Increasing competition and new opportunities in a changing business environment
The Toa Reinsurance Company, Limited
6, Kanda-Surugadai 3-chome, Chiyoda-ku, Tokyo 101-8703, Japan
www.toare.co.jp
Printed in Japan
The currency exchange rates used in this booklet are the ones effective at the date of production.
©2005 The Toa Reinsurance Company, Limited. All rights reserved. The contents may be reproduced only with the written permission of The Toa Reinsurance Company, Limited.
About the cover
Tokyo’s dynamic cityscape combined with a traditional Japanese umbrella symbolize our expanding business activities and commitment to providing the best protection possible.
C o n t e n t s page
To Our Clients 1
Teruhiko Ohtani
Operating environment changes and corporate 2
issues in Japan’s non-life insurance market
Hiroshi Hirano
Trends in the Japan’s agricultural cooperative 8
insurance market and Zenkyoren’s strategies
Toshiyuki Uehara
Insurer bankruptcy and the policy holder 13
protection system in Japan
Makoto Sano
Non-Life Japanese insurance market— 17
“Today & Tomorrow”
Howard J. Cheetham
Catastrophe modeling for the Japanese market: 21
the Third Generation RMS Japan Earthquake Model
Craig Van Anne
Patricia Grossi
Trends in Japan’s non-life insurance industry 27
The Toa Reinsurance Company, Limited
Trends in Japan’s life insurance industry 32
The Toa Reinsurance Company, Limited
Supplemental Data: 39
Results of Japanese non-life insurance companies for fiscal 2004, ended March 31, 2005 (part one)
Results of Japanese non-life insurance companies 40
To Our Clients
It gives me great pleasure to have the opportunity to welcome you to our 2005brochure which is now in its ninth year. It is encouraging to know that over the years our brochures have been well received even beyond our own industry’s boundaries as a source of useful, up-to-date information about Japan’s insurance market, as well as contributing to further develop an interest in and an under-standing of our domestic market.
Today, Japan is in the throes of a number of major transformations—both do-mestic and international in nature—such as an aging society, the globalization of many business activities, and the advancement of information technology. Since the 1990s, many Japanese firms concerned themselves with severe belt-tightening and restructuring efforts. Following this, they are now shifting from a defensive to a more aggressive management posture, in order to adapt to the realities of the new business environment. As a result of these efforts, business revenues are witnessing an improvement.
If we look at the banking sector, it shows that Japan’s financial system has also begun to regain its footing. This has been due to the efforts made by banks and other financial institutions to improve their financial situation, centered largely on resolving problems related to nonperforming loans. Looking to the future, I believe that if Japan’s financial system can be further stabilized, confidence in and expectations for the Japanese economy overall will rebound as well, and this, combined with today’s strengthening in capital investment, will establish a solid foundation for economic recovery.
In fiscal 2004, Japan’s non-life insurance industry faced growth difficulties as competition intensified, particularly in automobile insurance which accounts for around half of non-life insurers’ total revenues. In addition, claims payments for the year are expected to reach their highest levels ever due to the extreme wind and water damage caused by the ten typhoons that struck Japan last year. These and the effects from other natural disasters made 2004 an extremely tough one for the industry as a whole. Although measures such as utilizing contingency reserves enabled insurers to maintain bottom line profitability for the year, their income actually decreased when compared to the previous fiscal year. At the same time, an increasing number of insurers have made concerted efforts to expand into the third-sector area which includes lines such as medical insurance. Remarkable growth has also been seen from some insurers expanding into other insurance markets in Asia—an area which itself is experiencing rapid growth in the insurance sector. These developments have led to speculation that both domestic and overseas competition will most likely further intensify in the future. In the light of such circumstances, we will continue to adapt swiftly to the chang-es in our operating environment and continue with the day-to-day businchang-ess of meeting our clients’ needs as best, and as fast as we can.
In conclusion, I hope that our brochure will provide a greater insight into the Japanese insurance market and I would like to express my gratitude to all those people who so kindly contributed so much time and effort in the making of this brochure.
For half a century, Japanese non-life insurance companies were required by vari-ous regulations to maintain similar business models for their operations as well as offering similar products at similar prices and through similar sales distribution channels. All of this changed, however, as a result of the amendment to the In-surance Business Law in April 1996. The resultant dynamic easing of restrictions led to unprecedented changes in both the marketplace as well as the players themselves. A clear differentiation emerged in product strategies as well as actual distribution channels. Moreover, new players such as direct marketing insurers were able to enter the market. More significantly, the new law set the scene for a complete market reorganization with mass consolidations and business alliances being created. These changes were also accelerated by the trend in consumers’ own needs diversifying as they became more sophisticated in their product selec-tion. The result of all the above is that there are clear differences apparent today in the corporate strategies of non-life insurers operating in Japan.
() Easing of regulatory restrictions in the non-life insurance industry In the wake of the enactment of the April 1996 amended Insurance Business Law, a series of fundamental industry-wide structural changes took place. Looking back at the history of this deregulation shows that it developed in two major ways: the liberalization of products and premium rates and the liberalization of business fields. The liberalization of products and premium rates eased the requirement to comply with fixed premium rates, leading to both intensified competition to secure profits in traditional products centered on auto insurance and also to the possibility of developing a diverse range of tailor made products suited to the needs of various types of consumers and agents. The liberalization of business fields lowered the barriers to entry in the non-life insurance field, leading both to the entry of new competitors such as direct marketing insurers as well as niche insurers handling only specific types of products. It also led to the possibility of entering new business fields in the life insurance industry as well as those in the ‘third-sector’ market. The simultaneous advance of this intensifying competition and expanding business opportunities can be considered the key characteristic of this easing of regulatory restrictions in the non-life insurance industry.
In response to this intensifying competition a move toward alliances in the insur-ance industry began in earnest in 2001. Today, the top five insurers in the industry have all established such alliances. These have focused on increasing premium revenue and developing more cost efficient operations in order to maximize the effects of alliances among the non-life insurers. The results have led to a reduc-tion in each insurer’s expense ratio.
Expanding business opportunities have also led to the development of aggressive efforts such as non-life insurance companies establishing life-insurance
subsidiar-Operating environment changes and corporate
issues in Japan’s non-life insurance market
Hiroshi Hirano
President and Chief Executive Officer Sompo Japan Insurance Inc.
. Easing of regulatory restrictions and operating environment changes in Japan’s non-life insurance industry
ies as well as the sale of medical insurance by the parent companies, with each company seeking to turn changes in the operating environment into profit oppor-tunities. It appears that most such life insurance subsidiaries will make a positive contribution to the consolidated earnings of their parent companies. Moreover, the successful effort to sell medical insurance by the non-life companies reflects the degree to which each insurer has been focusing on this area.
