Moody's said it has given a negative outlook to the Japanese property-casualty market because of limited growth opportunities for the auto insurance segment–a large part of major Japanese p-c insurers' portfolios.
Moody's added that all p-c insurers' ratings still have stable outlooks.
"Given the stagnating Japanese population, the likelihood that the number of automobiles owned in Japan will keep increasing is not high," said Moody's, noting that they had decreased for the fiscal year ending in March for the first time since World War II.
Moody's said insurers have enhanced profitability by raising premiums, but added if the pool of insureds continues to decline, growth will be difficult. Moody's noted that acquisitions of p-c companies overseas may become more popular among Japanese insurers for this reason.
The rating agency said it will monitor the positive and negative effects of this expansion on the business portfolios and risk profiles of Japanese companies.
Moody's added that, currently, major Japanese p-c insurers are not geographically diversified, and that could open them up to considerable earthquake and windstorm risks in Japan. Reinsurance, risk swaps and catastrophe bonds mitigate that risk to some extent, Moody's said.
The rating agency also noted that the fiscal year saw adverse loss reserve development, as companies underestimated losses for long-tail auto businesses, such as liability coverage products for bodily injury. Moody's said it will monitor whether or not the adverse development is one-off.
As credit strengths for the Japanese p-c industry, Moody's cited the high concentration on auto insurance products, "which have a relatively low risk of deviation from pricing expectations." Stable profit growth and a decline in high-risk assets such as domestic equity could result in an upward adjustment of ratings, the rating firm said.
Conversely, Moody's said significant deterioration in profitability and increases in insurance risk could cause a decrease in ratings.
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