Japanese ILS structurer Keystone ILS Capital and Howden Re Japan will focus on quake risk and wider disaster resilience solutions in the initial stages of their partnership announced last month, the firms have told Insurance Insider ILS.
Keystone ILS Capital will provide the structuring services and local ILS know-how, while Howden Re brings its ILS franchise, with the broker taking a minority stake in Keystone.
The aim is to expand the ILS market in Japan, supporting local (re)insurance carriers and corporates to transfer risk to the capital markets through ILS.
Keystone was founded in 2022 by Shinji Yamamoto, formerly a managing director at Aon Securities in Asia.
Yamamoto told this publication that he was motivated to partner with Howden Re “to promote quake risk transfer to the capital markets” and to offer investors a diversification opportunity.
He noted “growing demand for ILS solutions because of the rising number of natural disasters and associated losses in Japan”.
“We aim to provide ILS solutions to corporates and local governments, in co-operation with domestic insurance companies and other types of financial institution,” Yamamoto said.
Japanese sponsors generally have an interest in diversifying their capital base, he added.
There is around $2.7bn of cat bond limit on risk covering Japan perils, mainly earthquake, as well as some typhoon and flood.
Pricing is a focus for Japanese sponsors
Japanese sponsors are generally price-sensitive, with this being one reason why local carriers' participation in the cat bond market has been somewhat subdued thus far, Yamamoto said.
This is particularly the case where the price differential is “overly unbalanced” between ILS and traditional reinsurance, he noted.
“If the cost becomes unbalanced, it may be difficult to justify cat bonds to Japanese sponsors,” he said.
Yamamoto continued: “ILS and cat bond usage by the corporate sector is still limited, although we have seen a couple of corporate cat bonds in the past, while municipalities have never used cat bonds.”
The “significant protection gap”, in Japan left space for the new partners to promote ILS to local private carriers, as well as to corporates and government entities, he added.
The Japanese primary insurance market is dominated by three vast carriers – Sompo, Mitsui Sumitomo & Aioi Nissay Dowa (MS&AD), and Tokio Marine – which together account for around 90% of premium.
The market is understood to be poised for growth, as local regulators mull reforms that would open the door to independent broker firms, according to analysis published last month by sister publication Insurance Insider.
Japan quake risk protection gap is ~$30bn of in premium
The country’s exposure to earthquake risk is substantial, with Yamamoto suggesting that a major quake impacting Tokyo could result in an economic loss of ~$600bn, for which the government is currently positioned to provide a maximum ~$82bn payout.
Kentaro Tada, CEO at the newly formed Howden Re Japan, said: “The Japanese earthquake protection gap is around $30bn in premiums, and our entry in the market is to help fill this gap.”
Last Friday, the Japanese government issued its first ever “megaquake” warning, after a 7.1 magnitude tremor was recorded near the Nankai Trough region in the southwest of the country.
Yamamoto noted that if such a “megaquake” were to strike, it would “not immediately translate to losses for catastrophe bonds”. Nor would it “have a direct impact on investor sentiment”, given that the potential for a quake in the Nankai Trough region has been discussed by investors for many years.
A small market with potential to expand
On the investor side, Yamamoto noted a good amount of caution about ILS.
Having entered the private ILS space in 2008 following the financial crisis, Japanese investors endured some years of poor performance, then exited and mostly have not returned.
“Where the performance in private ILS struggled after 2017, confidence in ILS as the alternative asset class wavered unfortunately, a situation that continues today,” he said.
He added that investors would be encouraged to return if the ILS product and market were to evolve and expand, and as investors’ concerns are eased through education about the asset class.
The small size of the Japanese ILS market is an area of concern for some investors, Yamamoto noted.
As well as quake risk, the Keystone ILS Capital and Howden Re Japan partnership could focus also on typhoon and tsunami risks in the future.
“We’re looking to provide comprehensive coverage at Howden Re, working closely with reinsurance hubs in Singapore, London, Bermuda and continental to provide that comprehensive coverage,” Tada said.
He also envisages using cat bonds to cover Japan cyber risks, although this is “more in the future,” he said.
The ILS market could also provide coverage around political risk, with geopolitical tensions growing in Japan.