Japan insurance faces motor pressure despite higher rates

Voluntary auto policies generate nearly half of industry premiums.

Japan’s non-life insurance sector is likely to maintain a stable outlook, but rising claims costs continue to put pressure on motor insurance, and the sector remains exposed to the risk of a major earthquake. 

The stable outlook is supported by higher domestic interest rates, the introduction of new capital rules and tighter regulatory oversight as factors supporting the market, AM Best said.

The rating agency said higher interest rates are improving reinvestment yields for insurers, whilst pricing changes and tighter underwriting terms are helping the profitability of fire insurance. 

AM Best said further interest rate increases are possible in 2026 if inflation remains above the Bank of Japan’s 2% target, although the timing and size of any increases remain uncertain. 

Higher rates are benefiting insurers by allowing them to reinvest maturing fixed-income securities at better returns. Japan’s 10-year government bond yield has risen to about 2.5%, compared with the low-1% range in early 2025. 

This is expected to support insurers’ net investment income. At the same time, the weaker yen is increasing the cost of claims, particularly for motor and fire insurance, even as it creates translation gains on overseas earnings. 

The sector is also adjusting to the Japan Insurance Capital Standard, or J-ICS, which took effect for the financial year ended 31 March 2026. 

The framework measures insurers’ assets and liabilities on an economic value basis and replaces the previous Solvency Margin Ratio. AM Best said the system should improve transparency and make Japanese insurers more comparable with overseas companies. 

Major non-life insurers have economic solvency ratios of slightly above 200%, according to regulatory testing and company disclosures, compared with a minimum threshold of 100%. 

AM Best said higher interest rates are not expected to have a material effect on insurers’ solvency because their liabilities are relatively short-term and asset durations are well matched. 

Regulators have also tightened rules following industry scandals involving sales practices and claims. 

New supervisory requirements cover areas including agency management, customer information and sales conduct. Changes to the Insurance Business Act that took effect on 1 June 2026 also introduced stronger compliance, internal audit and governance requirements for larger agencies and insurers. 

AM Best expects the measures to raise compliance costs in the short term but potentially reduce policy acquisition costs over time. 
Japan’s non-life insurance market remains concentrated, with four major insurers accounting for more than 80% of direct premiums written. 

The planned merger of Mitsui Sumitomo Insurance and Aioi Nissay Dowa Insurance, the two main non-life businesses of MS&AD, is due to take place in April 2027 and is expected to affect competition and the structure of the market. 

Premium income continued to grow during the financial year ended March 2025 and the first three quarters of the following financial year, supported mainly by higher fire and voluntary motor insurance rates. 

Lower-than-expected natural catastrophe losses over the past year also helped underwriting results. Fire insurance profitability has improved after several rounds of premium increases and changes to policy terms. 

Insurers have also shortened the maximum renewal period for homeowner policies from 10 years to five years, allowing them to adjust pricing more often. 

Motor insurance remains under more pressure. Voluntary motor policies account for nearly half of the industry’s premiums, whilst claims costs have risen because of the weaker yen, higher prices for imported vehicle parts, labour shortages and more expensive repairs for technologically complex vehicles. 

Insurers raised motor premiums during the latest financial year, and AM Best expects the combined ratio to improve modestly over the next 12 months as those increases take effect. 

Investment income is also supporting earnings. Major insurers have recorded gains from selling strategic equity holdings, whilst higher government bond yields have increased returns on new investments.

AM Best expects both factors to continue supporting earnings over the next year, although higher yields have reduced the market value of older, low-coupon bonds. 

Natural catastrophes remain a major risk. AM Best highlighted the possibility of a Nankai Trough earthquake of more than magnitude 8.0 within the next three decades.

Whilst a government-backed reinsurance system is expected to absorb much of the cost of residential earthquake claims, commercial and industrial risks remain largely with private insurers and global reinsurers. A major event could therefore increase reinsurance costs and cause greater earnings volatility across the sector.