() Operating environment changes
Next, I would like to remark on another change that has affected the non-life insurance market and that is Japan’s maturing economy. The country’s total popu-lation appears to be heading toward a peak in 2006 followed by a decreasing trend. This is thought likely to lead to the combination of an aging society and a reduction in market size for products such as auto insurance, which constitutes almost one half of overall insurance premium income, followed by property insur-ance, which is the next most important product. Naturally, one cannot immedi-ately discount this point of view, but when looking at the future of the non-life insurance market, it is necessary to consider not only total population, but also changes in Japan’s socio-demographic structure.
For example, it is said that in general non-life insurance premium revenues cor-relate highly with nominal GDP, even if the effects are slightly delayed. However, even if total population is in a decreasing trend, an increase in the percentage of female and elderly workers would stave off any immediate decrease in the overall size of the workforce. In addition, the second generation baby-boomers who are currently in their thirties are very likely to a key driver of personal consumption in the future. Given such macroeconomic environmental conditions, there is a pos-sibility that nominal GDP may well increase slightly over the short term.
Moreover, with an aging society, it is anticipated that the role of private insurers in supplementing public-sector insurance systems, such as those providing pensions and medical insurance is expected to continue to grow. For example, consumers’ awareness of the importance of medical insurance, which is central component of the third-sector insurance field, is increasing rapidly. This is leading to estimates that the market will expand by a further 2 to 3 trillion yen in the future. Non-life insur-ers are putting their energies into the sale of such third-sector products which is a reflection of the trend for pursuing new business opportunities.
Another change brought about by Japan’s aging society is the increase in the personal financial assets of baby-boomers as they reach retirement. Given that most non-life insurers are involved in asset-management, there is a possibility for them to treat this development as an opportunity through the formation and sale of investment trusts. Furthermore, there is a move underway for companies to amend their pension schemes from a benefit basis to one of defined-contribution in order to better quantify their future obligations. This matches with many employees’ increasing desire to ensure the portability of pension assets and diversification of investment methods. At Sompo Japan, we have established Sompo Japan DC Securities Inc. as a group company intended to provide invest-ment and manageinvest-ment services for such defined-contribution pension plans and are thus seeking to expand our fee-based businesses. In this way, it is evident that the trend toward a decreasing population and aging society expressed in our maturing economy will not necessarily lead to an immediate decrease in non-life insurance business, but will, rather, in many ways lead to the creation of new busi-ness opportunities.
. Sompo Japan’s corporate strategies
() Keys to survival in a competitive environment
Up to this point, we have touched on the creation of new business opportuni-ties brought about by the easing of regulatory restrictions, a maturing economy, and intensifying competition. Exploiting these business opportunities in order to overcome competition requires corporate strategies which will ensure a superior competitive position. Although the corporate strategies of each non-life insurer are becoming increasingly diverse in response to these changes in the business envi-ronment, the key factors for success remain profitability, growth, and stability. It is vital to increase corporate value while taking each of these factors into account as much as possible and maintaining an appropriate balance between them.
As one example of diversifying non-life insurance strategies, I would like to now explain how Sompo Japan deals with these factors of profitability, growth, and stability.
() Fundamental concept
The fundamental concept behind Sompo Japan’s corporate strategies is the concept of strengthening its core competencies and maximizing their utilization. Core competencies here refer to sources of competitiveness, areas in which our company is in a superior competitive position. Sompo Japan defines its own core competencies as those intangible assets that it has built up to this point by means of major investments in manpower, tangible assets, capital, and time. Specifically, there are four aspects which form the core of our corporate strategy: distribu-tion ability, claims handling services, product development capabilities and highly developed information technology systems. Since, for the most part, non-life insurers are not equipped with tangible production capabilities, they rely more on these intangible assets themselves. Put another way, it is these intangible assets themselves that serve as sources of value in non-life insurance business. Our com-pany believes that maximizing corporate value is unlikely to occur without being able to strengthen and utilize these assets as much as possible.
() Four intangible assets
To expound on these four intangible assets, it must first be noted that distribu-tion ability refers to the customer base and the delivery network for accessing this base. It does not matter how well products are developed, if they cannot be deliv-ered to customers, then such development would be a waste of effort. Secondly, since the true value of insurance is demonstrated when a claim arises from an insured peril, the ability to respond to such incidents is vital. Providing high-quality service is key to further expanding the customer base. Thirdly, since the freedom to design products increases as regulatory restrictions ease, a high level of product development capabilities is required in order to respond to customers’ increasingly sophisticated and diversifying needs. Finally, the infrastructure that enables a company to provide all of these high quality services is made up of the company’s information-technology systems. If these systems are not adequately constructed, the company’s overall business will be significantly constrained. Sompo Japan is investing consider-able business capital in the strengthening of these four intangible assets, in the recog-nition that by doing so, this in itself is a source of competitiveness.
. Non-life insurance
business and corporate social responsibility
() Selection and concentration of business fields
When we look at corporate strategies based on such awareness, inevitably we are led to select and focus on businesses that can best maximize these core compe-tencies. Following this selection and concentration of businesses, Sompo Japan has designated two specific high-priority business fields.
Automobile insurance is one high-priority field, since this is one in which these core competencies can be used in direct and dynamic ways. Although competi-tion is intensifying as a result of the easing of regulatory restriccompeti-tions, given that auto insurance accounts for approximately one-half of net premium income and this is the type of insurance with the largest source of actual profits and the great-est number of customers, it is no exaggeration to say that this is the field in which the capabilities of the non-life insurance business are most fully demonstrated. In addition, since it is the largest insurance market segment, it is a vital platform for brand building as well as cross selling of other types of insurance, while at the same time it demonstrates that streamlining the delivery process leads to increas-ing cost efficiencies.
The other high-priority fields are those that promise synergistic effects with our core competencies—specifically, these include the fields of life insurance and de-fined-contribution pension plans. We believe these fields have the potential for greater and more stable returns in relation to the business capital invested, since they offer the best use of the above mentioned core competencies, especially in the area of distribution ability.
Today, the major part of Sompo Japan’s earnings comes from the fields of asset management and non-life insurance. However, it is projected in the future that earnings will increase in areas such as life assurance and defined-contribution pen-sion plans. As mentioned earlier, since these business fields not only share Sompo Japan’s core competencies, but also involve different types of business structures, we anticipate more stable, yet diverse group-wide revenue sources. To return to the key concepts discussed earlier, Sompo Japan intends to secure group-wide stabil-ity by building up multiple businesses with these strengths. At the same time we must ensure profitability and growth in each business field by selecting and concentrating on those businesses in which these core competencies can be demonstrated.
