Global ratings agency AM Best has maintained its stable outlook on Japan’s life insurance market segment.
The agency cites in part the prospects for higher premium income based on rising interest rates, as one of the key reasons behind the stable outlook.
At the same time, Best also highlighted an increase in sales for foreign currency-denominated savings products amid the ongoing rise in foreign interest rates, which should play a pivotal role in strengthening premium income for Japan’s life insurers.
Other factors also include, potentially higher domestic interest rates and expected improvement in core profits due to the decline in COVID- related benefit payments.
In recent years, Japan’s life insurers have posted positive top-line growth, but, their core profits were adversely impacted by pandemic-related losses and higher foreign-currency hedging costs in fiscal year 2022, which ended March 31, 2023.
In view of Japan’s current operating environment and the significant drop in COVID-related claims, Best states that it expects that the Japanese life insurers’ premium income will be stable for the remainder of the current fiscal year, which ends on March 31, 2024.
Charles Chiang, senior financial analyst, AM Best, commented: “Most life companies have maintained very strong capital positions amid heightened financial market volatility over the last 12 months. In our view, the Japanese life insurers’ adequate capital buffers will help them withstand the potential impact of volatility in both the domestic and global financial markets, as well as potentially higher domestic interest rates.”
In addition, the agency also explains, that, despite several long-term challenges, life insurers’ operating performance will benefit from the improvement in core profits and a rise in investment income due to potentially higher domestic interest rates over the near term.
Looking back, Japan’s life industry posted an increase of nearly 16% in premium income, to JPY 34.5 trillion (US $232.4 billion) in FY2022.
This substantial growth was also due to a low base effect from depressed new business premiums in FY2021 stemming from the COVID-19 pandemic.
Interestingly, Best noted that it expects US interest rates to remain at the current elevated level, but Japan’s interest rates to remain at a significantly lower level. But, in their report, the agency explains that the rise in sales of foreign currency-denominated products owing to foreign interest rate movements is usually temporary in nature and cannot be sustained over the medium term.
