Japan experiences of evaluating insurance effectiveness: The role of governments

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1 Japan experiences of evaluating insurance effectiveness: The role of governments Teruo Saito Sompo Japan Nipponkoa Risk Management Inc. 1

2 Contents 1 Earthquake insurance and Great East Japan Earthquake 2 The risk of Water-related disasters 3 Development of new insurance products 2

3 Responsibility of the government of Japan Legal responsibility of the government is stipulated by the Basic Act for National Resilience -- the government has the responsibility to establish and implement measures concerning National Resilience (Article 3) Insurance plays an important role for recovery from disaster and developing resilience. -- It provides disaster victims with financial support and assistance to recover their lives. The government should closely cooperate with insurance industry for fulfilling its responsibility. 3

The effectiveness of the earthquake insurance was tried In March 2011, the Great East Japan Earthquake struck, centered on the Tohoku district, brought enormous, widespread damage.

4 The effectiveness of the earthquake insurance was tried In March 2011, the Great East Japan Earthquake struck, centered on the Tohoku district, brought enormous, widespread damage. - a total of 19,009 people dead or missing - 383,246 buildings completely or partially destroyed The effectiveness of the earthquake insurance was severely tried by the Earthquake. The government and insurance industry strived for fulfilling their responsibility, and got over the test. 4

5 The insurance was appreciated by victims as being effective During one year from the earthquake, victims could receive payment on 772,403 claims, totaling 1,241 billion yen (12 billion US$) During two chaotic months, insurance industry managed to pay about 60 percent of total claims. One year later, it reached 99 percent. Insurance industry completed its responsibility without significant financial impairment. In 2012, a project team of the Ministry of Finance reviewed effectiveness of insurance, in conclusion valued it highly. The government decided on the continuance of the system. 5

Number Change of the total number and amount of insurance claims paid out due to the Great East Japan Earthquake 1 year later Billion yen 1,241 1,200 2 months later Number 1,000 800 600 400 200 4/15

6 Number Change of the total number and amount of insurance claims paid out due to the Great East Japan Earthquake 1 year later Billion yen 1,241 1,200 2 months later Number 1, / / / / / / / / / /1 3/1 12 4/2 0 Total amount money of insurance claims paid Total number of insurance claims paid General Insurance Association of Japan 6

7 Outline of the earthquake insurance The earthquake insurance is an insurance exclusively for earthquake disasters. It indemnifies against damage caused by fire, destruction, burying or washing away, resulting from an earthquake or volcanic eruption or from a tsunami following either of these events. Fire insurance does not indemnify against damage caused by fire resulting from an earthquake or fire damage that spreads because of an earthquake. The earthquake insurance is attached to fire insurance. The earthquake insurance is established with the government reinsurance underwriting. 7

8 Key point 1 government s role as a reinsurer The earthquake insurance system stipulates Liability sharing of insurance companies and the government, and Maximum Payment Limit (MPL) Based on liability sharing, the government shared the payment of 1.2 trillion yen with insurance industry and it lightened the burden imposed on insurance industry. Due to a revision reflecting a rapid decrease in insurance industry s reserve after the earthquake, liability share of the government increased. And Maximum Payment Limit also increased to 7 trillion yen due to increase in the earthquake risk. 8

9 Liability sharing of insurance companies and Japanese government Former liability sharing and MPL (applied to the Great East Japan Earthquake) Total payment 1,241 billion yen 5,500 billion yen 115 billion yen 1,925 billion yen (Maximum Payment Limit) 50% Liability of Government 4,301 billion yen 95% Liability of insurance companies 1,198 billion yen 50% 5% Current liability sharing and MPL (as of April 2014) 100 billion yen 362 billion yen 7,000 billion yen Liability of insurance companies billion yen Liability of Government 6,738 billion yen General Insurance Association of Japan General Insurance Rating Organization of Japan About 99.5% About 0.5% 9

10 Key point 2 introduction of new approaches for payment of claims For proper and prompt payment of insurance claims, insurance industry introduced many new approaches under the leadership of the General Insurance Association of Japan (GIAJ). Insurance companies deployed many staffs needed to respond to damage of the earthquake. Sompo Japan set up 12 local headquarters in nationwide, and dispatched more than 3,000 staffs to the affected areas. The governments supported insurance industry s efforts. For instance, the government approved a car for use of insurance assessment as emergency vehicle, which enabled to pass Tohoku expressway in chaotic times when general vehicle couldn't pass there. 10

Example of new approaches Designation of the total loss areas, using 23,000 aerial and satellite photographs, which enabled to assess the degree of damage without building-by-building damage

11 Example of new approaches Designation of the total loss areas, using 23,000 aerial and satellite photographs, which enabled to assess the degree of damage without building-by-building damage investigation. Introduction of written investigations based on self-submitted reports by policyholders such as the exclusion zone related to the accident at the Fukushima Daiichi Nuclear Power Plant. Consulting system for answering policyholder s inquiries, in cases that it was not clear which company had underwritten, for reasons including loss of the insurance policy due to the tsunami or the death of the policyholder. 11