We have already touched on our company’s financial aspects. Now, I would like to consider our operations from the standpoint of corporate social responsibility (CSR). The concept of CSR refers to that of the triple bottom line. In other words, it considers the corporation’s responsibilities to include not just the creation of economic value but also the creation of environmental as well as social value. For several years now, this concept has been attracting increasing interest in Japan. In addition, the concept of socially responsible investing (SRI) (which con-siders the extent of a company’s CSR efforts to be a major criterion when select-ing investments) has become widely accepted in the world of asset management, through efforts such as the development of numerous SRI funds.
Since the first half of the 1990s, Sompo Japan has made energetic efforts toward contributing to the resolution of environmental problems. Since then, it has ex-panded its areas of activity to broadly embrace CSR, through means such as en-suring thorough regulatory compliance and promoting respect for Human Esteem. Our company’s CSR management has the following three key characteristics: (1) focusing its energies on CSR activities conducted via its core insurance and financial-services businesses; (2) focusing on communication with stakeholders; and (3) efforts to increase employee satisfaction (ES), such as establishing a Human Esteem Promotion Headquarters, whereby our employees are viewed as important stakeholders.
The company’s CSR activities conducted via its core businesses include the devel-opment of insurance products to cover various types of environmental risks, the development of eco as well as SRI funds that support companies involved in tak-ing on CSR and environmental issues, and participation in the Carbon Disclosure Project, an international activity conducted by institutional investors worldwide seeking to prevent global warming.
With regard to communication with stakeholders, the company recognizes that the proactive disclosure of information and a lively exchange of opinions with stakeholders both inside and outside the company are extremely important for the promotion of CSR. For this reason, we have implemented on-going bi-direc-tional communication through a wide range of events and media, such as issuing CSR communication reports and holding stakeholder meetings, as well as partici-pating in the CSR Consortium, which provides opportunities to exchange opinions with stakeholders via the Internet.
Assigning employees a position as vital stakeholders is based on our company’s management philosophy, which states, “With services that always exceed cus-tomer expectations, Sompo Japan will create shareholder value and grow to-gether with our employees.” This philosophy includes the following two concepts: first, not just satisfying our customers by providing services that meet their expec-tations, but actually inspiring customers by providing services that exceed their expectations; second, growing together with our employees by enabling them to work with pride and vigor. A company that can provide its customers with inspi-rational products and services is one whose employees can work with vigor and a high level of motivation, proud of their company. Earning the appreciation and support of a wide range of customers and other stakeholders by providing prod-ucts and services with inspirational levels of quality brings employees both satis-faction and growth. In other words, it is possible to use the interaction between customer satisfaction (CS) and ES to create a virtuous circle. We are certain that by generating and firmly establishing this virtuous circle for the entire group, this will increase corporate vitality and competitiveness and lead to increased corporate value by making it possible to achieve continued high level business performance. Yet another reason for considering the company’s CSR efforts as likely to contrib-ute to increasing corporate value is the worldwide spread of SRI. In recent years, as our CSR efforts have been highly evaluated, our company has seen an increase in opportunities to be incorporated into SRI funds and indices both in Japan and overseas, including the world’s largest SRI index, the Dow Jones Sustainability Index, which has a net asset value of approximately 3 billion euros. Since inclusion in an SRI index increases the market presence of the company’s stock, it can be said that the company’s CSR efforts are leading to increased corporate value.
The trend toward demands on management that focus on CSR is likely to accelerate even further in the future, via moves such as ISO standardization and assessment by CSR rating agencies. Our company plans to carry on our assertive CSR efforts in the future as well, with management being ever mindful of the triple bottom line.
There is no doubt that the environment in which not just the non-life insurance industry, but the whole financial sector operates will undergo further changes in the future. This will most likely result in the development of corporate strate-gies that have a greater wealth of variety among the companies operating in this sector. However, one fact that will remain unchanged is the need for a company to conduct its business with a balance between profitability, growth, and stabil-ity—all three achieved at the highest possible levels—no matter what kinds of corporate strategies it adopts. What is more, in order to ensure continued growth as a company, it is vital to make every effort to create not just economic value but environmental and social value as well. We are certain that Japan’s non-life insur-ers are in a position to lead the world in this area.
. Current situation
Trends in the Japan’s agricultural cooperative
insurance market and Zenkyoren’s strategies
Toshiyuki Uehara
President
The National Mutual Insurance Federation of Agricultural Cooperatives (Zenkyoren)
It seems difficult to describe the size of Japan’s cooperative insurance market in a few words, however, the Japan Cooperative Insurance Association Incorporated (JCIA) stated in its statistics that the share of Japan’s insurance and cooperative insurance market (on a coverage basis) accounted for by cooperative insurers was 22% in the life insurance field and 17% in the non-life insurance field in 2001. According to a survey by the International Cooperative and Mutual Insurance Fed-eration (ICMIF), the premiums received by Japanese cooperative insurers affiliated with ICMIF accounted for 11% of Japan’s insurance and cooperative insurance market in 2000. This share of 11% of premiums is largely the same as that across the nations of Asia (average: 10%) and is higher than the worldwide average of 5%, indicating that cooperative insurers in Japan are making strong efforts. Among Japan’s cooperative insurers, the National Mutual Insurance Federation of Agricultural Cooperatives (Zenkyoren), an agricultural cooperative insurer, has shares of 42% on a coverage basis and 80% on a premium received basis in 2003 (JICIA Yearbook, December 2004 Issue).
Zenkyoren’s businesses are centered on its 9 million members and their families, and are conducted by Japan Agricultural Cooperatives (JA) (with 877 organiza-tions as of June 2005) and by Zenkyoren (with a national headquarters and 47 prefectural headquarters). As of the end of March 2005, it provided 368 trillion yen (approximately US$ 3.4 trillion) in amount insured in the fields of long-term life insurance and building endowment insurance and held 5.5 trillion yen (ap-proximately US$ 51 billion) in total premiums received. With total assets of 42.7 trillion yen (approximately US$ 395 billion), Zenkyoren is one of world’s leading cooperative insurers.
Our agricultural cooperative insurance scheme was established based on the Agricultural Cooperative Society Law enacted in 1947, and has been conducted through JA. Basing its business activities on the concept of “mutual aid”, our scheme has expanded nationwide, launching operations in Hokkaido in 1948 and establishing Zenkyoren in 1951. Until 2000 the scheme had been organized as a three-tiered structure (consisting of JA, 47 prefectural federations, and Zenkyoren), and then Zenkyoren consolidated the prefectural federations into a two-tiered operation (consisting of JA and Zenkyoren). In 2003 The Kyoei Fire & Marine Insurance Co., Ltd. was made a Zenkyoren subsidiary as part of its strategy to expand the coverage and services provided.
centered on interest-bearing assets denominated in yen, such as yen-denominated bonds and loans, as most of its invested funds are for fixed assumed interest rate insurance.
