Headwinds persist for Japan's life insurers as low rates stifle investment income

However, most domestic life insurers maintain robust risk-adjusted capitalisation.

The pandemic has affected Japanese life insurers’ top-line growth whilst low interest rates have significantly dampened their investment income, according to an AM Best report.

The country continues to battle pressure coming from the home front and abroad due to the economic fallout resulting from the pandemic. The outlook mainly reflects anticipated challenges for the life insurers’ short-term operating performance metrics, the report said.

Whilst the current and expected macroeconomic conditions are likely to quell top-line growth and profitability of most domestic life insurers, most of them maintain robust risk-adjusted capitalisation and are likely to be able to power through the potential impact on capital changes stemming from global financial market volatility.

Domestic life insurance sales have gradually bounced back over the second half of fiscal year 2020, driven by the slow but steady resumption of sales activity and the implementation of new business strategies. 

These new initiatives include the increased use of online and digital and new product features addressing emerging customer needs, the report said.

Moreover, the amount of excess solvency margin held by most domestic insurers is also sufficient compared to the value of equities and foreign bond holdings, suggesting that there is a notable amount of excess capital available to withstand market volatility.

The possibility of the steep reduction in domestic interest rates, particularly too many declines in long-dated bond yields, continues to threaten life insurers’ economic solvency ratios, the report said.