cooperation and competition, as well as

an opportunity to ind a new way o providing inormation. In addition, uture

discussion o changes to earthquake insurance will be a chance to consider the essence

o insurance.The Great East Japan Earthquake entailed great sacriice. We must now move

orward.


Conclusion

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This article discusses two catastrophic events o 2011, which were signiicant

insured losses to the Japanese non-lie insurance market: the Tohoku Event (the Great

East Japan Earthquake and Tsunami) o March 11, 2011, and the Thailand Floods,

which persisted in the inal hal o 2011. Both events ranking in the top 3 insured

events o the year by all accounts highlight the need or better catastrophe risk

modeling and management practices. The authors discuss how catastrophe models are

being reviewed ollowing these events and the improvements needed in the

management o property exposures at risk rom natural hazards.

The natural disasters o 2011 included not only the historic Tohoku Event but

also a series o deadly tornadoes across the United States, an earthquake that destroyed

the abric o Christchurch, New Zealand, and major looding across Southeast Asia

(Table 1). Hurricane Irene made landall along the Eastern U.S. seaboard the irst

hurricane since the release o RMS v11 North Atlantic hurricane model. Each o these

events provides an opportunity or re-evaluation o catastrophe models or these

regions o the world, as well as improved methodologies or peril modeling (e.g.,

earthquake, severe convective storm, hurricane, and lood).

Following signiicant natural catastrophes, it takes time or relevant data to be

collected and distilled into actionable insights. Every natural catastrophe event is

unique in its occurrence, size, hazard ootprint, secondary perils, and overall

impacts. For signiicant events impacting insured exposures, it can take a signiicant

amount o time or the scientiic community to adequately evaluate and come to a

consensus, particularly or non-typical observations. For example, the

uncharacteristically high ground motions in New Zealand (due to high stress drops)

and the extent o rupture along the Japan Trench will be studied or years (e.g., there

are currently more than a dozen competing slip models or the Tohoku event).

Event (Date) Event Location Number of Deaths Insured Loss Estimate (USD)

Earthquake (March 11) Japan 15,844 35.00 billion

Earthquake (February 22) New Zealand 182 13.50 billion

Flooding (July 25-November 30) Thailand 790 10.78 billion

Severe Weather (April 22-28) U.S. (Southeast, Plains, Midwest) 344 7.30 billion

Severe Weather (May 21-27) U.S. (Plains, Midwest, Southeast) 181 6.75 billion

Hurricane Irene (August 22-30) U.S., Bahamas, Caribbean Islands 46 5.00 billion

Flooding (December 21-January 14) Australia (Queensland) 36 2.42 billion

Severe Weather (April 3-5) U.S. (Midwest, Southeast, Plains) 9 2.00 billion

Earthquake (June 13) New Zealand 1 1.80 billion

Severe Weather (April 14-16) U.S. (Plains, Southeast, Midwest) 48 1.70 billion

2. Patricia Grossi, Robert Muir-Wood, and Craig Van AnneRisk Management Solutions, Inc.The Catastrophe Losses of 2011 and JapansNon-Life Market: A Modelers Perspective

Summary

Introduction

Table 1. Top 10 Insured Losses in 2011

Source: Aon Benield

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Moreover, the view o the scientiic institutions o each country must be taken

into consideration or changes in a hazard perspective and thus, there is some

dependency on their timelines or research. For example, or earthquake hazards, this

includes the U.S. Geological Survey (USGS) in the United States, the Headquarters

or Earthquake Research Promotion (HERP) in Japan, and the China Earthquake

Administra tion (CEA) in China, among others . Final ly, sy stematic damage

assessments to estimate mean damage to structures and their contents take time

to perorm, as do claims acquisition and analysis. Some insurance claims rom the

Tohoku Event are still on-going over a ull year later and cannot be ully processed to

garner modeling insights or some time.

While time must be taken to incorporate appropriate changes to catastrophemodels, insights rom events emerge more rapidly.

The 2011 Great East Japan Earthquake and Tsunami was an unprecedented

event, rom which many lessons can be learned or catastrophe modeling and disaster

research. Future earthquake hazard assessments in Japan will relect the possibility o

higher magnitude events along the subduction zones situated o the coastline, ground

motion prediction equations will be updated utilizing the thousands o ground

motion recordings rom the event, and new approaches to modeling comprehensive

business interruption (BI) impacts will be developed. Flood deenses will be evaluated,

as will nuclear power saety. O the many insights into modeling, two key areas are

elaborated upon in this paper: the changes in seismic hazard as a result o the 2011

Tohoku Event and the impacts o the tsunami waves along the Japanese coastline.

Probabilistic Seismic Hazard

Since March 2011, the seismic hazard research community has endeavored to

understand whether other related damaging earthquakes can now be expected around

Japan and how this event may have aected the timing (advance or delay) o other

earthquakes in the region. In early 2012, RMS published the results o a study

exploring microseismicity patterns and static stress changes across the seismic sources

in the area rom northern Tohoku to the Tokyo region (See http://www.rms.com/

Publications/2011_Tohoku_Seismic_Risk.pd).