We owe what we are today to the understanding and trust of our members and policyholders over more than 50 years, as well as to our predecessors, who pro-vided superior insurance at reasonable premiums.
Our agricultural cooperative insurance scheme has the following unique business characteristics:
(1) Its membership consists of full members involved in agriculture (individual farmers and members of agricultural firms) and associate members who reside in areas served by JA.
(2) It is organized as a cooperative, based on the principle of mutual aid, rather than as a corporation.
(3) While the business of insurance companies is based on the Insurance Business Law and supervised by the Financial Services Agency, our business is based on the Agricultural Cooperative Society Law and supervised by the Ministry of Agriculture, Forestry and Fisheries.
(4) Our cooperative insurance business is one of the general lines of business provided by JA, and can provide both life and non-life insurance products and services.
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Due to these characteristics, our business is greatly influenced by the economic circumstances of Japanese agriculture and the regions in which JA offices are lo-cated. For this reason, it must respond to present-day requirements such as orga-nizational restructuring and amendments to the Agricultural Cooperative Society Law. Above all, securing and expanding the number of policyholders, as well as realizing a low-cost structure, which are the cornerstones of business operations, are vital topics for Zenkyoren.
The environment faced by the agricultural industry and JA changes from year to year due to factors including the following: delays in Japan’s economic recovery, stagnant agricultural production, strengthening of international regulations based on WTO agricultural negotiations, an aging and decreasing population of agri-cultural workers, and the transformation of agriagri-cultural communities due to part-time farming or diversification of the residents of such communities themselves. In regard to such environmental changes, we recognize that we face the following issues:
(1) The relationship between JA and its members is being diluted as the popula-tion of agricultural workers ages and decreases in number, leading to a trans formation (weakening) of JA’s organizational foundation.
(2) This point also means an aging and a decrease in the actual number of our policyholders.
(3) We need to shift from coverage against death to respond to diverse needs such as those for coverage for living or short-term and nonrefundable insurance.
(4) We face threats in market competition, both in the form of competition from other insurers and the postal life insurance and in the form of the expansion of sales channels resulting from the launch of insurance-product sales at banks. (5) Our management needs to control and respond to the risk of a gap between assumed interest rates and investment yields (i.e., a negative spread), as well as being prepared against major disasters.
(6) We need to reduce costs through business rationalization and increased efficiency.
In this business environment, Zenkyoren must maintain and expand the scale of its business in terms of both quality and quantity, in addition to helping members and policyholders establish “comprehensive life coverage”, which is one of its fundamental missions. These efforts are necessary to fulfill its responsibilities to members and policyholders.
Our two mid-to-long term strategies are as follows:
() Constructing a firm business foundation by strengthening ties and a sense of fellowship
Our mission is to provide our members and policyholders with the best coverage and satisfaction at all times through business activities based on the principle of mutual aid, and to contribute to enhancing the quality of life for members and policyholders and to the creation of affluent local societies.
For this reason, we are promoting efforts to enhance the coverage Zenkyoren provides to policyholders and to restructure its business organization, in order to establish a strong business foundation.
. Mid-to-long term strategies of Zenkyoren
In addition, we plan to promote: understanding of and participation in JA activi-ties by the next generation, associate members, and others; increasing the num-ber of “new partners” (new policyholders); the establishment of comprehensive life coverage for the existing policyholders; and the strengthening of existing ties with its members.
While working to increase policyholder satisfaction, we seek to maintain a level of approximately 18 million policyholders.
() Establishing comprehensive life coverage to meet the needs of members and policyholders
In order to establish comprehensive coverage for the lifetime of our members and policyholders and to contribute to their asset formation, we plan to focus on the individual-cover field by providing “comprehensive coverage of life, homes, and automobiles”. In addition to continuing to respond to the needs of our mem-bers and policyholders by providing coverage against death and disaster, we will strengthen efforts in the fields of coverage for living for medical treatment and of nursing care and short-term insurance such as automobile insurance.
With regard to the existing policyholders, we plan to promote membership in the “Zenkyoren Happy & Dream Club”, which provides benefits such as discounts on premiums for policyholders with high-value coverage, and to promote follow-up activities for members as well as promoting various additional insurance products for such members. For new partners, we plan to expand the membership by pro-viding low-premium coverage directly related to such members’ lives, including medical and automobile insurance.
Based on the above, we have formulated and are implementing a three-year plan covering the period from 2004 to 2006.
The following are summaries of current themes addressed by Zenkyoren:
A. Improvement of Zenkyoren-related legal structure
In order to protect its policyholders and ensure sound business operations through highly transparent regulations, legislation relating to Zenkyoren has been enacted.
Under the amendments to the Agricultural Cooperative Society Law enacted in April 2005, regulations and activities concerning thoroughly protecting policy-holders and responding to member needs (such as those regarding sales promo-tion, cooling-off periods, agents and subsidiaries), and concerning ensuring the soundness of business operations (such as those regarding disclosure of man-agement information, the application of prompt corrective measures regarding solvency margin ratios, as well as requirements for building up various reserves), which previously had been carried out via administrative guidance, are now stipu-lated by law. This is partly in response to reforms to Japan’s financial system and amendments to the Insurance Business Law enacted in recent years.
B. Restructuring of our business operations
As the frontline in serving members and policyholders, each JA is endeavoring to strengthen the structure of and develop the necessary human resources for its cooperative insurance sector. One example of these efforts is the strengthening of specialized staff (so-called Life Advisors) for providing coverage and consulting services in order to create a structure for the customers-oriented sales promotion. We expect that 65% of long-term insurance policies will be handled by 23,000 Life Advisors by 2006.
As for Zenkyoren, in addition to enhancing its guidance function for JA and in-creasing its level of specialization, we plan to consolidate and focus our business functions for providing services of consistent quality nationwide in an efficient manner. The new structure, which is to take effect in 2006 when two policy-underwriting centers will start operations, is expected to improve results even further.
C. Zenkyoren Happy & Dream Club
The Zenkyoren Happy & Dream Club, which was launched in 2002, provides vari-ous added benefits such as the centralized control of each policyholder’s policy information, as well as discounts on premiums and preferential treatment at JA facilities. There are no fees for joining this club, and no annual fees. Not only pro-viding higher levels of service for the existing policyholders, but this membership club also serves to expand new partners by providing the same benefits.
Eight million people are currently registered as club members, and we will con-tinue to make every effort to increase this number to ten million by the end of the 2006 fiscal year.
Today, the environment in which JA and Zenkyoren operate, including the agricul-tural industry and agriculagricul-tural communities, is on the verge of transformation. The vital roles, however, played by the agricultural industry and agricultural communi-ties will remain unchanged. Based on the fundamental principle that has remained unchanged since its founding: that of mutual aid, Zenkyoren will actively develop a wide range of the business and activities for the purpose of providing the high-est levels of coverage and satisfaction to its members and policyholders. As such, we intend to contribute to increasing the quality of life for our members and poli-cyholders, and to creating local societies in which residents can live in affluence with peace of mind.
