In the captive programmes that Global Link has assisted in establishing, reinsurance from the captive (i.e. retrocession from the primary insurer) has consistently been underwritten by the London Market branches of the world’s largest reinsurance companies, with the exception of certain specialised insurance lines typically handled by specialist syndicates at Lloyd’s of London.

Of course, our relationship is not based solely on terms and conditions. At the time of contracting, I travelled to the local office as the designer of the entire programme, shared meals with the underwriters in charge, and was invited annually to training sessions in the home country; through these repeated visits to London, I have built a deep relationship of trust. This is because, in Western business, what is essential is the ‘person-to-person’ connection, rather than merely a ‘company-to-company’ one.

However, no matter how close a personal relationship may be, as long as one is a company employee, the parting caused by ‘staff transfers’ is inevitable. One of the two underwriters in charge of Global Link was recalled to the home country just before the start of the COVID-19 pandemic and moved to a department entirely unrelated to the Global Link business.

Just the other day, after six long years, I unexpectedly received the following email from him.

‘Good morning, Mr Hatani. Very very veeery long time no speak and hope you are well!I I trust you are well! I have recently been transferred to a department responsible for various ART (Alternative Risk Transfer) solutions. Our department handles parametric insurance, as well as ILS (Insurance-Linked Securities) such as cat bonds and derivatives.’

1. Confirmation and Assessment of Insurance Claims

At the foreign-owned non-life insurance company I joined after graduating from university, I was fortunate to have wonderful superiors and colleagues, and at a young age I was entrusted with a key role at head office, overseeing the corporate insurance sector nationwide.

At the time, the company boasted the largest scale of any foreign-owned non-life insurer in Japan; including its sister life insurance company, the workforce exceeded several thousand, and it was a formidable organisation that owned a complex of 15 buildings in the prime Marunouchi district, right in front of the Imperial Palace.

However, the ‘head office’ referred to here was, strictly speaking, nothing more than a branch office known as the ‘Japan base’. My days were spent constantly awaiting instructions from the ‘true head office’ based in New York, and whilst I wouldn’t go so far as to say they dictated ‘every move I made’, I did feel somewhat stifled despite holding such a key position.

From my days as a new recruit, I travelled to New York on business almost every year, and as I interacted with executives at the head office, my desire to ‘work on the front line of the global non-life insurance industry’ grew stronger by the day. I was in my thirties, full of youthful vigour, Shaking off the strong attempts by close friends and acquaintances to dissuade me, I resolved to take on the challenge of working overseas. I was approached by CIGNA Corporation—touted at the time as the world’s largest insurance company—and attended an executive interview at its headquarters in Philadelphia, USA. Fortunately, I was successful, and my long-cherished wish came true: I began working in the New Insurance Products and Captive Division at the Philadelphia headquarters.

That winter, shortly after I had moved to the US, my boss, in a thoughtful gesture, suggested, ‘As you’re Japanese, it would be better for you to spend the New Year in Japan rather than Christmas.’ Consequently, I returned to Japan temporarily at the end of 1994 to fully savour the ‘Japanese New Year’, and had planned to return to Philadelphia on a flight scheduled for 20 January 1995.

Just then, on 17 January, the Great Hanshin-Awaji Earthquake struck. From early in the morning, television reports showed one harrowing scene after another of the devastating damage.

Unable to sit still, I contacted the CEO of our Japanese office, who told me, ‘I must set off immediately to assess the damage and investigate the payment of insurance claims.’ With transport networks severed, I couldn’t help but ask, ‘How on earth are you going to get there in a situation like this?’ To which he replied:

‘Neither the Shinkansen nor cars are an option, but we’ve finally managed to charter two helicopters. We’ll use these to take aerial photographs to assess the damage and make preparations so that we can pay out the insurance claims as quickly as possible,’ he said.

In general, the process of ‘damage assessment’—which involves determining in detail the extent of damage caused by an accident—is essential in property and casualty insurance. This is to verify the validity of the claim against the terms of the policy and to calculate the appropriate payout amount.

The system is such that insurance payouts are made only once this assessment is complete and the final amount has been determined. Consequently, it is only natural that the larger the scale of the disaster, the more time and effort the assessment process requires; as a result, the reality is that it takes a considerable amount of time for the insurance payout to reach the victims.

2. Insurance Premiums and Insurance Proceeds

I still remember how the induction training for new recruits at the foreign-owned non-life insurance company I joined straight after graduation began with an explanation of the basic insurance terms ‘insurance premium’ and ‘insurance proceeds’.

