The insurance industry is changing on a global level and Japanese insurers are cresting that wave of change. As Japan deals with a volatile global economy, we see how the insurance industry is coping.
Japan’s negative interest rate, combined with large Nat CAT losses has had a significant impact on the local insurance industry. While the general insurance industry managed to record good profits in 2016, the life industry was more negatively affected.
According to Mr Tomoatsu Noguchi, President and Chief Executive of Toa Re, this was due to “the general insurance industry being less affected by the ultra-low interest rate environment under the Bank of Japan’s negative interest rate policy and the appreciation of the yen against the US dollar after the UK’s decision to leave the EU.”
Life industry saw slight drop in net premium income
In reaction, the life industry adapted by improving investment expertise, revising their investment portfolios and increasing the proportion of foreign bonds. They also managed to increase demand for coverage from Japan’s shrinking, ageing population through development of new products and clever rebranding of current products to target their super-aged society.
Although there was an increase in capital gains due to an increase in sales of securities, there was a decrease in core business profits, mostly as a result of a drop in the sales of single premium products. Net income saw a slight drop of JPY1.2 billion (US$10.6 million) in 2016 as compared to 2015, according to numbers from the Japan Financial Services Agency . See Figure 1.
The life industry also saw an increase in the solvency margin ratio in 2016, going up 23.1 points from 2015, leading to total net assets of JPY207.6 trillion as of September 2016. The FSA reported that this improvement was due to the issuance of subordinated notes by some insurers.
General insurers post good profits despite large loss events
The negative interest environment and Brexit also affected the non-life industry in Japan. Combined with the Kumamoto earthquake in April, one would expect general insurers to have had a poor 2016. However, the increase of ordinary profits managed to combat these factors to allow these insurers to have a highly positive net income at the end of the year.
The Kumamoto earthquake was the largest Nat CAT event in Japan for the year while the rest of the year proved to be remarkably peaceful. The lack of Nat CAT claims domestically helped the industry maintain a positive outlook.
Year-on-year improvement of underwriting performance also contributed to the outcome of 2016. See Figure 2.
Digital generation will increase at a rapid rate
Japan’s population is rapidly shrinking – analysts forecast a population drop of 0.3% to 0.5% every year until 2020, leading to only 75% of the 2010 population by 2050. At the same time, the digital native generation will increase at the same rapid rate.
These demographic changes will lead to changes in consumer behaviour, as younger generations become core customers. Insurers in Japan are well-equipped to deal with these changes, as evidenced by initiatives set out by the LIAJ and GIAJ.
Self-driving cars
From a general insurance perspective, technological advances will have a big influence on future developments within the market, mainly focusing on auto insurance and its associated technologies.
For example, telematics is a fairly new technology that has been adopted by insurers and consumers worldwide. A majority of member companies within the GIAJ have been offering telematics-based services, such as safe-driving support and automatic notification to insurers in the event of an accident.
However, there are other advancements in the auto insurance industry that insurers need to keep an eye on. Mr Toshifumi Kitazawa, Chairman of the General Insurance Association of Japan (GIAJ), said: “Recently, vehicles equipped with ASV (Advanced Safety Vehicle) technology is advancing and spreading. For vehicles equipped with collision mitigation auto-braking systems, The General Insurance Rating Organization of Japan will apply a discount to the reference loss cost rates starting January 2018.”
At the same time, the GIAJ compiled a report on the potential legal challenges that might arise with the advent of self-driving vehicles, which was released in June 2016. In the report, the GIAJ warned of the possibility of a fundamental overhaul in the current legal liability framework, if the fully automated driving technology reaches ‘level 4’. (According to the classification system established by SAE International, level 4 is when the vehicle is able to autonomously control the vehicle through all but a few environments, such as severe weather.)
Said Mr Kitazawa: “Our view is that various discussions regarding the challenges facing automated driving will progress at the government level going forward, and GIAJ intend to actively take part in the discussions.”
AI for call centres and claims handling
Artificial intelligence (AI) is also being explored for use in call centres and claims handling, and it has already seen a good reception in other developed markets around the world.
“Going forward, through the use of AI, IoT and Big Data, it will be possible to achieve a higher level of marketing and pricing and a whole new style of interacting with customers.”
Technology impact on life and reinsurance sectors
The life insurance sector is also flooded with the introduction of technology, mainly seen in the form of wearables. Experiments are underway to identify the behavioural characteristics of consumers and to reflect them in insurance premiums.