The RMS study outlined potential changes in short-term risk due to static stress

changes in the tectonic environment in conjunction with short-term elevated

seismicity as a result o the 2011 earthquake. Signiicant variability exists among the

proposed inite ault slip solutions or the event, which leads to a wide range o

proposed static stress changes and consequently, varied occurrence rate changes or the

seismic sources across the impacted region. Subduction sources, and some crustal

sources, near the edge o the Tohoku Events rupture area show stress increases, whileall sources within the rupture area itsel exhibit stress decreases. From this analysis, it

2. The Catastrophe Losses of 2011 and Japans Non-Life Market: A Modelers Perspective

2011 Great EastJapan Earthquakeand Tsunami

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became clear that occurrence rate changes cannot be resolved exclusively by analyzing

static stress changes on known seismic sources. The presence o many unknown

seismic sources makes this a limiting approach to understanding short-term changes in

hazard and risk (Figure 1).

Across the Northeast Honshu region, sensitivity testing o occurrence rate

changes due to a combination o static stress and microseismicity rate changes is

recommended to explore the range o changes in short-term risk estimates. Estimated

occurrence rate changes, based only on the calculated static stress changes, indicate

that short-term earthquake risk (i.e., within two years o the events occurrence) to the

Tokyo region, where approximately 10% o Japans population resides, has remained

relatively unchanged ollowing the 2011 Tohoku Event. Considering increased

patterns o post-event seismic activity, however, risk estimates can potentially increase.

Figure 1. Changes in risk due to static stress changes as a result o the 2011 Great East Japan Earthquake, showing changes in

ground up average annual loss (AAL), with solid colors indicating areas o decreased risk and hashed patterns indicating areas

o increased risk; changes within 5% are not shown.

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This uncertainty in potential hazard poses a challenge to accurately assess hazard

within the next ew years, as post-event seismic activity decreases with each passing

month. RMS is utilizing the results o this short-term risk analysis, the decay rate o

seismic activity since the 2011 event, and preliminary changes in seismic source

characterization by Japans Headquarters or Earthquake Research Promotion (HERP)

or a late 2012 update to its Japan Earthquake Model.

While the 2011 earthquake has reshaped the hazard landscape o Northeast

Japan, the event also highlighted that in the largest o earthquakes, tsunami peril canbe the principal driver o casualties, damage, and insured loss. In Japan, tsunami was

the principal cause o damage to ports, boats, cargo and the coastal railway system

(Figure 2). The waves were generated by the sudden vertical displacement o the sea

loor rom the 40 meters (or more) movement on the Japan Trench, the underlying

shallow subduction ault zone that marks the boundary between the Paciic and

Okhotsk plates and that dips down beneath the coast o northeast Japan.

As the sealoor above the upper end o the ault was raised several meters, the

overlying water was lited and then this mass o water spilled sideways and became the

tsunami advancing west towards the coast o Japan and east across the Paciic Ocean.

In deep water, the wave moved at speeds o more than 600 km per hour but slowed

and increased in height as it reached shallower water in low lying coastlines.

Along Japans coastline, water moved on average 1 km inland and to elevations in

excess o 30 meters in some coastal inlets. In many coastal settlements with tsunami

walls, predicated on repeats o tsunamis no larger than those witnessed over the past

two centuries, these walls were overtopped or destroyed.

Around 1.2 million properties were identified as being damaged by the earthquake

and tsunami. The best breakdown of damages suggests that 104,000 buildings were

completely destroyed by the tsunami, while 111,000 were partly destroyed and 67,000

partially damaged. This compares with the shaking damage in which 25,500 buildings

were totally destroyed, 143,000 were partially destroyed and 635,000 partially damaged.

By these estimates, the earthquake caused approximately 42% of the damage tobuildings, the tsunami 39% of the building damage, and the loss of buildings in the exclusion

zone around the Fukushima

power plants reflects 19% of

the total direct damage.

However, given that the

nuclear inc ident was

attributable to the tsunami,

in total 58% of the impact

was related to the tsunami.

Tsunami

Figure 2. Devastation in Onagawa, showing heavy, mid-rise

concrete structures toppled due to the tsunami waves ollowing

the 2011 Great East Japan Earthquake (Source: RMS)


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This degree o devastation stresses the need or detailed (i.e., high resolution) modeling

o tsunami risk. There are challenges, however, to calculating tsunami risk at a location. It is

necessary to understand the speed and extent o a tsunami waves propagation inland, as well

as the elevations o buildings and their vulnerability to inundation. As with all looding, risk

depends on site-speciic elevations, construction characteristics, and the existence o local

and network deenses. While aggregate inormation can be a valid approach to assessing a

portolio at risk rom earthquake ground shaking, high-resolution inormation is needed to

dierentiate tsunami risk (Figure 3). For a ully probabilistic tsunami model, one must

understand the recurrence associated with tsunami-generated events notably, large

subduction zone earthquakes o the coastlines o the world. In Japan, a M9.0 earthquake

will not now recur o the Tohoku coastline o Northeast Japan or hundreds o years. Morethan 1100 years had elapsed since the previous equivalent version o the 2011 earthquake in

869AD. However, similar earthquakes and megatsunamis are expected along the coast o

Hokkaido. There is also the potential or major tsunamigenic earthquakes along the Nankai

Trough subduction zone o southern Japan, as well as on the Ryukyu subduction zone to

the southwest o Japan running all the way to Taiwan.

Figure 3: The impact zone o the 2011 Great East Japan Earthquake and Tsunami, illustrating the wide area o ground shaking ( rom

under III to over VIII) elt across Honshu, and the concentrated northeastern coastal areas aected by the tsunami (Tsunami Inundation)

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The most signiicant aspect o the 2011 Thailand Floods was that it was a

surprise catastrophic loss to the global insurance industry, impacting concentrations o

industrial exposures within the Chao Phraya River basin. Flooding began in late July

2011 and by the end o November 2011, waters began to recede. Throughout this

time, major looding aected much o northern and central Thailand, most severely in

the Chao Phraya River basin, but also in the Mekong River basin (Figure 4).

