Global credit rating agency, AM Best has revised its outlook on Japan’s life insurance market to stable from negative, as overall business conditions for the life insurers have improved compared to earlier stages of the COVID-19 pandemic
According to a report, key positive and beneficial factors that supported this revision included continued positive momentum in top line recovery; possibility of further foreign interest rate hikes; and bottoming out of domestic interest rates.
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.
At the same time, several long-term and persistent challenges remain, including ageing demographics and a shrinking working population, stagnant wages and evolving consumer needs.
Most Japanese life insurers 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, the agency explained.
Although the sales performances of most life insurance companies have yet to recover to pre-pandemic levels, AM Best views the situation is likely to continue improving, aided by an acceleration of digital transformation and new product launches.
Jason Shum, associate director, analytics, AM Best, said: “Prospective sales of foreign currency-denominated products are likely to increase in tandem with foreign interest rate increases in the coming quarters.
“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.”
The ultra-low interest rate environment in Japan has always posed a challenge for Japanese life insurers, the report noted.
However, Japan’s central bank may consider normalising its monetary easing measures over the short to medium term as most major central banks around the word begin or continue to tighten credit.
AM Best said: “While it is difficult to anticipate precisely the future development path of domestic interest rates, at a minimum, AM Best notes that it is unlikely that the prospective yield curve would shift down significantly from the current level.
“Should domestic interest rates hold up (at least close to current levels), this could imply that the worst, in terms of negative yields on medium-term JGBs, is behind us. This would provide additional support to the positive momentum in Japanese life insurers’ operating performance metrics over the near term.”