Put simply, the difference between ‘premium’ and ‘proceeds’ lies in the ‘direction in which money flows’. ‘Insurance premiums’ refer to the so-called ‘premium payments’ made by the policyholder to the insurance company, whilst ‘insurance payouts’ refer to the money paid by the insurance company to the policyholder (or beneficiary) when an event specified in the contract occurs—such as illness or death in life insurance, or fire or a motor vehicle accident in non-life insurance.

3. Costs associated with the payment of insurance proceeds

Whilst the core business of an insurance company is ‘underwriting insurance’, ‘paying out insurance benefits accurately’ when an accident actually occurs is an even more important mission. This is because insurance as a product only demonstrates its true value when payments are made reliably in the event of an unforeseen incident.

However, in reality, this ‘claims assessment’ incurs enormous costs. For general non-life insurance companies, the expenses associated with claims assessment—particularly labour costs—are, in fact, a significant burden on their operations.

To rewind slightly: in April 1996, when the amended Insurance Business Act came into force, six major life insurance companies successively established non-life insurance subsidiaries in August of the same year. Armed with the life insurance industry’s powerful sales network—said to comprise some 500,000 ‘sales staff’ (known as ‘life insurance ladies’)—they surged into the non-life insurance market, identifying ‘motor insurance’ as their ‘fortress’ and concentrating their capital there. However, whilst life insurance companies possessed a powerful sales network, they lacked a ‘network for claims assessment and payment’.

Unlike buildings, which are fixed assets, motor vehicles can travel anywhere in the country, and it is impossible to predict where an accident might occur. Consequently, in order to fulfil their mission as non-life insurers, they needed to establish and maintain a claims assessment network covering every corner of the country, regardless of the number of policies held or the frequency of accidents. The associated costs and labour expenses became enormous.

In light of this, one must conclude that the decision by many life-insurance-affiliated non-life insurers to make motor insurance their core business constituted a fatal strategic error: a ‘failure to choose the right strategic domain’.

Around that time, having been appointed as a management consultant, I was well versed in the US motor insurance market and therefore strongly advised the management team to ‘withdraw from the motor insurance market at the earliest opportunity’.

This was because I was convinced that, eventually, motor insurance would become ‘a business in which success or failure is determined by the level of IT investment’. The far-sighted management team took the bold decision, following the merger in 2004, to withdraw completely from the sale of motor insurance and transfer the existing policy portfolio to other companies.

As of October 2026, thirty years on, the only company still in existence as a ‘non-life insurance subsidiary’ of a life insurance group established at that time is Meiji Yasuda General Insurance, a firm with which the author has been involved in management consultancy for many years.

4. The Unique Nature of Earthquake Insurance Claims Assessment

As discussed previously, the enormous costs associated with claims assessment have a significant impact on the management of non-life insurance companies. The ‘captive’ model is precisely the mechanism that skilfully resolves this heavy burden of operating expenses.

In a captive arrangement, day-to-day operational tasks are outsourced to specialist consultancy firms or management companies. Furthermore, a scheme has been established whereby the most onerous task—the assessment of insurance claims for payment—is borne by the front-line primary insurer.

In particular, damage assessment following a major earthquake is extremely difficult. As was the case during the Great Hanshin-Awaji Earthquake mentioned at the outset, not only do we face physical barriers such as ‘neither the Shinkansen nor cars being usable’, but there is absolutely no guarantee that even the helicopters that were fortunately arranged at that time can be reliably chartered amidst the chaos of a large-scale disaster

Should the ‘Nankai Trough Earthquake’—which is currently a cause for concern—actually occur, it is anticipated that the Shinkansen network and the motorway network—Japan’s major arteries—will be completely severed across a vast stretch of the Pacific coast, from Shizuoka to Miyazaki. Even the government’s (Cabinet Office) damage projections predict that ‘not only will insurance claims assessments be impossible, but even the initial measures for saving lives will not be in place’.

Given the severity of such anticipated circumstances, is conventional earthquake insurance alone truly sufficient for corporate earthquake preparedness?

If physical transport networks are severed and the situation where even damage assessments cannot be carried out persists, insurance payouts will inevitably be significantly delayed. This means that the funds required for business recovery cannot be secured swiftly, resulting in the reconstruction of companies taking an immense amount of time; in the worst-case scenario, this could even threaten their very survival

A new product has been devised as a groundbreaking solution to overcome the structural and fatal weaknesses inherent in conventional non-life insurance—and that is precisely ‘parametric insurance’, proposed after six years of development by an underwriter from the world’s largest reinsurance company, as mentioned at the outset.

