Japan’s life insurance industry is seeing a resurgence as the economy overcomes its “lost decades,” according to a recent report by global reinsurer Swiss Re.
In contrast, China’s life insurers are now dealing with the same “negative spread” problem. Since 2020, investment yields in China’s life insurance sector have fallen by over 300 basis points.
John Zhu, Chief Economist Asia Pacific & Yaxin Chen, Economist, Swiss Re Institute, noted: “We estimate the net profit of China’s life sector declined by nearly 20% y-o-y in 2023, mainly due to lower investment returns.”
As Japanese life insurers benefit from rising interest rates, Chinese insurers are facing significant challenges. In the first quarter of 2024, investment yields for Chinese life insurers dropped to 2.16%.
Chinese companies have fewer opportunities for foreign investments. However, they can improve profitability by focusing on protection products and leveraging gains in mortality and morbidity risk, analysts noted.
Japan’s life insurers struggled with prolonged economic issues, where guarantees on older products exceeded the returns on current investments.
The recent interest rate hike by the Bank of Japan, although small, was symbolically important after 17 years. While Japanese insurers anticipate growth in life savings and annuity products, Chinese insurers are experiencing a similar decline in investment yields, leading to significant profit reductions.
To boost investment yields, Japanese life insurers diversified into foreign securities and benefited from the yen’s depreciation.
Chinese insurers, however, have limited overseas investment options, which puts additional pressure on their returns. Zhu added: “A more applicable lesson for China would be that Japan’s insurers also shifted their product mix towards protection-type policies, such as traditional life insurance and medical or long-term care insurance, to better meet the needs of an ageing population.”
In Japan, this shift was supported by deregulation, leading to a significant decrease in endowment policies from 86% in 1970 to 8% by 2010.
For Chinese insurers, effectively managing mortality and morbidity risk is essential to maintaining profitability amidst narrowing interest rate margins.
In Japan, improved longevity helped offset negative spread issues, with lower-than-expected death rates reducing payouts.
The combination of maturing high-yield contracts, higher-yielding foreign assets, and significant cost-cutting (a 20% reduction in operating expenses from 1992 to 2002) improved interest margins, with net margins turning positive by 2013 according to the Bank of Japan.
Zhu stated: “Some of China’s challenges are even more urgent: its population is already shrinking, while Japan’s only started to decline in 2009, when it was already rich in per capita terms.”
This potential, along with lower life insurance penetration compared to Japan in the 1980s, supports new premium growth and insurers’ toplines.
Both countries emphasise reforms. Japan is enhancing corporate governance, contributing to the Nikkei 225’s strong performance. China, by continuing financial reforms, can improve productivity and capital allocation.