The river systems o central Thailand are very slow draining, with low gradients.

Much o the central part o the country is a large delta, where rivers come together

270 km rom the coast to orm the Chao Phraya River that then lows slowly through

the swampy delta towards the sea. The capital city o Bangkok, close to the mouth o

this river, is only 2 m above sea level.

Over the past twenty years, the Government o Thailand had encouraged the

creation o a number o industrial parks to the north o Bangkok. When inding

suitable sites, the government required undeveloped, lat land (readily extended as

needs arose). Inevitably, such land was within loodplains. The industrial parks each

specialized in high technology and auto manuacturing sectors, with componentscompanies and major manuacturers situated in the same site. Major Japanese

companies with large manuacturing acilities in these industrial parks include Toyota,

Honda, Hitachi and Canon.

The 2011Thailand Floods

Figure 4: Thailands river network, along with looded area in the 2011 Thailand Floods


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European Solvency IIComing to Japan

While this concentration ensured companies could reduce the costs and time or

transportation, it created major concentrations o risk the opposite o the principle

o diversiication that underlies insurance. Even though the values o plant and

equipment at these sites were substantial (e.g. in at least one case, in excess o $10

billion), the risk mitigation measures proved insuicient.

During the 2011 looding event, water inundated seven major industrial parks in

the main lood zone (Figure 5), which were closed or between 35 and 85 days. As a

consequence, the insured losses have been estimated to be US$11 billion both on

commercial policies written in Thailand and on the corporate policies written in

Japan. Although there was an enormous amount o primary and secondary contingent

business interruption, it appears the majority o these losses were not insured.

The 2011 Thailand Floods have alerted the international insurance industry to

the inherent problems associated with large concentrations o exposure developed in

locations where the level o protection is not appropriate to the values at risk. The

culture o risk management must keep pace with development.

Though the timing is coincidental, with the occurrence o the 2011 Great East

Japan Earthquake and Tsunami, it is now understood that the Japan Financial Services

Authority (JFSA) is contemplating the adoption o a orm o solvency oversight that is

expected to be similar to the experience o the European market. The primary objective

o European solvency oversight is the protection o policy holders by ensuring theinancial soundness o insurance undertakings and company operations is driven by a

measurement-based risk management system. For such a risk management oversight to

be successul, it requires three elements: the accountability o senior management, the

Figure 5: Industrial estates looded during the 2011 Thailand Floods (let); damage at an industrial acility in early December 2011 (right)

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on-going ability to dynamically assess portolio risk at all levels o the underwriting

process (to manage exposure accumulation), and the implementation o JFSA oversight

across the Japanese market in an eicient, timely, and consistent manner.

The reality o catastrophe modeling or the insurance industry is that all

models (across perils and across geographical areas) are not created equal: in terms o

methodology rigor and accuracy, or in terms o the robustness o the underlying

exposure data. Indeed, it may be that a certain peril in a certain geographical area may

not be modeled until market demand supports the inancial investment required to

develop a robust and realistic probabilistic model even when the scientiic and

engineering knowledge is suicient to do so. Does this mean that the goals o solvency

oversight will not be met? Not at all!A 2011 survey o insurers by the Institute o Risk Management (IRM) indicates

that only approximately 20% o insurers are highly conident o the eicacy and

completeness o their exposure data. Recent catastrophic events aecting the Japanese

insurers may provide some insight into the beneits o dynamic risk management that

adheres to the solvency oversight goal o measurement-based risk management

practices. In both the 2011 Thailand Floods and the 2011 Great East Japan

Earthquake and Tsunami, ully robust modeling was not available to the industry to

assess common risk metrics such as Average Annual Loss (AAL) or return period loss

estimates. I one accepts the deinition o risk being the vulnerability o exposure to a

certain peril coupled with the likelihood (probability) o that peril occurring, then it

can be arguedthat the risk management system in place at the time o these events ell

short o the goal o solvency oversight.

However, the industry has the ability to make great strides towards a robust

measurement-based risk management system by rigorously capturing exposure

accumulations at the highest resolution possible. While this is ar rom a probabilistic risk

analysis o ground up, gross and net loss at location, account and portolio levels, it is an

imperative start towards a real-time understanding o exposure accumulation by senior

management. Had exposures in Thailand and Japan been captured and dynamically

tracked at the location level in a way the data could have been easily manipulated, such a

high resolution understanding may have yielded great insight in mitigating a uture loss

event. Such a state o knowledge o portolio exposure will advance signiicantly theimplementation towards a measurement-based risk management system, even in the

absence o a ully robust probabilistic catastrophe model.

Both the 2011 Great East Japan Earthquake and the 2011 Thailand Floods

highlighted areas o improvement or catastrophe models, along with ways to more

vigorously manage catastrophe risk. Prudent catastrophe risk management should involve

the re-examination o exposure accumulations across the most catastrophic loss scenarios

(as in the case o the 2011 Thailand Floods) and the consideration o a range o scenarios

or concentrations o risk, such as the Tokyo region or other megacities, such as Mexico

City. Further, there is a need or more detailed data to be captured and utilized when

transerring risk or high resolution perils, such as tsunami or lood, as well as a need to

strive or measurement-based risk management systems within insurers operations.

