With Japan having one of the largest commercial insurance markets in the world, its captive insurance industry remains underutilised, according to a new A.M. Best briefing.
The new briefing, Growing Role of Japanese Captives, explains that the low utilisation in Japan is partially due to historically strong relationships with major domestic insurance groups, which have traditionally been the largest shareholders of industrial organisations.
According to the briefing, these relationships have evolved in recent years, as evidenced by the continuous reduction in business-related stock holdings by major Japanese groups.
A.M. Best said the decline would suggest that there might be additional Japanese captives in the future.
This growth would be particularly timely as various companies are investing in or starting new subsidiaries outside of Japan, said the ratings agency.
In terms of domiciles, Bermuda and Hawaii remain the most popular choices for Japanese captives. However, domiciles in the Asia-Pacific region, such as Micronesia, have been an attractive choice for Japanese captives.
A.M. Best explained that rated Japanese captives currently face an increasing challenge due to the weakening credit profiles of the parent companies.
The ratings agency said: “Although parent profile is not a sole factor in assessing the creditworthiness of the captive, this factor is increasingly putting downward pressure on the ratings of captives given their main purpose of managing the risks of captive owners.”
“Another challenge for the Japanese captives has been the inclusion of new lines of business associated with the parent’s business expansion.”
A.M. Best noted that senior management would need further education about the risks and benefits that a captive can provide.
