The recent and first ever ‘megaquake’ warning issued by authorities in Japan has heightened the perception of the peril’s risk and regardless that the warning was eventually lifted, it’s seen as an element that might be supportive of reinsurance pricing for that country, by analysts at J.P. Morgan.
Japanese earthquakes are considered one of the height perils for the worldwide insurance and reinsurance industry, while additionally it is a comparatively significant factor of the catastrophe bond market as well.
In actual fact, Japanese earthquake risk makes up 4.4%, or roughly US $2.11 billion, of the outstanding catastrophe bond market presently, across pure Japanese quake cat bonds and Japanese focused multi-peril deals that include earthquake exposure.
View Artemis’ chart that breaks down the cat bond market by peril here.
Along with that, there may be an extra US $730 million of additional cat bond market exposure to Japanese earthquakes in multi-peril transactions covering a spread of locations and risks all over the world.
On which basis, we estimate at Artemis, that nearly 6% of the outstanding cat bond market actually has exposure to a megaquake in Japan.
The ‘megaquake’ warning was issued by Japan after a 7.1 magnitude earthquake hit off the southern island of Kyushu on August eighth and brought the Nankai Trough into query, being an area where earthquakes have up to now caused 1000’s of deaths and seen as fault location potentially overdue for a significant event.
The J.P. Morgan analyst team note that after the mid-year reinsurance renewals there are some signs of property catastrophe rates moderating somewhat.
But they added, “Bearing in mind that Japanese earthquake risk is now more high profile given the mega quake warning and the Atlantic hurricane season is predicted to be energetic, we consider that these aspects should mean that pricing shouldn’t collapse even when the loss environment stays relatively benign for the rest of 2024.”
The Japan Meteorological Agency (JMA) state there may be a 70-80% likelihood of a magnitude 8 or 9 quake related to the Nankai Trough inside the following 30 years, the JPM analysts note, but say “the probability is now higher than normal after the most recent quake.”
For the massive 4 European reinsurance firms, the analysts note that taking a look at 1-200/250 12 months scenarios for exposure to Japanese earthquake tail risk, “it stays significant.”
“That is unsurprising because it is considered one of the 5 global peak insured perils. If we compare the exposure to 1H24 equity, we will see that it ranges between 8-13% based on the most recent disclosures,” the analysts said.
Nonetheless, they note that even were a big Japanese earthquake to occur, “we consider that the claims burden shall be manageable for the European reinsurers.”
A part of the rationale for that’s that retrocession would likely respond, with a share of losses passed through quota share structures reminiscent of sidecars, while other retro arrangements, a few of which may be within the capital markets including cat bonds, could also reply to a significant event.
Which speaks to the importance of the capital markets and instruments from sidecars, to catastrophe bonds, in helping the world’s largest re/insurers manage the impacts of any major peak peril catastrophe loss event.
While the megaquake warning may be supportive of reinsurance pricing in Japan resulting from the best way it has rekindled awareness of what can occur, without some form of disruptive loss activity, or other inputs reminiscent of inflationary effects, it seems likely Japans next reinsurance renewal would prove relatively flat within the principal again, given the well-capitalised state of the reinsurance and ILS market.