Conclusions


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Chinas insurance market has grown substantially in tandem with economic

development since China adopted its reorm and opening policy and became a

member o the World Trade Organization (WTO). Since China gained WTO

membership in 2001, Chinas insurance market has grown in importance over the

decade rom 2002 to December 31, 2011, as it has risen to the number two position

in Asia ater Japan while domestic premium income has increased by a actor o ive.

Premiums per capita are small because Chinas population is large, but potential

or growth is strong because GDP per capita is expected to increase to USD 10

thousand rom USD 5 thousand in the ive years ending December 31, 2015.

In contrast, domestic insurance underwriting in China was at a standstill or

nearly two decades rom 1958 to the end o the Cultural Revolution in 1976,excluding the minimum necessary business outside o China. Essentially, Chinas

domestic insurance market has only a 30-year history ater underwriting o all types o

insurance began again in 1982. More time is required and issues must be resolved

beore Chinas insurance market matures and achieves stable growth. I would thereore

like to consider those issues and the markets current direction based on the current

market situation.

3. Yuki Katayama NLI Research InstituteChinas Life Insurance Market:Current Conditions and Future Direction

Strong Growth inChinas Insurance

Market

Source: Created by complementing publicly available data on the China Insurance Regulatory

Commission website with publicly available data rom the National Bureau o Statistics o China website

Figure 1: Premium Income in Chinas Insurance Market

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Chinas insurance market has grown by a actor o ive since 2002. A key eature o

this growth is that premium income has continued to increase by more than 10 percent

annually excluding 2011, and as Figure 1 shows, had phases o pronounced growth in

2002, 2008 and 2010 due to the impact o the economy and inancial markets.

Three peaks o strong year-on-year growth in premium income basically

overlapped a period o ive consecutive years rom 2003 with real GDP growth over

10 percent. With national income increasing strongly, capital lowed into inancial

assets such as stock investments and insurance during this time.

Originally, savings-type insurance such as dividend-paying endowment insurance

accounted or a large proportion o Chinas lie insurance market. However,

investment-type insurance also made a signiicant contribution to the peaks inpremium income growth in 2002 and 2008. Around 2000 a number o insurance

companies in China began selling unit-linked insurance. At that time, insurance

companies were worried about negative spreads rom repeated decreases in interest

rates on deposits, which led them to aggressively sell unit-linked insurance. While sales

subsequently subsided, against a backdrop o the strong undamental need among the

populace or asset ormation and investment, unit-linked insurances market share

increased to 8.0 percent rom the ormer 1.5 percent in 2007 (Figure 2), when

economic growth and stock prices peaked with real GDP growth o 14.2 percent and

the Shanghai Stock Exchange Composite Index at the 6,000 level.

However, ollowing the global inancial crisis in the second hal o 2008, the

government agency China Insurance Regulatory Commission (CIRC) enactedbancassurance regulations or sales o investment-type insurance. Accordingly,

insurance companies took steps such as revising their product portolios, causing

investment-type insurance sales to decrease. In 2010, thereore, endowment insurance

3. Chinas Life Insurance Market: Current Conditions and Future Direction

Sales Trends:External Factors Easily

Affect Life InsuranceProduct Sales

Source: Annual Report o China Insurance Market 2007 and 2010-2011, edited by the China

Insurance Regulatory Commission and published by China Financial Publishing House

Figure 2: Life Insurance Market Share by Product(Premium Income Basis)

2007 2010

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and other types o dividend-paying insurance came to account or a large proportion

o the lie insurance market totaling about 70 percent (Figure 2).

Thus people in China exhibit a pronounced tendency to view insurance products

as a tool or inancial asset ormation rather than just security in the event o a

calamity such as death or disability, with capital requently lowing rom bank

accounts to insurance products according to luctuations in the interest rates on

deposits. Similarly, economic and inancial conditions make certain products popular

at certain times, and the inluence o government agency regulation and initiatives

drives product sales more than the initiative o users or insurance companies. In other

words, external actors easily aect Chinas insurance market.

The social insurance system encompassing medical and pension insurance is nowin an adjustment phase. The insurance industry and government agencies must

emphasize the importance o and the need or the essential security unction o

insurance, such as medical, casualty and death insurance.

The oreign-capital insurance company AIA Group Limited was the irst to enter

Chinas individual agent channel in 1992. Since then, this channel has become

important in Chinas lie insurance market. Today, the three major insurance market

channels are individual agents, bancassurance sales, and direct sales by insurance

company employees. Internet sales and telemarketing are new sales channels that are

gaining popularity, especially or non-lie insurance, but still only account or about 1

percent o the lie insurance market (Figure 3).

Expansion of theBank Sales Channel

and the Addition ofInsurance Companiesto Bank Groups

Source: Annual Report o China Insurance Market 2007 and 2010-2011, edited by the China

Insurance Regulatory Commission and published by China Financial Publishing House

Figure 3: Life Insurance Sales Channels (Premium Income Basis)

2007 2010

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Originally, the household savings rate was high in China, and banks had long

been the intermediary in inancial asset ormation. The strong social credibility o

banks as inancial institutions has engendered amiliarity with the insurance markets

bancassurance channel among users, especially or savings-type products. O particular

note, insurance companies used banks to sell the investment-type insurance products

mentioned earlier. As a result, bancassurance generated growth in insurance sales rom

around 2007, and became a key channel that has driven the insurance market rom

2008. Exempliying its increasing signiicance and importance, the bancassurance

channel accounted or hal o the overall market in 2010 (Figure 3).