12 Key point 3 affordable premiums Earthquake insurance premium has been kept at a level that as many people as possible can afford. For that purpose, the scope of indemnity is limited and the rates are established in eight risk classes derived from the four insurance zones (location) and the two types of building structures. Penetration of the earthquake insurance has been improving due to the government and industry s promotion activities and rising consumer awareness of earthquake risk. In 2012, 56.5 % of fire insurance policyholders have earthquake insurance policy cover. The governments aims at 61.6% in Limiting the scope of indemnity The policyholder is required to set the amount insured under earthquake insurance within a range of 30-50% of the insured amount of fire insurance. However, the amount insured is limited to a maximum of 50 million yen for a building and 10 million yen for personal property. 12

13 Basic premium rates Nonwooden Wooden Prefecture Zone 4 Zone1 17 prefectur es Zone2 15peifect ures Zone3 6prefect ures 0.50yen 1.00yen Iwate, Akita, Yamagata, Fukushima, Tochigi, Gunma, Toyama, Ishikawa, Fukui, Tottori, Shimane, Yamaguchi, Fukuoka, Saga, Nagasaki, Kumamoto, Kagoshima 0.65yen 1.27yen Hokkaido, Aomori, Miyagi, Niigata, Nagano, Gifu, Shiga, Kyoto, Hyogo, Nara, Okayama, Hiroshima, Oita, Miyazaki, Okinawa 1.o5yen 1.88yen Ibaraki, Saitama, Yamanashi, Osaka, Kagawa, Ehime Zone 3 Zone 2 Zone 1 Zone4 9prefect ures 1.69yen 3.13yen Chiba, Tokyo, Kanagawa, Shizuoka, Aichi, Mie, Wakayama, Tokushima, Kochi (As of April 2014) Per one year insurance period and \1,000 of amount thousand insured General Insurance Rating Organization of Japan 13

Coverage of the earthquake insurance The ratio of households with earthquake insurance and the ratio of fire insurance policyholders with earthquake insurance coverage (%) The number of earthquake

14 Coverage of the earthquake insurance The ratio of households with earthquake insurance and the ratio of fire insurance policyholders with earthquake insurance coverage (%) The number of earthquake insurance policies The number of earthquake insurance policies The ratio of households with earthquake insurance to all households The ratio of fire insurance policyholders with earthquake insurance coverage to all fire insurance policyholders General Insurance Association of Japan 14

A challenge to the risk of hydrometeorological disasters In Japan, there is an increasing tendency of torrential rainfall as a long-term trend.

15 A challenge to the risk of hydrometeorological disasters In Japan, there is an increasing tendency of torrential rainfall as a long-term trend. It will become stronger due to the impact of climate change. General insurance capacity may be influenced by the increase of the risks of water-related disasters in the future. Change of annual number of occurrences of torrential rainfall of 80mm or more in one hour Annual number of occurrences per level of hourly rainfall (per 1,000 measurement points) year Japan Meteorological Agency 15

16 Research for evaluation of future flood risk with Kyoto University In 2010, Sompo Japan Nipponkoa Risk Management Inc. launched a research project on an estimate of future flood risk together with Disaster Prevention Research Institute of Kyoto University. The joint team developed flood simulation models, for the Kinki metropolitan area ( Yodo River basin) in 2011, for the Tokyo (Tone River Basin) and Chukyo metropolitan areas (Kiso River Basin) in Kyoto Shiga The team is studying on quantifying the flood risk Hyogo using these models taking account of the impact of climate change. Osaka Nara Mie Yodo river basin (8,240km2), 16

17 Development of new insurance products for vulnerable people Insurance can play also an important role to contribute to mitigating the impact of climate change for vulnerable people in developing countries. But existing insurance products in developed country, just as it is, may not be suitable for them. Insurance companies have responsibility to develop new insurance products. It necessitates partner s participation. Sompo Japan has been endeavoring to develop insurance products that will contribute to mitigating damage from climate change in cooperation with partners. 17

Provision of weather index insurance in northeast Thailand From 2007, Sompo Japan began researching risk financing methods to address climate change together with the Japan Bank for International

18 Provision of weather index insurance in northeast Thailand From 2007, Sompo Japan began researching risk financing methods to address climate change together with the Japan Bank for International Cooperation (JBIC) In 2010, Sompo Japan Insurance Thailand started providing weather index insurance in northeast Thailand through the Thai Bank for Agriculture and Agricultural Cooperatives (BAAC), to farmers who had contracted BAAC s loans. In 2012, sale of the product has expanded to cover nine provinces in northeast Thailand (one province in 2010, five provinces in 2011). NKSj Holdings, CSR Communication Report

Pacific Catastrophe Risk Insurance Pilot Program For mitigating the impact of climate change on small island countries, regional risk pooling such as CCRIF has occupied the attention.

19 Pacific Catastrophe Risk Insurance Pilot Program For mitigating the impact of climate change on small island countries, regional risk pooling such as CCRIF has occupied the attention. In 2013, the World Bank and five pacific countries launched the Pacific Catastrophe Risk Insurance Pilot Program. In 2014, Cook Island joined the program. Sompo Japan, joined the program as a private insurance company when it was established in NKSj Holdings, CSR Communication Report

Announcement on the Revision of the Standard Full Rates for Earthquake Insurance

Announcement on the Revision of the Standard Full Rates for Earthquake Insurance (GIROJ filed the revision of rates with the Commissioner of the Financial Services Agency on June 15, 2017.) General Insurance