Cat bonds are seen as a smart choice for Japanese sponsors, according to a report. However, mergers and acquisitions could impact the issuance.

Japanese reinsurance cedents are actively utilizing insurance-linked securities (ILS) market for risk capacity, with a preference for catastrophe bonds, demonstrating the critical role of cat bonds, as highlighted by AM Best. However, shifts in the Japanese insurance landscape due to mergers and acquisitions (M&A) might impact the flow of risk to the ILS market in the near term.

According to AM Best, the Japanese reinsurance market experienced a turning point in April 2024, leading to a softening trend that persisted into 2025. This shift was driven by surplus capacity, enabling Japanese cedents to secure robust reinsurance coverage and marking the conclusion of the hard market cycle in the Asia-Pacific region. Major Japanese insurance conglomerates, wielding substantial influence in the reinsurance sector, bolstered their capital reserves and lowered reinsurance costs by upping their retentions, aligning with a decrease in rates. Consequently, the overall pool of property catastrophe reinsurance premiums in Japan contracted, with reinsurers looking towards the Asia-Pacific region for growth opportunities, potentially accelerating a softening of market conditions in the upcoming January 2026 renewals, unless significant catastrophe events arise.

Despite the softening market landscape, catastrophe bonds remain a key mechanism for Japanese insurance giants to access reinsurance capacity, supplementing traditional reinsurance structures. Japanese cedents have been actively engaging with the capital markets for catastrophe risk transfer, evidenced by recent transactions like Sompo Japan’s Sakura Re Ltd. (Series 2025-1) cat bond and Zenkyoren’s Nakama Re Pte. Ltd. (Series 2025-1) issuance. In addition, Zenkyoren leveraged the Liongate Re DAC cat bond and Peak Re’s Black Kite Re Limited (Series 2025-1) cat bond to mitigate Japanese peril and earthquake risks from China and India. However, Japanese peril-focused cat bonds constitute only a small fraction of the overall market.

AM Best anticipates changes in the reinsurance landscape due to the planned merger between Mitsui Sumitomo Insurance (MSI) and Aioi Nissay Dowa Insurance (ADI) by 2027, reshaping the Japanese reinsurance sector significantly. Both entities, longstanding sponsors of catastrophe bonds, are expected to integrate their reinsurance programs post-merger, intensifying competition for future combined reinsurance initiatives. The consolidation of reinsurance offerings could potentially impact the utilization of catastrophe bond-backed protection by the combined entity, influencing the distribution of risk to ILS capital sources.

The Japanese catastrophe bond market, characterized by thin returns over expected losses, has featured prominently in the broader landscape of multi-peril cat bonds covering international regions. While Japanese exposures are a draw for investors seeking diversification, competition from traditional reinsurance markets has dampened the appeal of Japanese cat bonds for some investment managers in the ILS market. Nonetheless, Japanese catastrophe bonds remain integral to the market, with 54 cat bonds solely addressing catastrophe risks in Japan.

In conclusion, the evolving Japanese reinsurance market, influenced by M&A activities and competitive dynamics, will likely impact the utilization of catastrophe bonds in transferring risk to the capital markets, underscoring the strategic importance of cat bonds for Japanese sponsors.