Against this background, bancassurance beneited both banks and insurance

companies. For example, banks were able to generate stable ee income without theuse o capital at a time when equity capital regulations were becoming more rigorous,

while insurance companies gained access to the enormous customer base o banks.

Banks have submitted a steady succession o applications to invest in insurance

companies since receiving permission or this investment in January 2008. O note, banks

have taken over insurance company investments rom which large Chinese companies and

major oreign-capital irms have withdrawn since the global inancial crisis. Approximately

one bank per year has received approval to invest in an insurance company since around

the end o 2009, with three banks Bank o Communications, Bank o Beijing and China

Construction Bank receiving approval or their applications. Moreover, approval is

pending or three other banks Industrial and Commercial Bank o China, Agricultural

Bank o China and China Merchants Bank. Thus banks are likely to continue orming

groups that include insurance companies in the uture.


Source: Created by complementing publicly available authorized disclosure o the beore and ater investment data rom

the China Insurance Regulatory Commission website with company press releases

Figure 4: Investment by Major Chinese Banks in Insurance Companies

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On the other hand, CIRC has been enacting bancassurance regulations since

2009. CIRC temporarily halted previously brisk bancassurance sales o investment-

type insurance in Beijing and Shanghai at the end o 2008, then introduced various

rules in 2009. These included a requirement that banks establish dedicated in-branch

bancassurance counters staed by qualiied experts who had taken speciied training

courses.

In 2010, the China Banking Regulatory Commission (CBRC) added several

mandates to the previously mentioned rules. These included a rule basically limiting

banks to agency agreements with a maximum o three insurance companies to address

sharply rising ees and unauthorized transers by banks, and a rule requiring qualiied

employees to handle bancassurance.These moves limited bancassurance agency agreements and encouraged banks to

avor their group insurance companies or ailiates in strengthening ties with insurance

companies.

Under Chinas 12th Five-Year Plan running through 2015, CIRC has added the

goal o increasing security-type insurance product sales to its existing emphasis on

savings-type product sales, while aiming or a market structured to emphasize essential

insurance unctions. Similarly, in sales channels insurance companies may need to

emphasize sales o medical, critical illness and level-premium whole lie insurance

through individual agents in addition to relatively simple savings-type products

through bancassurance mechanisms. Individual agent market share has allen to about

40 percent because o problems with deceptive practices at the time o sale and the

entrenched position o bancassurance. However, this share may well increase in the

uture as a result o changes in insurance market product mix.

Having covered products and channels in Chinas insurance market in the

previous section, I would like to discuss actual levels o insurance penetration in

China.

Dividing China into the eastern, central and western regions, the eastern region

with its economically developed coastal areas accounts or about 50 to 60 percent opremium income or China as a whole. The advance o insurance penetration in the

eastern region is intimately connected with Chinas history. For example, Chinas irst

insurance company was ounded in Guangzhou in 1805. Shortly ater, insurance

companies were established in the coastal areas o Shanghai and Tianjin ater these

ports opened up as a result o the Opium War with the United Kingdom. Today, these

areas eature advanced insurance penetration as well as economic growth.

Looking at insurance company head oices, branches and sales oices by region

underscores their signiicant impact on regional disparities in insurance share. About

85 percent o all insurance companies in China have their head oice in the

economically developed coastal areas o the eastern region, where about 50 percent o

all branches and sales oices or both lie and non-lie insurance are located. Basically,

the location o insurance sales inrastructure alone accounts or almost all o the

regional disparities in premium income.

Regional Variations inInsurance Penetration

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Moreover, premium income per capita or China was 1,083 yuan in 2010, but

varied signiicantly by region (Figure 5). For example, premium income per capita was

6,310 yuan in Shanghai, 5,407 yuan in Beijing and 4,000 yuan in Shenzen,

demonstrating higher penetration in these economically developed eastern cities than

in other cities and regions. While gross regional domestic product varies between

Shanghai, with the highest premium income per capital o 6,310 yuan, and the Xizang

(Tibet) Autonomous Region, with the lowest per capital premium income o 172.6

yuan, the dierence o about 37 times or per capita premium income is pronounced.

Additionally, the highest share o premium income in gross regional domestic

product was 7 percent in Beijing, which is on par with developed countries, while the

lowest was a paltry 1 percent in the Xizang (Tibet) Autonomous Region.


Source: Created by complementing data or each region rom Peoples Bank o China, China Regional Financial Operation Report (2010),

with publicly available data rom the China Insurance Regulatory Commission website

Figure 5: Insurance Penetration by Region (2010)

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The target o sustained growth in Chinas insurance market will require urther

gains in existing markets where insurance penetration is advanced, and new business

development in untapped markets where insurance penetration is not advanced.

However, the great disparities between these two market types suggest that products

sold will vary signiicantly according to region, income and customer.

Besides the existing market o Tianjin, several regions have high rates o

economic and premium income expansion that indicate potential or growth. Hainan

Province, Qinghai Province and Hubei Province are regions that are promoting resort

and energy development as well as inrastructure investment. Premium income growth

was particularly strong in Hainan Province and Qinghai Province at more than 40

percent year on year. While the current insurance markets are small in these regions,they are expected to have strong potential or growth.

