Moody’s Japan has changed its outlook for Japan’s life insurance industry to negative from stable, citing challenges to capitalisation and profitability due to the coronavirus (COVID-19) pandemic.
Analysts noted that the virus outbreak has already caused significant disruption to the domestic and global capital markets, and could put strain on insurers’ performance.
“The Japanese life insurers could see their otherwise strong capital position erode over the next 12-18 months amid increased capital market volatility,” said Soichiro Makimoto, a Moody’s Vice President and Senior Analyst.
Japanese insurers tend to have large exposure to domestic equities and unhedged foreign-currency positions, Moody’s explained, which could leave them vulnerable to declines in the country’s stock market and a sharp appreciation in the Japanese yen.
The risk for capital erosion has also risen despite Moody’s belief that insurers currently maintain relatively strong economic capitalisation despite the latest drop in domestic stock prices.
“Moreover, disruptions from the coronavirus outbreak will add further pressure on the industry’s investment yields by maintaining already ultralow domestic interest for longer, while sales activities will be disrupted through reduce in-person interaction,” Makimoto added.
That said, Japanese insurers’ premium base remains supported by their large number of existing policies with long durations, which will partially mitigate the impact of a sharp drop in new sales.
Moody’s expects the G-20 economies will experience an unprecedented shock to economic growth this year, with for Japan’s real GDP set to contract by 2.4% in 2020 before rebounding to 1.4% in 2021.
The rating agency acknowledged that it could change the Japan life outlook back to stable if the disruptions from the outbreak and capital markets start to stabilise, and the insurers maintain their strong financial and business profiles.
