With insurers in Japan having long been affected by ultra-low interest rates, Fitch Ratings sees its life insurance market as an opportunity for insight into the potential environment insurers worldwide will be operating in since the emergence of COVID-19.
The Bank of Japan decreased interest rates significantly in response to the economic stagnation in the early 1990s, and rates have been low in Japan ever since.
Fitch notes how the country’s life insurers have mitigated the effects of these low rates by adopting various product, investment and business strategies.
As COVID-19 continues to unfold, policymakers and central banks will aid economic recovery and alleviate pressure on borrowers through the use of low interest rates – potentially for a long while after the pandemic eases.
Fitch highlights how life insurers’ investment margins become constrained by low interest rates, reducing insurers’ ability to meet investment guarantees and weakens their earnings and capital. This pressure is increased by fairly narrow corporate bond spreads.
Japan’s life insurance market reportedly demonstrates that rating downgrades are not inevitable in a low interest rate environment, as long as insurers adapt their business models to the new operating environment.
Nevertheless, Fitch notes that low rates are a key driver of its negative outlooks for life insurance sectors in the US, Germany and elsewhere, and companies that fail to adapt are likely to be taken over or put into run-off.