On the other hand, the Xinjiang Uygur Autonomous Region, the Tibet

Autonomous Region and Gansu Province are not on the insurance industrys second

avenue or growth as discussed above, and the gap between these and other areas is

widening. Insurance penetration in these areas will not center on standard insurance

products. Rather, it may come rom small-amount insurance, or microinsurance,

similar to postal lie insurance in Japan, which provides a certain measure o security at

a low premium. Post oices throughout the country and large Chinese lie insurance

companies that are amiliar to people in regional areas will be the channels enabling

penetration, particularly or small-amount insurance in low-income demographics and

regions where the purchase o standard insurance products is diicult.

Thus, while the insurance industry has work to do in each region, the overall

Chinese insurance market is growing strongly. How has CIRC deined the uture

direction or the development o the market?

Since 2006, CIRC has ormulated and executed ive-year plans or the

development o the insurance industry. In 2011, it announced the ive-year plan

through 2015, which has the ollowing ive major objectives.

The 12th Five-YearPlan for the InsuranceIndustry and FutureDirection

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CIRCs numerical targets or 2015 include a 100 percent increase in market scale

compared to actual 2010 market scale (Figure 6), which would be the same growth

rate targeted during the ive-year plan launched in 2006. Speciic targets or 2015 are

total lie and non-lie premium income o 3 trillion yuan, compared with 1.45 trillion

yuan or 2010; total insurance industry assets o 10 trillion yuan, compared with 5.05

trillion yuan or 2010; and per-capita premiums o 2,100 yuan, compared with 1,083

yuan or 2010.

In addition, the plan envisions a uture market in which insurance companies

switch their priority rom their ormer ocus on expanding scale to enhancing their

presence in the inancial industry, thus aiming to improve and strengthen their socialstanding. In this regard, the Great Sichuan Earthquake o 2008 reairmed the role o

the insurance business in supplementing national systems or handling situations such

as catastrophes. Chinas response to the global inancial crisis provides urther

background, as measures to expand internal demand through means such as

inrastructure investment highlighted the important role o institutional investors.

Moreover, the CIRC anticipates the shit o its powerul market and policy leadership

to insurance companies and users in stages with progress in doubling national income

and increasing insurance penetration over the coming ive years.


Source: Outline of 12th Five-Year Plan for the Chinese Insurance Industrys Development

(China Insurance Regulatory Commission, 2011)

Figure 6: The Five Major Objectives of the 12th Five-Year Plan for the Insurance Industry

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CIRCs objectives or lie insurance products include encouraging expansion in

long-term savings products such as endowment insurance and medical insurance as

well as in security-type products, accompanied by stable, moderate growth in

investment-type insurance. Concerned that a drop in stock prices will cause a wave o

policy cancellations and unsettle the market, CIRC is aiming or a market structured

to emphasize even greater stability or the essential security unction o insurance.

With China overhauling the medical insurance and pension systems that make up its

social insurance and the one-child policy accelerating the onset o an aging society,

expanding the penetration o supplemental savings-type and security-type products

has become a critical task. CIRC has also targeted more diverse sales systems,

encouraging insurance companies to use channels suited to their sales models. Thisinvolves increasing sales via bancassurance and individual agents and incorporating the

relatively new channels o telemarketing and the Internet.

On the other hand, the regulations or investing in insurance companies have

eased as part o deregulation, resulting in easing o restrictions on the size o equity

stakes when appropriate. This is adding breadth and diversity to the capital base o

insurance companies by supporting government, private and oreign investment.

Previously, CIRC restricted the equity stake o a single investor to less than 20 percent

in principle, but eased this restriction when relevant conditions were met. Foreign

investment is subject to separate regulations. However, CIRC may signiicantly ease

investment limits in light o the level o bank investment in insurance companies.

Foreign lie insurance companies are limited by law to 50 percent or less equity

ownership o lie insurance companies established jointly with a Chinese irm. They

also receive treatment that is unoicially quite dierent rom their Chinese

counterparts, such as longer wait times or approval o applications in each jurisdiction

to establish operations and begin sales. While restrictions on oreign investment are

likely to ease over the medium and long term, this may well take time considering the

degree o maturity o the market.

The Chinese insurance market o the uture will have a stronger presence both

domestically and internationally. A SwissRe Sigma report orecasts that China will rise

to second in the world in terms o premium income rom lie insurance in 2021.

While China has many issues to reine and resolve in becoming a truly major player inglobal insurance, its potential or growth is enormous. Expectations are great or

China to ulill this potential as Asias premier growth market.

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Figure 1: Insured Catastrophe Losses

28

An unprecedented combination o catastrophe events in the last two years have

tested the insurance and reinsurance industry in Japan as never beore, ocussing

global attention on risk assessment and risk management in Japan and in the Asia

Paciic region. The magnitude and destruction o the March 11, 2011 Great East

Japan Earthquake and Tsunami, and the extent o the human tragedy, captured the

worlds attention, while the response o the Japanese people commanded the respect

and admiration o all. By contrast, the widespread damage to property and to balance

sheets rom the loods in Thailand last year was not immediately recognized and it is

still, even now, being evaluated. The losses incurred by our industry have been

exceptional not only in their sheer size and inancial impact, but also in their nature,

highlighting the need to improve not only the understanding o known risks, but alsothe need to capture exposures that were previously either unrecognized or

insuiciently provided or.

Yet, in the ace o these adverse events, the insurance and reinsurance industry

has continued to demonstrate its qualities o resilience. While 2011 ranked as the

second largest year in terms o the size o insured catastrophe losses, it ranked irst or

reinsured catastrophe losses. Nonetheless reinsurance capacity, measured by capital,

returned to its previous record high o 470 billion U.S. dollars at the end o the irst

quarter o 2012. Insurers capital too continued to grow to new records. There

continues to be an excess o supply over demand or reinsurance globally.