. Conclusion
In comparison with the nations of Europe or North America, Japan has an ex-tremely small number of insurance companies. For this reason, Japanese insurance companies tend to be large in size and thus unlikely candidates for bankruptcy. In particular, for a long period following World War II, no insurers went bankrupt. This was a result of insurance supervision policies implemented by the insurance regulator, the Ministry of Finance, that were intended to prevent insurer bank-ruptcies. However, in 1996 the Insurance Business Law of Japan was substantially amended to advance liberalization of the Japanese insurance market. A series of insurer bankruptcies followed.
These bankruptcies resulted from various causes. In many of these cases, the bankruptcy resulted from so-called “negative spreads.” This refers to gaps between the actual investment returns earned by insurance companies and the planned returns for policyholders. Japan’s bubble economy collapsed in the early 1990s, and as a result, market interest rates fell rapidly. As insurers held large numbers of policies underwritten during times of high interest rates, they were forced to bear the cost of the resulting gap by reducing market interest rates. Insurers that could not withstand this burden fell into bankruptcy.
However, not all insurer bankruptcies resulted from negative spreads. For example, the bankruptcy of Taisei Fire and Marine Insurance in November 2001 resulted from large payments of insurance claims in connection with the September 11 terrorist attacks in the United States.
() Types of policyholder protection institutions
Partly due to the fact that Japan saw no insurer bankruptcies over a long period of time, the previous Insurance Business Law made no provision for a system to protect policyholders in the event of insurer bankruptcy. The 1996 amendment to the Insurance Business Law created a new policyholder protection system known as a “policyholder protection fund.” In 1998, this organization was strengthened functionally and renamed as the Insurance Policyholders Protection Corporation of Japan. Today, the organization consists of two Protection Corporations, the Life
Table 1 Postwar insurer bankruptcies in Japan
Date of bankruptcy Insurer Type of insurance Current company name
April 1997 Nissan Life Life Prudential Life
June 1999 Toho Life Life AIG Edison Life
May 2000 Daiichi Fire and Marine Non-life —
May 2000 Daihyaku Life Life Manulife Japan
August 2000 Taisho Life Life Yamato Life
October 2000 Chiyoda Life Life AIG Star Life
October 2000 Kyoei Life Life Gibraltar Life
March 2001 Tokyo Life Life T&D Financial Life
November 2001 Taisei Fire and Marine Non-life Sompo Japan
. Insurer bankruptcies in Japan
Insurer bankruptcy and the policyholder
protection system in Japan
Insurance Policyholders Protection Corporation of Japan and the Non-Life Insurance Policyholders Protection Corporation of Japan.
() Obligation to join an Insurance Policyholders Protection Corporation All domestic and foreign insurers licensed to operate in Japan must be members of an Insurance Policyholders Protection Corporation of Japan. However, reinsur-ers are not required to be membreinsur-ers.
() Member contributions
The Insurance Policyholders Protection Corporations protect the policyholders of a bankrupt insurer, with the fund contributed by the member insurer. The amount of contribution by each member is calculated based on the following two indicators. 1) The amount of insurance premiums received by the member
2) The amount of underwriting reserves accumulated by the member
It is possible that it would be fairer to use indicators that take into account the likelihood of bankruptcy, or financial soundness, of each member in calculat-ing the amount of contribution by the member. Calculation of the amount each member much contribute, based on financial soundness indicators, is referred to as a “variable-rate system.” Currently, South Korea uses this system. Although use of such a system is permissible under Japan’s Insurance Business Law, at present neither of the two Insurance Policyholders Protection Corporations does so. () Policyholder protection methods
Policyholder protection by the Insurance Policyholders Protection Corporations of Japan is implemented by providing financial assistance to the insurers taking over the policies of bankrupt insurers.
When an insurer has gone bankrupt, it is merged with another sound insurer or its policies are transferred to a sound insurer. Such a sound insurer is called a “redemption insurer.” At the time it receives the transfer of the policies of the bankrupt insurer, the insurer taking over these policies also receives transfer of the bankrupt insurer’s assets. However, as the assets transferred from the bankrupt insurer will be insufficient to cover the amount of policy liabilities transferred, the relevant Insurance Policyholders Protection Corporation provides funds to assist in the performance to policyholders of insurance-policy liabilities.
() Policies eligible for compensation
The Insurance Policyholders Protection Corporations do not protect all policyhold-ers. For the most part, the policies eligible for protection are those held by indi-viduals. In addition, compensation is provided only for up to 90% of insurance-policy liabilities. (However, this does not apply to some insurance policies with strong public-welfare aspects, such as Compulsory Automobile Liability Insurance and earthquake insurance.) Reinsurance policies are not eligible for compensation.
() Problems with the current system
A. Exhaustion of funds
As noted above, since the creation of the policyholder protection system in 1996, nine insurers have gone bankrupt. As a result, the Insurance Policyholders Protec-tion CorporaProtec-tions have provided large amounts of financial assistance, leading to severe financial circumstances for the Protection Corporations. This is particularly true for the Life Insurance Policyholders Protection Corporation, which has suf-fered seven bankruptcies.
Although in order to remedy these financial circumstances it will be necessary to increase the amount of contribution by members, the method of doing so is at issue. Increasing the amount borne by members means increasing the amount paid by sound insurers who have not gone bankrupt. As such, any increase would ultimately be borne by the policyholders of such sound insurers. As a result, poli-cyholders who wisely chose sound insurers would be forced to bear costs attributable to policyholders who made the poor choice of selecting an insurer that went bankrupt. This presents issues in terms of fairness.
Furthermore, increasing the amount borne by members would put pressure on the balance sheets of sound insurers, in turn becoming itself another risk that could lead to insurer bankruptcy.
In order to overcome issues such as these, possible solutions, such as the adop-tion of assistance using public funds and reducadop-tions in compensaadop-tion percentages, must be considered.
B. Characteristics of non-life insurance
The current system provides for the continuation of a bankrupt insurer’s policies by transferring them to a redemption insurer, which then takes over the policies. This method is applied to long-term life insurance policies held by policyholders who would have difficulty taking out new policies due to age. However, most non-life insurance policies have single-year terms, and policyholders encounter few difficulties in taking out new non-life policies. For these reasons, in the event
. Trends concerning revision of the policyholder protection system
Table 2 Policies subject to compensation by Insurance Policyholders Protection Corporations, and compensation percentages
Type of insurance Compensation percentage
Compulsory Automobile Liability Insurance,
Earthquake Insurance 100%
Auto Insurance, Fire Insurance, Personal Accident Insurance, Medical Expense Insurance,
Healthcare Expense Insurance 90%
Non-life insurance other than the above (Marine Insurance, Transit Insurance,
Credit Insurance, Aviation Insurance, Workers’ Compensation Insurance, Guarantee Insurance,
Liability Insurance, etc.) Not covered
of the bankruptcy of a non-life insurance company, policyholders will tend to shift quickly to other, sound insurers, further worsening the asset situation for the bankrupt insurer and making it difficult to find a redemption insurer.
