Japan’s fundamentals to stay healthy in 2024 – Fitch Ratings

Japanese life insurers are likely to increase their investments in super-long government bonds in 2024.

The underwriting fundamentals of Japanese life and non-life insurers are forecasted to stay healthy in 2024, according to Fitch Ratings. This was attributed to the slowdown in aggravated claims caused by the pandemic. Overall, the rating agency observed the Japanese insurance sector as neutral.

The impact of the pandemic, particularly significant insured losses from "deemed hospitalisation" due to the Omicron variant, affected Japanese life insurers until the first half of 2023. 

However, this trend reversed after the government altered the rules in May 2023, leading to a recovery in the earnings from underwriting for Japanese life insurers from mid-2023 onward.

In 2024, Japanese non-life insurers are expected to achieve adequate profitability in domestic underwriting, partly attributed to ongoing premium rate hikes in property insurance. 

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The virtual oligopoly in this sector reinforces the positive outlook. However, non-life insurers will need to manage substantial natural catastrophe risks in Japan.

Fitch suggests that Japanese life insurers are likely to increase their investments in super-long Japanese government bonds in 2024, preferring them over currency-hedged foreign bonds. This decision is driven by a moderate rise in Japanese-yen bond yields and increased currency-hedging costs. 

Consequently, Fitch expects the interest-rate risks caused by asset and liability duration mismatches for Japanese life insurers to further decrease.

While Japanese insurers maintain sufficient capitalization, Fitch notes that they continue to have substantial exposures to financial market risks. Any significant stress in financial markets, particularly in domestic equities and, to a lesser extent, foreign bonds and currencies, could impact their capital adequacy.