Moody’s has cut the long-term ratings outlook on Japan’s three largest insurers due to the severity of catastrophe losses last year and their exposure to the country’s moribund auto industry.

The ratings agency has downgraded the outlook of Tokio Marine & Nichido Fire Insurance, Mitsui Sumitomo Insurance and Sompo Japan Insurance to stable, and warned further downgrades are possible if they fail to improve their return on capital to “at least” 4%.

Further catastrophes or an increase in their exposure to insurance risk could prompt another downgrade, Moody’s says.

An upgrade will only be possible if all three insurers limit high-risk assets to less than 50% of shareholder equity and improve return on capital to around 8%.

“While these companies are taking measures to reduce asset-side risk, they continue to show high exposures to the Japanese stockmarket, making their capital vulnerable to both catastrophes and investment risk,” Moody’s says.

Japanese insurance companies bore the brunt of last year’s quake and tsunami, which Munich Re estimates caused $US210 billion ($197 billion) in economic losses – the costliest natural catastrophe of all time – and $US40 billion ($37 billion) in insured losses.

Losses were only limited by the lack of insurance penetration in Japan, which according to AIR Worldwide is about 14% to 17% nationwide for earthquake cover.