At the same time, as the payment amounts of insurance claims for non-life insur-ance policies can be very large, in such cases the current system, which covers only 90% of such payments, may not provide sufficient protection for policyhold-ers or parties sustaining damages. For example, if damages of 100 million yen were to arise in an automobile accident involving personal injury, coverage of only 90% of this amount would force the policyholder to bear a cost of 10 million yen him or herself. If the policyholder could not pay this amount, the injured party would have to bear this huge cost him or herself.
From this perspective, it might be desirable to change the current system, under which financial assistance is provided to the redemption insurer taking over non-life insurance policies, to one, under which the affected policyholder would be compensated for the full amount of any insurance money for a certain period following the bankruptcy of the insurer, during which time the other policyholders of the bankrupt insurer can switch to sound insurers.
(2) Trends in revisions to the system
In order to overcome the above issues, the policyholder protection system is cur-rently being revised. In April 2005, an amendment to the Insurance Business Law passed the Diet, and this amendment is planned to take effect beginning April 2006. Although the framework for the amendment consists of the two points specified below, their details will be determined through directives to be issued by regulators in the future.
A. Review of compensation in accordance with the characteristics of insurance policies 1) Adopting a compensation method, that would encourage policyholders of non-life insurance to switch to other insurers, while providing full compensation for three months after the bankruptcy of an insurer
2) Determining compensation percentages for financial assistance and the like based on consideration of policy types, planned interest rates, and other policy terms, and providing compensation under this system for 85% – 90% of each life insurance policy with a high planned interest rate
3) Managing insurance policies, in which amount paid to policyholders is linked to investment performance (such as so-called “variable insurance”) separately from other policies, and providing 100% compensation for such policies
B. Review of financial measures of the Life Insurance Policyholders Protection Corporation
1) In principle, funds of the Life Insurance Policyholders Protection Corporation are financed by contributions from individual insurer based on pre-agreed limits. 2) If the balance of debts for the Life Insurance Policyholders Protection Corpora-tion exceeds 460 billion yen and the funds for processing of an insurer bankruptcy cannot be covered entirely by funds from insurers, the government shall provide assistance. However, such government assistance is a temporary measure that shall be implemented only over the coming three-year period.
Yesterday
Non-Life Japanese insurance market —
“Today & Tomorrow”
Howard J. Cheetham
Managing Director Aon Re Japan, Aon Limited
Deregulation in 1996 led inevitably to consolidation. The 60 companies have become 44, of which 28 are domestic. More dramatically, the 80/20 rule applies —the top 5 companies now control market share greater than 80%.
Deregulation has also had impact upon the distribution channels. Non-life prod-ucts are now available through life companies and vice-versa. Banks are now permitted to sell insurance. Brokers have now been introduced as an additional distribution channel. In a business culture that has been underpinned by continu-ity, the pace of change since deregulation has been spectacular. It has proved that it is simply not possible to be “slightly” pregnant!
Within this continuing white water of change, the industry will face many new challenges. There is a strand of logic that suggests that we could anticipate more consolidation. The economies of scale achieved by the biggest companies result in expense ratios which give competitive advantage over the rest of the market. The middle/small market may be forced to choose between a more niche market position or consolidation.
The attraction of product diversity increases—the issue is which combination of Financial Institution/Life Insurer/Non-Life Insurer is best suited to the market environment. The decision process is ultimately financial, according to the histori-cal background and the strategic parameters of the entities included. In this ultra competitive environment we already see exciting progress in the way that the in-dustry has embraced product development. The consumer is more clearly “King” than ever before. Nowhere is that more recognised than the impending regulation of the “Kyosai” sector—a part of the industry which is totally consumer driven. Competition has increased to the benefit of the consumer particularly in the Auto and Personal Lines sectors. Both pricing and scope of cover have been subject to some innovative development and given that Auto accounts for more than 50% of Industry income, margins have been significantly squeezed. This trend has been repeated in the commercial sector, where we have seen an increase in the number of tender bids which have successfully provoked competition between the do-mestic insurers. With no cyclical data to analyse, the market is forced to consider its future in terms of developing new revenue streams and maintaining market position, a measurement that is considered critical in Japan.
By conventional measures, premiums as a proportion of GDP as well as per capita, Japan is already a mature market. Growth is therefore a major challenge for all. Since deregulation, the homogenous face of the Japanese market has changed dramatically. Each insurer now has it’s clear characteristics and identity, so the growth imperative is met differently by each Company.
The biggest Companies are seeking growth by diversification—but in very dif-ferent ways. Some may look outside Japan for their future needs. However, even here the strategic focus is different. One might only consider Asia. One might consider building it’s own international network from it’s own resource. One may consider “fast-track” growth through international acquisition. One may feel that it is better to remain focussed on domestic clients and diversify through product type and/or access channels.
Each strategy has been carefully considered and executed. Both in terms of geo-graphic reach and market intellect, coupled with product innovation and knowl-edge, we believe the role of the broker is of increasing value in supporting these journeys into unfamiliar areas. Our areas of client interface are broadening daily. We may all agree that growth is essential over time—but without damage to shareholders’ returns. Margins are being squeezed already. Each area of cost must be analysed and understood as being the most efficient. Objective and scientific measurement has become increasingly important. The cost of reinsurance is one important factor. Working with our clients to evaluate the efficiency of their pro-grammes is one of our key roles. We anticipate that our clients will expect their broker to develop this analysis in two directions. Already we have increased the transparency of the model to allow a more rigorous analysis of the catastrophe reinsurance proposition.
This analysis may become the more important if insurers submit to pressure from industrial clients to provide additional earthquake capacity. We also believe it is of interest to define the expense of reinsurance relative to the cost of capital through dynamic financial analysis. This methodology has been welcomed by our clients in other important markets. We are already seeing evidence of companies developing their own optimum retention strategies. These conclusions are usually justified against a scientific model. In most cases these companies are increasing their retention of risk and, therefore, exposing their balance sheet to the higher probability of damage. We are all aware that there exists a basis risk between modelled result and actual performance. If this basis risk is now being assumed on the balance sheet it becomes more important to refine the model to minimise such basis risk. This is a great area of opportunity for those brokers/advisors with the relevant intellectual capital.
