Global life insurers urged to learn lessons from Japanese peers amidst low rates

Written by Adam Cadle

20/11/2019

Global life insurers may seek to learn from their Japanese peers of how to preserve profitability amidst a low rate environment, according to a report published by Moody’s Investors Service.

The report analysing the global life insurance market said large Japanese life insurers have preserved profitability even after two decades of low rates. Japanese life insurers, according to the report, have been able to maintain high margins on protection-type products which protect against the risk of dying prematurely (mortality risk) and contracting certain types of disease (morbidity risk).

This is reflected by strong pricing power. The Japanese life insurance industry is highly concentrated with the six large life insurance groups together accounting for more than half of total premium income. Large life insurers also have strong pricing power because they have adopted product designs that stress customisation and complexity, which make their sales less price sensitive.

In addition, the Japanese life insurance industry’s distribution network is dominated by captive sales agents. This has allowed Japanese insurers to shift their product mix towards protection products relatively easily.

Lastly, the Japanese life insurance industry prices conservatively across key product categories, a stance supported by prevailing regulations. For example, Japanese regulators require life insurers to use standard mortality rates for policy reserves which are relatively conservative, giving life insurers high margins

Japanese insurers seeking to reduce their exposure to low rates have also adopted some of the strategies pursued by their US and European peers. For example, they have continuously lowered crediting and guaranteed rates, such that the latter are now below investment yields.

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