4. Dominic Christian Co-CEO, Aon BenfieldJapans Insurance and Reinsurance Market2011-2012 Resilience in Adversity

Introduction

Source: Aon Benield Analytics

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Japan TreatyRenewals 2012

The adequacy o reinsurance capacity has been demonstrated most recently at the

renewals in the Asia Paciic region o property catastrophe reinsurance programs as at

April, June and July 2012. Insurers in New Zealand, Japan, Thailand and Australia

were and are extensive users o reinsurance and their reinsurance strategies in 2010

and 2011 protected their earnings and capital rom very material direct losses, in spite

o 2011 being a year in which, or the irst time, the Asia Paciic region accounted or

the majority over 60% - o total global insured natural catastrophes. The renewals

or 2012 proved to be orderly, and the reinsurance market has continued to provide

the required capacity to insurers.

A key topic in pre-renewal negotiation was whether, and on what terms, Japanese

non-lie insurers would be able to renew their earthquake pro rata treaties, or many

companies a core element o their reinsurance schemes. In the end, the substantial

improvements achieved by Japanese insurers in the original rating and conditions o

the underlying primary business meant that the capacity or Japanese pro rata treaties

stood up well, supported by reductions in event limits and ceding commissions.

Although tsunami risk was not included within the vendor model outputs, the actual

loss rom the Great East Japan Earthquake was generally well within the earthquake

limits purchased by the Japanese insurers. With underlying commercial and industrial

earthquake exposures not growing signicantly there was limited need or additional

earthquake excess o loss reinsurance. Upward pressure on pricing also infuenced the

renewal o wind/food excess o loss programs, and capacity was sucient to meet thedemand.


Figure 2: Insured Catastrophe Losses by Region

Source: Aon Benield Analytics

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4. Japans Insurance and Reinsurance Market 2011-2012 Resilience in Adversity

30

The impact o the 2011 fooding in Thailand led to very signicant losses to the

major Japanese non-lie companies, resulting in substantial reinsurance recoveries. The

scale o the Thailand losses was unexpected not only or insurers, but also or

reinsurers who had previously not considered food in Thailand as a peril that would

give rise to a loss o this scale. The response o reinsurers at renewal included requiring

amendments in treaty terms and conditions, and a requirement or higher granularity

o inormation to ensure that all exposures are properly understood and priced or.

Reinsurers required details o improvements in primary underwriting and

accumulation control o natural perils and business interruption (including contingent

business interruption), along with a well-articulated strategy as to how clients will

achieve this. Without detailed exposure data, capacity was limited or pricing wasloaded or uncertainty. Even with it, there were substantial rate increases or loss-

aected contracts, as well as tighter reinstatement conditions and a restriction on the

cover available or natural perils.

The combination o two such major loss events, in less than a year, reinorced the

value o the reinsurance product, as well as the need or a robust process to ensure a

clearer understanding o the potential or global catastrophe losses. There were

substantial variations in the response and the renewal appetite o individual reinsurers,

with some reducing their level o commitment in Japan while others ound that

increased pricing and improved transparency allowed them to step up their support

or the Japanese market at renewal. Substantial reinsurance capacity continued to be

available or Japanese programs and the market remained in balance. The successul

completion o renewal was acilitated by appropriate adjustments to treaty terms and

conditions, but it also owed much to the strength o the relationships built up over

many years between Japanese non-lie insurers and their leading reinsurers. The supply

o capacity was sucient to meet Japanese insurer demand and an orderly renewal was

achieved, albeit at increased prices.

This is not to say that signicant challenges do not lie ahead. The size o the

regions losses in 2011 has caused many reinsurers undamentally to re-evaluate their

strategies in Japan and the Asia Pacic region. The combined ratio o the group o

reinsurers monitored by Aon Benield (in our Aon Benield Aggregate analysis)

increased to 108.2 percent in 2011, an increase o 13.5 percentage points compared to2010, with a 14.1 percentage point increase in natural catastrophe losses. Reinsurer

returns on equity in 2011 dropped to 3 percent due to catastrophe losses and lower

investment yields; although analyst consensus earnings or public reinsurers show

returns on equity recovering to the 10 percent range or 2012 and 2013.

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Evaluation o risk, and more comprehensive risk management, to include

ormerly non-modelled perils, will be a major area o ocus in the near term, and

with revised vendor models expected to be released in 2013 we expect that signicant

resources will need to be dedicated to this subject. It is apparent that the enhancement

o their risk management unction has already been made a priority by insurers. Theimportance which we place on understanding risk ourselves is underlined by our own

preparedness to make a signicantly increased investment in our analytics capabilities

in the Asia Pacic region. We shall continue to develop catastrophe models proactively

as well as in response to major industry events: or instance, ollowing the Thailand

foods in 2011, we are creating a Thai food model, which will assist insurers better to

understand their exposures, while assisting analysis o the appropriate pricing or the

transer o risk through reinsurance.

In the last decade and more, market consolidation and merger and acquisition

activity in the Japanese market has led to the creation o major insurance groups with

global interests, and substantial reinsurance programs, in some cases among the largest

catastrophe programs in the world. In uture, the expectation is that urther market

consolidation will ensure that Japanese demand or capacity continues to grow, even

beore allowing or potential growth in the demand or protection against natural

perils in the primary market, or or changes in original policies which may be

introduced in the uture to expand the cover given.

