Japan’s non-life insurers strengthen as oversight improves

The FSA has also introduced stricter governance requirements.

Japan’s non-life insurance market will likely hold a stable outlook, amidst improved profitability in the fire insurance segment and enhanced regulatory oversight as key factors supporting the sector's stability, AM Best said.

In its latest report, “Market Segment Outlook: Japan Non-Life Insurance”, AM Best highlights that Japan’s Financial Services Agency (FSA) has tightened its regulatory stance over the past 18 months. 

The FSA has introduced stricter governance requirements, including increased supervision of agency networks and a crackdown on improper incentives provided by insurers to distributors. 

Whilst these measures are expected to raise compliance costs in the short term, AM Best believes they will improve transparency, foster fairer competition, and lead to greater cost efficiency in policy acquisition over time.

The industry is also preparing for the implementation of the Insurance Capital Standard in fiscal year 2025, which will require assets and liabilities to be valued at market rates.

Although this solvency regime is expected to have a more significant effect on life insurers, most Japanese non-life companies have been strengthening their risk management systems in anticipation of the change.

AM Best’s director of analytics, Chanyoung Lee, noted that the regulatory developments will enhance transparency and align Japanese non-life insurers more closely with international peers, enabling them to better manage economic uncertainty and improve their global competitiveness.

The report also points to progress in addressing underwriting volatility in fire insurance, particularly for homeowners, where insurers have adjusted pricing to reflect higher natural catastrophe risks. 

These efforts are intended to improve pricing accuracy and reduce long-term underwriting losses.

Favourable shifts in Japan’s interest rate environment are also supporting the sector. 

As the economy shifts from deflationary pressures to inflation control, insurers with large bond portfolios are expected to benefit from improved investment income over the next year.

However, challenges remain in the automobile insurance segment, where profitability is under pressure. 

Rising repair costs, driven by higher prices for spare parts and labour, have caused loss ratios to increase across major non-life insurers. 

Charles Chiang, senior financial analyst at AM Best, said this trend has been evident in recent quarters and remains a key concern for the sector.