5. What is parametric insurance?

Also known as index insurance, parametric insurance bases the requirement for an insurance payout not on the ‘actual amount of loss’ but on whether an incident meets ‘pre-determined objective criteria (parameters: indices)’. It therefore falls into a completely different category from conventional insurance, where ‘assessment of the amount of loss’ is essential.

In the context of earthquake insurance, ‘seismic intensity’ and ‘magnitude’ are typically used as parameters.

In March 2020, this column featured an article entitled ‘What is a CAT Bond?’. CAT Bonds also utilise similar parameters and refer to ‘bonds with a maturity of generally between two and five years, issued by securitising risks with the aim of mitigating losses caused by large-scale natural disasters, such as earthquakes, which, whilst having a low probability of occurrence, carry a high potential for massive losses’. It is one of the products offered by the division to which the underwriter of the world’s largest reinsurance company—mentioned at the outset—belongs.

In the field of earthquake insurance, taking parametric insurance for a high-rise building in Chiyoda Ward, Tokyo, as an example: if a condition is set stating that ‘1 billion yen will be paid if a seismic intensity of 6+ or higher is observed at a monitoring station in Chiyoda Ward’, then following an earthquake, provided that official data from the Japan Meteorological Agency or similar sources meets this condition, the insurance payout will be made even if there is absolutely no damage to the actual building or its facilities.

Conversely, however, even if the building were to collapse, no insurance payout would be made unless a ‘seismic intensity of 6+’ is recorded.

The advantage of this type of insurance is that claims are settled very quickly, as no damage assessment is required. It is not intended to strictly cover the reconstruction costs of buildings and the like; rather, its purpose is to enable companies to rapidly secure the funds necessary to resume business operations in the event of a major earthquake.

On the other hand, a disadvantage is that no payment is made if, despite damage to buildings or other structures, the data from the observation stations does not reach the threshold (parameter) set for this insurance.

For these reasons, parametric insurance is not intended to be taken out on its own; it is only when combined with standard earthquake insurance that its strength and convenience are realised to the fullest extent.

Furthermore, by centrally managing risks through a captive and optimising the scope of cover provided by both conventional earthquake insurance and parametric insurance, it is possible to establish a robust earthquake risk management framework that far surpasses that of standalone earthquake insurance.

6. The Need for a Captive

The combination of ‘earthquake insurance and parametric insurance’ serves as a powerful shield for the stability of corporate management and the promotion of business continuity planning (BCP). Furthermore, the establishment of a ‘centralised management framework’ that maximises the benefits of both is the greatest significance of setting up a captive.

If both types of insurance are taken out separately, there is a risk of overlapping cover or ‘coverage gaps’ arising where cover falls between the two. Accurately controlling risk within the single framework of a captive is the best means of preventing such waste and gaps.

As has been mentioned repeatedly in this column, there are immense cost benefits to establishing a captive. Compared with earthquake insurance premiums quoted by domestic non-life insurers, premiums can be kept to approximately ‘one-third’ whilst offering exactly the same level of cover by utilising the London market. This is a fact that has been demonstrated in all cases handled by Global Link.

In other words, by utilising a captive, it is possible to procure low-cost reinsurance for earthquake risk from the world’s largest reinsurers, which possess some of the world’s strongest credit ratings. By channelling part of the savings from these reduced premiums into parametric insurance, it is possible to establish ‘comprehensive earthquake risk management’ whilst keeping the actual additional financial burden to a minimum.

Summary of this issue

With conventional earthquake insurance, ‘loss assessment’ is essential for the payment of claims. However, in the event of a major earthquake, physical assessment becomes difficult due to the disruption of transport networks, and this structural limitation means that prolonged payment delays jeopardise corporate business continuity (BCP).

The solution to this weakness is ‘parametric insurance’. Rather than being based on the actual amount of damage, insurance payouts are made swiftly without assessment provided that pre-defined objective criteria (parameters), such as ‘Seismic Intensity 6 Upper’, are met. However, as no payment is made if the criteria are not met—even if damage has occurred—it is essential to use this in conjunction with conventional earthquake insurance.

This is where the use of a ‘captive’ (a company’s own insurance company) proves effective. By procuring earthquake insurance at low cost from the vast overseas reinsurance market (the London Market) via a captive, and by allocating the cost savings to parametric insurance whilst managing both schemes centrally, it is possible to build robust earthquake risk mitigation measures whilst keeping the actual additional burden to a minimum.

Author/Translator: Shinichiro Hatani