Moody's Investors Service has changed the outlook on Japan's life insurance sector to stable from negative.
In a report, “Life Insurance –Japan: Outlook changed to stable as resilient profit supports strong capitalisation”, Mr Soichiro Makimoto, a Moody's vice president and senior analyst, makes several observations:
Capital will be driven by internal capital generation and market recovery.
The industry's capitalisation will remain strong in the next 12-18 months as a result of continued internal capital generation. This follows financial market recovery, which has boosted insurers' capital metrics over the past year. Customers' preference for sales consulting from insurers' captive sales channel, together with several regulations including the use of standard mortality rate table and severe morbidity stress tests for reserve valuation, will ensure insurers' pricing power. This supports insurers' internal capital generation even amid the ongoing COVID-19 pandemic. The pandemic is likely to raise consumers’ awareness of medical risk and demand for high-margin medical protection products.
New capital regulations will promote risk control.
Japanese authorities' latest clarification of the roadmap for the upcoming capital regime, while tentative, will lead insurers to implement more active capital management efforts and undertake initiatives to improve economic capital. One common focus across insurers will be the reduction of investment risks including equity and interest rate risks.
Asset composition will gradually shift to credit investments and Japan Government Bonds (JGBs).
The shift will be made from equities as insurers react to the rising focus on economic capital management. Insurers' incorporation of environmental, social and governance (ESG) considerations in their investment process will grow. The result will be a reduction in insurers' overall asset risk, a mild credit positive.
Slow, steady pace of digitalisation will support agent sales against risk of future disruption.
Life premiums will be steady and well supported by sizable recurring premiums from in-force policies and resuming new business inflows. The resilience in Japanese insurers' distribution capacity testifies to strong consumer preference for traditional in-person channels. Therefore, digital transformation in the sales channel is slower than in other global markets. Nonetheless, insurers are developing technologies, such as video meeting tools for consultation and online systems for closing policy sales, to address the risk of future disruptions.