Finally, one of the major challenges facing the Japanese non-life market is the globalisation of regulation in terms of both operating procedures and financial regulations. Japan must now consider the impact of international accounting standards. Whilst the utilisation of finite reinsurance has not been prevalent in Japan, recent developments elsewhere will add to the regulatory scrutiny of the present and future arrangements.
Historically, Japanese companies have benefited from close relationships with governmental organisations and the resulting Tax and Accounting practices were considered by some to be “flexible”. As the past problems are unravelled at an
Today
increasing pace, familiarity with and acceptance of global standards also increase. The non-life Insurance Industry is also facing these developments. The ability to build up Catastrophe reserves in a tax advantageous environment, the calculation of solvency margins and consolidation of expanding overseas activities are just some of the factors which Japanese insurers are facing up to.
The insurance sector is regulated under different official bodies. The non-life insurance sector exists under a strict regimen regulated by the Japanese FSA, Another important sector of the Japanese insurance industry falls under the definition known locally as “unregulated” Kyosai—mutual aid entities. During the year 2006 these Kyosai will come within the regulatory authority of FSA and, as such, their relative advantage should be neutralised under that regime. This will create opportunities for all who truly understand the dynamics of the business and expectation of the consumers. By definition, brokers will be required to advise their Japanese clients on these and many similar issues.
The Japanese market is still an attractive target for both reinsurers and brokers. The former benefit from an increasingly sophisticated environment and the pos-sibility of a consistent long term approach.
New analytical techniques and increasing quantity of quality data continue to improve the understanding of the risk.
Indeed this was evident in the 2005 renewal with cedants amending their buying patterns and reinsurers comfortable in offering capacity at what many consider to be competitive prices. Having said that, the high frequency of 2004 windstorm catastrophes at around or just below deductible levels led to further rapid ero-sion of the old “payback” mentality. Also, the delay in development of these loss amounts has caused surprise and disappointment to a number of reinsurers and there is hope and indeed expectation for change and improvement.
Tomorrow
1991 T19 (Mireille)2004 T18 (Songda)1999 T18 (Bart)1998 T7 (Vicki)2004 T23 (T okage)
2004 T16 (Chaba) 1993 T13 (Y ancy)
2000 May Hail1990 T19 (Flo) 2000 Sep Heavy Rain
600,000 500,000 400,000 300,000 200,000 100,000 0 Marine Automobile Fire & Misc.
Paid Loss Amount (JPY million)
Name of the Event
Top 10 Wind Flood Insured Damage Non Life Ins. Association Members Top 0 Wind Flood Insured Damages
0
The broker’s outlook on the Japanese market is also one of attraction. While transactional capability has become a less required skill in other markets, it is still prized by Japanese cedents. However, there is increasing requirement for consultant and solution based capabilities—an expectation of increased use of skill sets and the challenge of meeting client expectations.
The Aon target is to bring all or any of the skills available within our resource base, to our Japanese clients. This is reflected in the wide range of demands we receive from our clients, relating not only to the domestic Japanese business environment but also to Japanese, and increasingly international, interests worldwide. As clients look elsewhere to develop their businesses, those brokers with a true global net-work become more valuable.
The marrying of further enhancement of technical risk analysis (both peril and internal risk assessment) with the more continuity based approaches of the past presents the major “cultural” challenge for the market. The most successful participants have been able to apply such technical advances whilst maintaining consistency. Likewise for the Reinsurance broker in Japan, while delivering the add on services has become absolutely essential, the key differentiating feature is still the ability to deliver efficient market-price capacity to the client.
Risk Management Solutions, Inc. (RMS) is the world’s leading provider of solu-tions for the management of catastrophe risk. Founded in 1988, RMS released its initial earthquake and typhoon catastrophe risk models to the Japanese insurance market in 1995. Over the past decade, the Japanese market significantly changed with the deregulation of the market and the increasingly competitive non-life mar-ket industry. At the same time, RMS recognized the importance of understanding the shifting market landscape and latest scientific advancements in earthquake engineering. In 1998, RMS joined forces with Japan’s leading geotechnical engi-neering firm, OYO Corporation, to form OYO RMS. Also in 1998, the RMS Japan Earthquake model was updated to include the latest information on earthquake hazard and vulnerability analysis.
In the fall of 2005, RMS will release the latest version of its Japan Earthquake model. In the development of this new model, OYO RMS played a key collabora-tive role, as did ERS, a joint venture between OYO Corporation and Kajima. The RMS Japan Earthquake model contains third generation earthquake modeling techniques including RMS’ patented variable resolution grid (VRG) technology and the spectral response methodology approach to vulnerability modeling. The model additionally incorporates the latest research for active faults and subduc-tion zones in Japan, more refined geotechnical data, and financial modeling enhancements consistent with Japan’s co-operative insurance policy structures.
At the time of the Great Hanshin-Awaji earthquake on January 17, 1995, Japan’s insurance industry was still heavily regulated with an insignificant amount of insur-ance provided by overseas carriers. At the time, only about 7% of homeowners carried earthquake insurance; in the immediate aftermath of the 1995 disaster, demand for earthquake insurance doubled to 15% of Japanese households. The increased demand strained domestic carriers as they sought to buy sufficient reinsurance and this led primary carriers to pursue alternative risk transfer deals as well as risk swaps.
In 1998, Japan initiated primary insurance deregulation and international insur-ers were granted licenses to accept direct risks. Although this has led to greater choice for Japanese insurance buyers, it has not had a significant effect on earth-quake coverage. Commercial lines are not reinsured by the central government, but capacity is limited by governmental intervention. Because of the very limited commercial capacity in Japan, some risk is placed offshore.
Over the past decade, commercial earthquake insurance penetration has increased significantly. For the commercial market, providing earthquake coverage is a stra-tegic response to keeping and/or getting new business. With the influx of foreign
Introduction
The shifting non-life catastrophe insurance market
Catastrophe modeling for the Japanese market:
the Third Generation RMS Japan Earthquake Model
Craig Van Anne, CEO, OYO RMS Corporation
management and the changing environment of cross-holding of stock by related companies, there is a greater attention to shareholder concerns. This attention has been seen by management’s increased appetite for earthquake and business interruption (BI) insurance coverage. First loss is frequently written, becoming the standard form of coverage in the market. In addition, limits have increased and the majority of earthquake polices are multi-location; the “one location, one policy” business practice is a thing of the past. It is increasingly common for cor-porate property programs to be written on a multi-location basis with a first loss indemnity limit related to the top location. When these programs are “layered”, earthquake coverage is normally limited to the lower layers.
