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New capital requirements in Japan are credit positive: Moody’s

6th April 2022 - Author: Pete Carvill

Moody’s has said that Japan’s new economic capital regulations for insurers are credit positive by encouraging more efficient capital management.

moodys-logo_blueThe firm said in a new report that the regulations will improve insurers’ capital management, promote balanced risk-taking and make capital metrics more reflective of, and responsive to, interest rate changes. It said that insurers have already started to make changes to their economic capital and risk management ahead of the implementation of the new regime in 2025 as suggested by the Japan Financial Services Agency.

Soichiro Makimoto, a vice president and senior analyst at Moody’s, said: “We expect two key changes to capital requirements for Japanese insurers, namely valuing assets and liabilities based on market interest rates and calculating risks at higher risk charges. These changes will foster balanced risk-taking investment decisions.”

Moody’s said it expects the new regulations to require insurers to disclose quantitative metrics of economic capital positions in a standardised way. The stricter disclosure requirements will be credit positive, because greater transparency will incentivize insurers to improve economic capital management, especially for rated life insurers, which are mostly mutual companies with less disclosure components than public companies.

The agency also said that standardised capital requirements will spur insurers to reduce risks and manage capital more effectively. Currently, insurers calculate quantitative economic capital metrics based on internal models in their own enterprise risk management framework without mandatory disclosure. The lack of standardization and public scrutiny has given rise to an absolute-return driven, instead of a risk-return driven investment style amongst life insurers, heightening asset and currency risks over much of the last decade.

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Moody’s said that it believed life insurers would move to reduce interest rates and equity risks while taking on more credit risk. It said that the new regulations would encourage insurers to move towards capital-light protection products with low interest rate risks and away from long-term savings products with high interest rate risks.

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