Outlook improves on more favourable conditions in life market
Overall business conditions for life insurers In Japan have improved compared to during earlier stages of the COVID-19 pandemic, prompting AM Best to revise its outlook on the life insurance market to ‘Stable’ from ‘Negative’.
In a new Best’s Market Segment Report, titled, “Market Segment Outlook: Japan Life Insurance,” AM Best notes that most Japanese life insurance companies maintain very strong capital positions, and are likely to be able to withstand the potential impacts on capital changes that may result from global financial market volatility.
Several long-term and persistent challenges remain, including aging demographics and a shrinking working population, stagnant wages and evolving consumer needs. However, AM Best expects insurers’ operating performances in the near term to benefit from some tailwind factors, such as the positive momentum in top-line recovery and the possibility of further foreign interest rate increases, as well as a bottoming out of domestic interest rates.
Most life insurers in Japan rely heavily on face-to-face sales distribution; thus, the outbreak of COVID-19 adversely affected life insurance sales given social distancing measures and restrictions on face-to-face sales activities. Although the sales performances of most life companies have yet to recover to pre-pandemic levels, AM Best views the situation as likely to continue improving, aided by an acceleration of digital transformation and new product launches.
“Prospective sales of foreign currency-denominated products are likely to increase in tandem with foreign interest rate increases in the coming quarters,” said Mr Jason Shum, associate director, analytics, AM Best. “Additionally, continued hikes in global interest rates will bode well for life insurance companies in Japan as the prospective investment climate should benefit insurers’ ability to manage risk-adjusted returns and re-investment risk, albeit with generally higher hedging costs.”
Over recent quarters, particularly since the first quarter of 2022, yields of medium- and long-term Japanese government bonds (JGB) have been on a generally rising trend. Should domestic interest rates hold up (at least close to current levels), this would provide additional support to the positive momentum in Japanese life insurers’ operating performance metrics, including new-business profit margins, the value of new business, and operating return on embedded value, over the near term.