Japan: Life insurers taking on bigger investment risks
Source: Asia Insurance Review | Dec 2016
Japanese life insurers are being forced to take on greater corporate risk abroad, creating a new set of challenges for investment managers already squeezed by the ultra-low interest-rate environment.
The lack of safe foreign government bonds that offer sufficient return is prompting the insurers to take on the greater risks associated with financing companies abroad, reported The Wall Street Journal. Japanese life insurers traditionally invested mainly in yen-denominated bonds. However, Japanese government bonds with terms of up to 10 years have carried a negative yield for most of this year.
“We are investing in assets that have some spread, mainly foreign corporate bonds such as US ones,” Mr Iwao Matsumoto, general manager for investment planning at Sumitomo Life Insurance, said. “Investments in Treasurys don’t generate returns.”
While the 10-year US Treasury currently offers a much better yield – around 1.86% – investment managers in Japan say that return is almost entirely erased by the cost of hedging against yen-dollar fluctuations.
Investing in corporate bonds and other credit-linked products overseas requires Japanese life insurers to develop new skills. Many say they are hiring more professionals with expertise in assessing industry conditions overseas and corporate risk.