Mortality and morbidity margins for Japanese life insurers will remain strong even under a base case scenario of a combination of slow economic growth and low interest rates, says Moody's Japan.
The international rating agency says that its outlook for the Japanese life insurance industry over the next 12-18 months is stable.
"Underwriting margins of our rated Japanese life insurers will remain strong, and capital will continue to improve on the industry's high retention of economic profit, which is far higher than its accounting profit and the associated dividends," said Mr Soichiro Makimoto, a Moody's vice president and senior analyst. "However, investment risk and the duration gap will continue to be a drag on the industry," he added.
Moody's points out that life insurers continue taking incremental investment risks to boost investment returns to beat the ultra low domestic rates, and that their duration gaps will not improve because the industry continues to refrain from investing in long-duration Japanese government bonds.
Moody's conclusions are contained in its just-released report, "Life Insurance — Japan: 2019 outlook stable as core profit and capital strong despite low interest rates".
On both mortality and morbidity products, the industry continues to retain substantial pricing power. By contrast, the economic contribution from interest margins to core profit will remain small. New business will continue to shift away from traditional products, which face subdued demand because of a shrinking working age population and ultra low domestic interest rates.
On the other hand, insurers have been introducing new products such as:
- insurance products that promote better health,
- products that target the needs of the rising retiree population, and
- foreign currencydenominated savings products.
Insurers with strong brand value and those with new value-added products will likely maintain sales without reducing margins, says the report.