In spite o these challenges, there is I believe good reason to be positive about the

prospects or the insurance and reinsurance industry in Japan.


Figure 3: Aon Benfield Aggregate Combined Ratio Comparison

Source: Individual Company Reports, Aon Benield Analytics

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4. Japans Insurance and Reinsurance Market 2011-2012 Resilience in Adversity

32

Our industry has once again demonstrated its ability to regenerate capital quickly

ollowing signicant market events. Reinsurance capacity increased to 470 billion U.S.

dollars by the end o the rst quarter o 2012back to 2010 peak levels. Lower than

average global catastrophe losses through the rst quarter o 2012, and increased

premiums at 2012 renewals have also assisted reinsurers in increasing capital. At the

time o writing, low catastrophe loss activity in the second quarter is expected to result

in urther increases o capital or the rst hal o 2012.

This essentially stable capital position underlines the point that, despite the

exceptional number o large global natural catastrophes in 2011, losses to reinsurers

were substantially contained within earnings, rather than eating too ar into capital

bases. Nonetheless, it can clearly be seen that reinsurers are being driven by the losses

towards a greater determination to understand the breadth o coverage provided under

treaties, raising concerns about issues including data transparency, event limits,

catastrophe cover under per risk XL treaties, and exposure to CBI risks.

Traditional reinsurance providers have indeed been severely tested but, as the

robustness o their capital position demonstrates, it is clear that they have responded well

to the challenges. At the same time, we have seen signiicant development o the

Insurance-Linked Securities (ILS) market in the rst hal o 2012. Catastrophe bonds

continue to enjoy an expanding market position and continue to infuence the market

by adding a meaningul alternative to traditional reinsurance. The issuance in recent

quarters has been very strong, and growing interest rom investors has provided insurers

better price visibility and multiple year commitments. Both eatures are important to

insurers and new demand continues to fow to this market. Following a record 1.493

million U.S. dollars in catastrophe bond issuance in the rst quarter o 2012, the second

quarter saw seven catastrophe bonds successully closed, providing 2.095 million U.S.

dollars o new capital to repeat and new sponsors. As o June 30, 2011, there was 14.9

Figure 4: Change in Reinsurer Capital

Source: Individual Company Reports, Aon Benield Analytics

Capital Markets

Capital Strength

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The twenty-six non-lie insurers comprising the members o the General

Insurance Association o Japan recorded the iscal 2011 business results described

below.

Net premium income in all lines o business increased to 7,116.1 billion yen, up

145.1 billion yen rom the previous scal year, as changes in premium rates increased

premium income rom Compulsory Automobile Liability Insurance and automobile

insurance and a rise in earthquake insurance contracts ollowing the Great East Japan

Earthquake led to growth in premium income rom earthquake insurance.

Net claims paid increased to 5,505.8 billion yen, up 1,187.1 billion yen rom the

previous scal year, due to payments related to the Thailand foods and the Great East

Japan Earthquake, as well as to typhoons and other natural disasters that occurred inJapan. The loss ratio increased by 15.9 % to 83.4%.

Operating and general administrative expenses related to insurance underwriting

declined to 1,162.7 billion yen, down 29.5 billion yen rom the previous scal year,

due to reductions in both non-personnel expenses and personnel expenses. As a result,

the net expense ratio decreased by 0.8% to 33.8%.

Net underwriting prot declined by 155.9 billion yen rom the previous scal

year to 339.1 billion yen in the red, the largest loss to date, mainly due to additions to

loss reserves or the Thailand foods. Claims paid or the Great East Japan Earthquake

had a limited eect on net underwriting prot or scal 2011, because the associated

loss reserves were recorded in the previous scal year.

Ordinary prot including return on asset investments was 80.1 billion yen, down

154.2 billion yen rom the previous year, and the net loss was 262.1 billion yen.

(1) The Great East Japan Earthquake

The magnitude 9.0 earthquake that occurred on March 11, 2011, the largest in

recorded history in Japan, and the accompanying large tsunami caused unprecedented

damage to a widespread area o the Pacic coast in eastern Japan.

In Japan, insurance policies against earthquake risk generally consist o two types:

earthquake insurance policies or personal dwellings (earthquake insurance policies

subject to the Act on Earthquake Insurance) and earthquake insurance policies or

companies (earthquake coverage endorsements).

A. Earthquake Insurance Policies for personal dwellings (Earthquake Insurance

Policies Subject to the Act on Earthquake Insurance)

An earthquake insurance policy is a contract attached to a re insurance policy. It

is entered into or between 30% and 50% o the insured amount o the re insurance

policy with the aim o stabilizing the living conditions o people whose homes are

damaged. In addition, private insurers and the central government jointly run a

reinsurance system. Private insurers and the central government share responsibility

or earthquake insurance policies. The system requires the central government to bear

a higher percentage o the loss caused by an earthquake when the loss exceeds a certain

5. Trends in Japans Non-life Insurance IndustryOverview of BusinessResults of Non-LifeInsurance Companies

Effects of a Series ofNatural CatastropheLosses Including the

Great East JapanEarthquake andThailand Floods

Underwriting & Planning DepartmentThe Toa Reinsurance Company, Limited

34

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amount. Ater the Great East Japan Earthquake, the reinsurance scheme implemented

in May 2011 raised the amount borne by the central government and reduced the

amount borne by private insurers. The amount borne by the central government

was increased again in April 2012. The number o consumers holding earthquake

insurance policies has

2012 insurance

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