Japanese insurance companies safeguarding the distance between climate action promises and reality
In Japan, the insurance protection gap, historically associated with earthquake damages, has expanded when it comes to climate-related disasters such as typhoons and flooding. This trend is a cause for concern as the Japanese Meteorological Agency predicts an increase in the intensity of typhoons and the frequency of torrential rain in the coming years.
The decline in the number of households with flood insurance is evident. From around 80% in 2013, the figure has dropped to just over 60% in 2022, due to flood insurance being optional. This situation is particularly concerning given the rising risks posed by climate-related disasters.
In an effort to address this issue, insurers are requesting the Global Risk and Insurance Research Centre Japan (GIROJ) to improve its climate-related risk models through scenario analysis. The Japanese government and regulators are also taking steps to prepare for growing climate-related damages. This includes conducting risk surveys, crafting business continuity plans, providing real-time disaster information, and improving climate-related risk models.
The FSA encourages insurance companies to properly assess river flooding risks and provide adequate information on other water-related disaster risks. This push for transparency aims to help policyholders make informed decisions about their insurance coverage.
Parametric insurance, which automatically provides rapid payouts to policyholders if key weather metrics reach above a certain threshold, is gaining attention as a way to slow or prevent the widening of the climate-related protection gap. Mitsui Sumitomo Insurance and Sompo Japan Insurance recently introduced parametric weather insurance products in Japan.
Despite rising damages and premiums, the number of households and companies with insurance coverage against wind damage remains high. This is largely due to wind damage being automatically attached to fire insurance policies, ensuring that damages from wind disasters, such as typhoons, are covered almost 100% for both households and companies.
However, the Japanese government acknowledges that while the protection gap for climate-related disasters exists, it is not as serious a problem compared to levels in Europe, the US, south-east Asia, or other emerging economies.
In 2024, the four major insurers announced premium hikes for fire insurance by an average of 15% for corporate clients and around 10% for households. This increase reflected a 13% increase in the fire insurance rate published by the General Insurance Rating Organization of Japan (GIROJ) in June 2023.
The issue of collusion among insurance companies, as seen in the past with price hikes for corporate clients following extreme weather events, remains a concern. The Japanese government has taken steps to address this issue, forcing insurance companies and brokers to recommend products that benefit their customers and ordering the insurers to sell their cross-shareholdings with their clients.
In the face of these challenges, applying the experience gained in parametric earthquake insurance to wind, flood, and other weather insurance should be considered the low-hanging fruit for the insurance industry. As the risks posed by climate-related disasters continue to grow, finding effective solutions to close the protection gap will be crucial for Japan's resilience in the face of these challenges.
Climate-related disasters caused losses of US$320bn globally in 2024, according to Munich Re. This underscores the need for effective insurance solutions to protect communities and businesses from the devastating financial impact of these events.
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