Japan’s interest rate rise offers lessons for China’s insurers

To manage low interest, Japanese insurers shifted to foreign securities and protection-type policies.

Japan's life insurance industry is emerging from its "lost decades" with higher interest rates, offering lessons for China's life insurers facing similar challenges, John Zhu, Chief Economist Asia Pacific and Yaxin Chen, Economist, at Swiss Re Institute, said in a recent insight.

In the first quarter of 2024 (Q1 2024), China's life insurers reported investment yields of 2.16%, a decline of over 300 basis points since 2020, contributing to an estimated 20% year-on-year (YoY) decrease in net profit for 2023. 

Unlike Japan, Chinese insurers have limited options for overseas investments, further pressuring returns.

To manage low interest rates, Japanese insurers shifted towards foreign securities and protection-type policies, such as traditional life and medical insurance, which offer better margins. This shift was supported by deregulation and proved effective amid Japan's aging population.

Carefully managing mortality and morbidity risks could provide a profitability buffer for Chinese insurers. 

In Japan, improvements in mortality helped mitigate the negative spread problem, while higher-yielding foreign assets and cost-cutting measures further supported profitability.

Whilst China faces challenges similar to Japan's in the 1990s, such as real estate overexpansion and banking risks, it remains an emerging market with growth potential in green technology and the digital economy. 

In contrast to Japan, China's GDP growth is expected to stabilise, maintaining a higher rate than Japan's during its lost decades. 

However, China's life insurance penetration remains much lower than Japan's was in the 1980s, suggesting room for growth.

Both countries are pursuing reforms to improve corporate governance and financial systems, which could enhance productivity and capital allocation in the future.