One of the distinctive features of Japanese society is the strength of the co-op-eratives that provide insurance services to their members. The co-opco-op-eratives are mainly active in personal lines and the use of their services in the residential catas-trophe market is growing. For example, Zenkyoren has approximately 13.5 million policies with natural catastrophe coverage, representing 10 to 20% of all residen-tial properties. In addition, Zenrosai has natural catastrophe coverage as an add-on to their fire policy, with approximately 1 milliadd-on policies in force, representing 1.5% of total residential market, growing by 10% per year. The policies offered by these co-operatives are ‘multiple step policies,’ where insurance payouts are tiered or stepped up as a function of the damage ratio, though often subject to a franchise deductible (Yen 1 million for earthquake damage).
Partly because of the stagnant economy and partly because of the competi-tion created by liberalizacompeti-tion and deregulacompeti-tion, the Japanese non-life insurance market has shown little growth for the last several years. However, the market has changed over the last ten years, particularly with a revision of the Insurance Business Law (in 1995) and the Financial System Reform Law (in 1998). Mergers, management integration and alliances have been active in the late 1990s through today. In 2002 and 2003, for example, a series of mergers and alliances were formed, including Fuji Fire’s agreement with AIG and Orix, NIPPONKOA’s merger with Taiyo, and Kyoei becoming a subsidiary of Zenkyoren.
The standard framework for earthquake catastrophe modeling is a four step process, including generating a stochastic event set, assessing earthquake ground motion, calculating damage, and quantifying financial losses (Figure 1). A stochas-tic event set represents the full spectrum of likely events that can affect exposures in a region. Each event is described by its physical parameters, location, and fre-quency of occurrence. With this stochastic event set, the earthquake ground mo-tion at each property locamo-tion is calculated for every event that is likely to cause losses at that location. Ground motion relationships are examined and adjust-ments for site conditions, such as soil liquefaction susceptibility, are incorporated. The damage to each property location is quantified in terms of the damage to the building, its contents, and the resulting loss of use. Finally, losses are calculated considering any specified insurance or reinsurance structures.
The RMS Japan Earthquake Model: meeting the needs of the market
Catastrophe modeling for the Japanese market: the Third Generation RMS Japan Earthquake Model
Quantify Financial Loss Assess Earthquake Motion Generate Stoch.
Events CalculateDamage
With the changing dynamic of the Japanese catastrophe insurance market, RMS is posed to release a new earthquake catastrophe model to the Japanese market that will allow insurers to more accurately model the vulnerability of individual locations to earthquake hazard and to more successfully manage their entire port-folio at risk. Each portion of the model—from the generation of the stochastic event set to the quantification of financial loss—will be updated using the latest scientific and market research. The highlights of this update are discussed below, including the latest scientific research on earthquake hazard (to generate the stochastic event set and assess ground motion), the spectral response approach to vulnerability modeling (to calculate earthquake damage), a refined fire following earthquake methodology (to calculate fire following earthquake damage), and the incorporation of a complex (multiple) step policy (to quantify financial loss).
Hazard Modeling
Following the 1995 Great Hanshin-Awaji earthquake, a special governmental organization known as the Headquarters for Earthquake Research Promotion was established to promote earthquake disaster prevention. Under the guidance of this organization, the Earthquake Research Committee (ERC) began developing country-wide seismic hazard maps for Japan. This seismic hazard mapping project incorporates the latest research for active faults and crustal earthquakes, as well as subduction interface and intraslab events. It also includes the latest research on time dependent recurrence modeling and new understanding of earthquake ground motions for Japan. In March 2005, the ERC released the National Seismic
Hazard Maps, accompanied by detailed reports outlining the underlying data
and assumptions.
Throughout the development of its new Japan Earthquake model, Risk Management Solutions and OYO RMS
worked closely with members of the ERC to incorporate this latest
under-standing of seismic sources, recur-rence, and ground motion modeling
into the RMS Japan Earthquake model. In all, the 98 major fault systems researched by the ERC
since the Great Hanshin-Awaji earthquake are part of the RMS
Japan Earthquake model; 178 minor fault systems are included as well.
Thirty new zones of background seismicity are defined, which characterize the historical crustal
seismic activity. The main sub-duction zones are delimited,
including the Kuril trench, the Japan trench, the Sagami trough,
and the Nankai trough. Figure 2. Seismic Hazard Map of Japan (developed by the Earthquake Research
Committee of the Headquarters for Earthquake Research Promotion)
Time dependent recurrence modeling is incorporated for a subset of major fault systems where there is sufficient information available to accurately assess time dependencies between earthquake events. Moreover, the model considers a range of event sizes around a fault’s characteristic magnitude (i.e., the maximum magnitude expected to repeatedly occur on a fault system) to reflect the uncer-tainty of occurrence of higher magnitude earthquakes. The model additionally reflects a greater range of high magnitude earthquakes through the use of cas-cade modeling, where an earthquake is assumed to rupture across fault systems. Through the incorporation of these techniques (e.g., time dependent recurrence, cascade rupture modeling) and other sophisticated methodologies, the RMS Japan Earthquake model includes a comprehensive set of earthquake events, providing a full probabilistic view of Japan seismic risk.
Vulnerability Modeling
Spectral Response Approach to Vulnerability
RMS is the first modeling firm to use the performance-based engineering frame-work developed at the Pacific Earthquake Engineering Research (PEER) Center in the United States to estimate vulnerability. This methodology, known as spec-tral response modeling, was first released in 2003 in the RMS western U.S. and Canada Earthquake models. RMS is using this approach to estimate damage from actual building response to ground motions for its global suite of earthquake modeling regions including Japan.
There is considerable variability in damage levels caused by every ground motion. Past techniques incorporated additional uncertainty to account for this variability, and used subjective measures, such as Modified Mercalli Intensity (MMI). Spec-tral response modeling provides an objective evaluation of building performance and is therefore a better estimate of risk. It differentiates structure response by: ground motion characteristics (magnitude, frequency, soil effects), and structural characteristics (construction material, building height).
The spectral response methodology is comprised of four steps (Figure 3). In the first step, the set of earthquake ground motions from past events are selected. These ground motions are grouped based on the distance to the source and soil conditions. The spectral acceleration of these ground motions are prepared for further refinement by reviewing the shape of spectra, amplitude and frequency content. In the second step, the effects of distance and soil amplification are considered for the complete range of frequencies on the amplitude and shape of spectral acceleration. The proposed soil amplification is based on the analytical soil study and calibration with the actual recorded ground motion on soil sites. In the third Step, the structural model of buildings are analyzed using the ground motions selected in step one. The structural responses, which are lateral deforma-tion and inter-story drift, are evaluated for these ground modeforma-tions. In the last step, the structural deformation measured as inter-story drift is converted to a damage ratio using the drift limitation provided by FEMA and other research and experi-mental studies on the performance evaluation of component of buildings. These damage functions are calibrated with damage and insurance loss claim data that RMS has collected over the years.
The principle underlying the spectral response approach to vulnerability model-ing is to link the vibrations that are emitted from a rupturmodel-ing fault, through the
