In an era of perennially low interest rates life insurers should look to Japan, where the industry has remained largely profitable despite facing consistently low rates for over two decades, Moody’s says.
The report states that Japanese life insurers have adjusted to perpetually low rates by developing highly-effective liability management strategies.
Major differences between Japanese insurers’ strategies and those of global peers is strong pricing power and the use of standard mortality rates, allowing the industry in Japan to maintain particularly high margins on protection-type products.
Insurers in Switzerland, UK and Korea, have been employing similar strategies but are not yet as successful, and those in other countries still have a long way to go, says the report.
Key strategies currently employed by insurers in eight countries examined by Moody’s across Europe, Asia, and North America include the selling of profitable protection products, reduction of crediting/guaranteed interest rates and the selling of unit-linked/fee-based products. The eight countries include Japan, Korea, Taiwan, the UK, France, Italy, Germany and the U.S.
However, the report highlights key structural difference between Japan its peers, stating that features of the former’s industry allow life insurer to maintain particularly high margins on protection-type products, enabling major insurers to operate profitably in an economy where the yield on 10- year government bonds have been below 2% for more than 20 years.
The rate environment has turned even worse in recent years, with the yield on 10-year Japanese government bonds (JGBs) staying below 1% since 2012 and dropping to almost 0% in 2016-17 amid unprecedented quantitative and qualitative monetary easing, Moody’s says.
Strong control over captive sales channels also enables Japanese life insurers to change its product mixes relatively easily, which helps the sector to be even more immune to ultra-low interest rates and demographic changes. For example, insurers can increase sales of products by raising sales commissions and offering other sales incentives.
The report concludes that insurers in other countries have made far slower progress in growing protection business. Generally in Europe, although life insurers are seeking to boost sales of protection and retirement products in response to the aging of populations, protection volumes remain low.
In France, its protection market is currently dominated by mortgage insurance, and its penetration rate is already very high. As such, insurers are trying to develop health and protection products, but that business is expanding at a very slow pace.
