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Fire premiums set to gradually rise amid increasing climate risks

Japanese property and casualty (P&C) insurers will increase fire insurance premiums, shorten policy durations and use location-specific pricing to reflect natural catastrophe risks, to account for the growing frequency and intensity of climate-related natural catastrophes.

But policy changes will be gradual because of social pressure to keep insurance affordable, according to a new report by Moody’s Japan.

“A reference rate that P&C insurers use to set fire premiums will likely continue to rise over coming years, which will allow insurers to gradually increase prices to better reflect heightened natural catastrophe risks,” said Tomoya Suzuki, a Moody’s vice president and senior analyst.

Insurers will also gradually shorten policy durations to five years from 10 and switch to a location-specific pricing system. The changes will support insurers' efforts to make their fire lines profitable in an environment of rising claims stemming from natural catastrophes.

Social pressure to keep insurance affordable and widely available will prevent insurers from sharply increasing prices over a short time. Likewise, the difficulty in striking a balance between well-priced premiums with affordability and availability to people in risky areas will mean a new location-specific pricing system will take time to evolve.

Increasing fire insurance premiums to better account for climate-related natural catastrophe risks will give insurers greater flexibility to lower premiums for their other business lines.

If insurers do lower premiums for other types of insurance, it will somewhat offset profitability gains from higher fire premiums, meaning that overall profitability gains will be modest. Insurers have more flexibility to adjust premiums in corporate lines than those in consumer lines.


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