Learning from Japan’s heavy typhoon seasons

May 14 2020 by Andrew Tjaardstra and Yvonne Lau

Japan was hit by multiple severe extreme storm losses in 2018 and 2019 which shocked the global (re)insurance market.

The loss creep from Typhoon Jebi, for example, hit (re)insurers for much of last year – despite the storm occurring at the end of August and beginning of September 2018.

The market has been prioritising reassessing climate models, claims, pricing and resilience.

As Japan typhoon season approaches once again, this year could be even trickier as we could see the double whammy of dealing with a severe storm combined with the challenges from Covid-19.

InsuranceAsia News (IAN) spoke with three senior market leaders to discuss the key lessons: James Beedle, chief executive, Asia Pacific, PartnerRe; Jens Mehlhorn, head of property underwriting, Japan, Swiss Re; and Mamouri Tanouchi, managing director, Japan, Crawford & Company.

IAN: What are the (re)insurance market lessons from the Japanese windstorms of 2018 and 2019 and how might Covid-19 impact this year’s nat cat season? 

James Beedle, PartnerRe: The active 2018 and 2019 typhoon seasons in Japan underline the importance of achieving technically sustainable rates for the exposure carried on the balance sheets of both insurers and reinsurers. To price our products correctly, we must use the best available science, updated with the most recent data points, to ensure we have a clear understanding of the risk return profile for this peril.

At PartnerRe, we have a long track record of investing considerable resources in understanding both the frequency and severity of large typhoons – our recent publication on Typhoon Jebi estimates a return period of 20 to 25 years.

The financial market volatility caused by Covid-19 is impacting balance sheets and is driving an increase in the demand for reinsurance and a ‘flight to quality,’ particularly for nat cat. Following three years of significant global cat activity and close to zero interest rates, the shift in the demand / supply dynamic is re-setting pricing expectations for the market.

As the year progresses, we will learn more about the impact of Covid-19 on both the asset and liability side of reinsurer’s balance sheets; nevertheless our expectation is that pricing will continue to harden in both cat and non-cat lines of business.

IAN: How is climate change impacting the outlook for Japan’s typhoons?

Jens Mehlhorn, Swiss Re: Typhoons in Japan are no surprise: the last 100 years have seen repeated occurrence of this peril. While not unexpected, the events of the last two years have challenged the current insurance industry view of tropical cyclone wind and flood risk in Japan. In particular, flooding from Typhoons Hagibis (2019) and Prapiroon (2018) has put a spotlight on the flood risk potential.

Climate change has altered the game. With warmer seas and more unpredictable precipitation patterns, weather-related events have reached a higher level of intensity. While huge investments in coastal and inland flood defenses since the 1950s and 1960s have helped to mitigate the impact, Typhoon Hagibis in particular has challenged this assumption: at least 55 levee breaches and overflowing rivers illustrated a substantial flood risk that is only partially mitigated. Out of the US$8 billion in insured losses, more than half stemmed from flood losses.

According to a Swiss Re Institute Sigma report, weather-related risks remain insurable if action is taken now. The insurance industry needs to actively embed and dynamically track the effects of the warming climate and adapt risk models to a profoundly changing landscape.

The risk landscape is dynamic and to avoid falling behind the curve, insurers need to actively track socio-economic developments, scientific findings as to climate change effects, and the status of local risk mitigation measures in order to keep weather risks insurable. A recalibration of flood risk assessment in the country is much needed, particularly within the context of a warming climate, to mitigate future risks and keep weather events insurable.

IAN: From a loss adjusting perspective, what are the lessons learned from Japan’s typhoons and how are firms changing behaviour? 

Mamoru Tanouchi, Crawford & Company: The typhoons in 2018 and 2019 caused widespread damage with consecutive events impacting the same regions. This placed considerable pressure on both the construction and insurance industries due to the scale of the impact, while demand for materials sparked a sharp cost increase driving up repair costs.

Some insureds opted for temporary repairs until material prices dropped, while others proceeded with reconstruction and incurred additional costs. This contributed to both higher insured losses and longer settlement periods.

Loss analysis has revealed the impact of contingent business interruption losses was lower than originally predicted. This reflected the success of mitigation measures by insureds plus the effectiveness of business continuity plans which reduced supply shortages. Higher losses tended to result from increased working costs rather than loss of profit.

We have since seen greater interest in AI and machine-learning capabilities to support speedier claims settlement. Also, insureds have reassessed the balance between in-house claims employees and specialist independent loss adjusters to better optimise the claims process.

From a general financial perspective, high levels of retained earnings should help reduce the impact on larger corporations. However, smaller organisations, particularly in highly exposed sectors such as tourism, may struggle to recover post pandemic.

While it is difficult to predict the market impact – much attention to date has focused on business interruption cover. However, most policies specifically exclude pandemic cover which is likely to limit such insured losses.

We would expect to see an uptick in interest in new technologies and service capabilities that support increased self-service options for claims notification and remote claims handling. Prudent investment in solutions which support more effective and efficient claims management will be needed.

MORE FROM: Market View
Partner Content