With inflation and its consequences roiling global financial markets, preparations for tougher times by Japan’s insurers are looking to have paid off, according to S&P Global Ratings.
In S&P’s view, the creditworthiness of Japan’s insures will likely remain stable in 2023.
With financial markets likely to continue to fluctuate due to central banks tightening measures globally, insurers accumulated retained earnings and capital bases, which are enhanced by reduced exposure to market risk, will support their creditworthiness.
S&P said that it expects the moderate rise in domestic interest rates to have a positive impact on life insurers’ creditworthiness in Japan., citing that the rise in the interest rate of super-long-term bonds is likely to improve their economic-value based capital.
The agency noted that this is because it will increase earnings from investments related to yen-denominated bonds, as well as reduce both policy reserves burdens and interest rate risk by insurers extending the maturities of assets.
S&P also touched on nat-cat related losses: “We anticipate natural catastrophe-related losses will remain the most significant risk factor for domestic non-life insurers. We believe non-life insurers will maintain their capital at a certain level by stabilizing underwriting income and conducting adequate risk management. Still, inflation, stock market volatility, and increased overseas credit risk are on our radar.”
Furthermore, sharp increases in interest rates have reduced unrealized gains from available-for-sale securities. S&P noted how this has pressured shareholders equity under JGAPP.
Accordingly, the agency stated that it is “watching for rises” in financial leverage ratios and falls in solvency margin ratios (SMRs) under the current regulation.
Additionally, SMRs have also been plummeting at both life and non-life insurers.
S&P concludes: “From fiscal 2025, insurers operating in Japan will likely be required to calculate their capital strengths based on new economic-value based solvency regulation. Given that SMR and ESR trend differently, insurers are likely to face difficulty in financial management.”
