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Mutuals: Digital technology will be biggest game changer

Source: Asia Insurance Review | Feb 2017

Japan is the world’s second largest mutual insurance market. Ms Irina Fan of Swiss Re gives a brief overview of this market. 
 
Highlights
  • Japan is moving towards a new economic value-based solvency regime similar to Solvency II;
  • More effective use of reinsurance and capital market instruments should provide mutuals with increased financial flexibility; and
  • Survey findings show that around two thirds of Japanese consumers prefer personal interaction when researching or buying an insurance policy.
 
Japan’s mutual insurance market is the second largest in the world, with US$185 billion in premium written in 2014. See Chart 1. (Sigma No 4/2016 – For Japan data, 2014 refers to 12 months ending March 2014).
 
Chart 1: World mutual insurance market
 
   Life mutuals dominate the Japanese market, accounting for 85% of the total mutual premiums.  Japanese life mutuals continue to maintain a substantial market share in the domestic market, while the share of non-life mutuals remains relatively low (Chart 2).
 
Chart 2: Japanese mutual market share (%)
 
New solvency regime can put pressure on smaller mutuals
Japanese mutuals are well-capitalised. International Cooperative and Mutual Insurance  Federation (ICMIF) data shows that the underwriting leverage ratios of medium and large size mutuals have decreased in the past few years (Chart 3). This could reflect higher risk awareness relative to available capital and their limited ability to raise external capital. 
 
Chart 3: Average underwriting leverage of Japanese mutual*
 
   Japan is moving towards a new economic value-based solvency regime similar to Solvency II, which may put many smaller mutuals at a competitive disadvantage compared with better diversified insurers. 
 
Reinsurance and CAT bonds
More effective use of reinsurance and capital market instruments should provide mutuals with increased financial flexibility. Mutuals have traditionally focused on the role of reinsurance to reduce earnings volatility. 
 
   The global trend is increasingly to use reinsurance as a mechanism for achieving the optimal capital allocation. This global trend may affect the capital strategies of Japanese mutuals, given their increasing globalisation efforts through overseas M&As.
 
   Zenkyoren, the largest Japanese cooperative insurer also actively issues catastrophe bonds to manage CAT risk and bolster capital. Nevertheless, more conservative regulatory requirement sometimes limits the options for Japanese cooperatives insurers in adopting risk transfer options
 
Lagging behind the pack in online distribution
Digital technology could present the biggest game changer for mutuals and the wider insurance market. 
 
   Our analysis of a global sample of mutuals’ websites show that larger mutuals in Japan appear reluctant to shift significantly to online distribution, perhaps reflecting consumer preferences for traditional distribution channels (Chart 4). 
 
Chart 4: Mutuals’ adoption of technology in distribution
 
   Survey findings show that around two thirds of Japanese consumers prefer personal interaction when researching or buying an insurance policy. Although more Japanese consumers indicated intentions to use online channels for pre-purchase research, the figures still lag behind other parts of Asia.
 
   Exploiting social media and smart analytics to understand better the needs and preferences of customers should be a natural fit for mutuals whose roots are grounded in serving and maintaining the trust of their members. 
 
   Furthermore, if technology-led moves towards full risk-based pricing mean that some people are priced out of conventional insurance, mutuals may have an increasingly important role to play in keeping some risks insurable. By leveraging new technologies, existing mutuals can potentially launch a new era of mutualism.
 
Ms Irina Fan is Senior Economist at Swiss Re. 
 
Japan’s latest reform to upgrade corporate governance
 
Alongside enhanced solvency regulation, governments in many countries have strengthened financial sector corporate governance requirements. The Japanese Prime Minister Shinzo Abe has touted corporate governance reform as a key element of the “Third Arrow” to revitalising the country’s economy.  
 
   In 2014, Japan made substantial amendments to the Companies Act and launched the (voluntary) Stewardship Code to encourage the country’s institutional investors to get more involved with the companies that they invest in. 
 
   According to data from Japan’s Financial Services Agency, as of March 2016, 22 insurance companies have announced their acceptance of Stewardship, including the five Japanese life mutuals. 
 
   A new Corporate Governance Code was launched in June 2015, aiming to help align Japanese regulations on corporate governance with international standards. The code is not legally binding. The approach it adopts for implementation is “comply or explain” (either comply with the principle or explain why it has not done so). 
 
   Listed insurers are taking initiatives such as the standards regarding independence of outside directors and regular corporate governance reports.  Although the Corporate Governance Code is not applicable to cooperative insurers, many larger cooperatives have responded on a voluntary basis.
 

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