The outlook for the Japanese life insurance industry over the next 12-18 months has been changed to stable from negative, says Moody's Japan. Challenges remain, but life insurers have demonstrated that they can cope with ultra low rates.
In Moody's just-released report titled "Life Insurance — Japan: 2018 outlook stable as life insurers demonstrate ability to cope with low rates", Mr Makimoto said that life insurers will continue to demonstrate high mortality and morbidity margins, which is a structural feature of the Japanese market. Large Japanese life insurers have strong pricing power because their customised, complex products make it difficult for consumers to compare prices. And the popularity of captive sales agents — who only offer products of the companies they are associated with — helps life insurers lock in customers.
In addition, the insurers are changing their liability structure to help offset ultra low interest rates. Life insurers have stopped sales of yen-denominated single-premium savings products and are shifting their focus to foreign currency-denominated savings products and protection products, such as third-sector products, which are less affected by low rates.
Asset-liability management remains challenging. Because of the low interest rates, life insurers have curtailed investments in super long-term Japanese government bonds (JGBs) with maturities longer than 10 years; thereby widening the duration gaps between assets and liabilities. Life insurers typically maintain some allocation to super long-term JGBs to prevent a large decline in asset duration, but unless interest rates rise significantly, asset-liability mismatches will continue to grow gradually.