From the reinsurance perspective, the increasing amounts of digitisation, automation and telematics will create new risks and insurance products and also lead to the development of loss prevention skills.
Mr Noguchi is currently not clear about the extent of reinsurance needs that may be created in future. “We are striving to examine and consider this issue so that we can underwrite risks of new insurance products promptly and flexibly in line with the trend of the times. We think it is necessary to deepen the understanding of risk and respond to reinsurance needs by recognising innovation as business opportunities while maintaining close communication with our clients,” he said.
Increasing resiliency against disaster risk
While 2016 was relatively light on Nat CAT events in Japan, Mr Kitazawa pointed out that large losses occurred in areas previously not thought to be at great risk. “This gave us the impression that uncertainty is increasing for natural catastrophe risks,” he said.
Against this backdrop, he believes that the non-life insurance industry has to adapt its role in society moving forward, which includes informing and educating the public of natural catastrophe risks; adequate control of natural catastrophe risks (strengthening of ERM); and developing claims response for widespread disasters.
The GIAJ is already taking steps to ensure that their member companies are well-equipped to handle these tasks, such as:
- Conducting seminars for agents in various areas in Japan focusing on earthquake risks specific to each region.
- Publishing advertisements which educate and inform the public about earthquake risks and earthquake insurance.
- Conducting educational seminars for consumers in various areas in Japan regarding prevention and reduction of natural catastrophes.
- Providing educational tools regarding disaster prevention and reduction suited for school education, and also conducting seminars.
- Conducting ERM seminars for member companies.
- Developing claims procedure frameworks such as streamlining the claims procedure of earthquake insurance.
These measures would also help combat the large Nat CAT protection gap in Japan, as observed by SwissRe.
“Also, from a risk management perspective, in addition to insurance, I think it is important to encourage our customers to develop disaster prevention plans to prevent and reduce losses and prepare Business Continuity Plans,” said Mr Kitazawa.
Adjusting to the super-aged society
The Life Insurance Association of Japan (LIAJ) has been conducting a series of initiatives that aim to encourage member companies to improve service quality for the elderly, according to their Chairman, Mr Akio Negishi.
One of the initiatives is to utilise the Individual Number System (social security/taxation number) in the private sector to pave the way for the life industry’s efforts in improving service quality for their elderly consumers. The LIAJ is currently outlining a recommendation for the early utilisation of the Individual Number System, which is expected to be published in April 2017.
In July 2016, Mr Negishi outlined three initiatives to enhance their social role in providing financial security for Japanese citizens, all of which are advancing at a rapid pace. The initiatives include promotion of life insurance for the elderly, improving insurance education amongst the population and refining the consumer-oriented management infrastructure.
Further, the LIAJ will continue to make efforts to increase opportunities for insurance education at schools. “For example, the LIAJ is preparing educational materials for junior high school and high school students in collaboration with the Ministry of Health, Labour and Welfare, incorporating insights from active teachers. Additionally, the LIAJ is developing a web portal within the LIAJ’s website to collectively provide information on insurance education to teachers,” said Mr Negishi.
The LIAJ is also working to enhance industry best practices through PDCA (Plan-Do-Check-Act) management cycle. The LIAJ underscores customer-oriented action in its Code of Conduct, and member companies conduct various measures to achieve customer orientation.
Softening of the market
As the sole indigenous reinsurer in Japan, Toa Re takes its responsibility in supporting domestic insurers very seriously. “If there is a movement to fill the protection gap in the Japanese insurance industry, we will support the industry from reinsurance side,” said Mr Noguchi.
“We have an extremely solid client base in Japan, and our Japan business represents about 50%, which is the highest ratio in our portfolio on net premium income basis. Since the Japanese market has matured and is not expected to grow much further, we regard our overseas business as a pillar of growth. Even under these circumstances, however, the Japanese market is still the most important market for us from the perspective of both quality and quantity.”
While the pace of the softening in the reinsurance market is slower than in 2015, the reinsurer expects the trend to continue to a certain extent in connection with the Japanese April renewal this year. They observed no significant changes in the reinsurance needs of domestic insurers, except for those that rise in relation to new risks such as cyber risk.
“We think domestic insurers are trying to continuously conduct various types of verification mainly related to natural catastrophe protection in order to raise the effectiveness of reinsurance,” Mr Noguchi said.
Evolving with the customers
Exciting things lie ahead in the Japanese insurance industry, as insurers and consumers alike adapt to economic and social changes within their nation. Insurers remain as technologically savvy as their consumers, and we can expect many innovations to come from Japan in the coming years.