Major Japanese life insurers remain profitable despite the fact that the life sector has been facing low interest rates for more than two decades, says Moody's Japan.
"A major difference between the strategies of Japanese insurers to counter low rates and those of their global peers is that the strong pricing power of the major insurers and the use of standard mortality rates allow the industry in Japan to maintain particularly high margins on protection-type products," said Soichiro Makimoto, a Moody's Vice President and Senior Analyst.
Moody's conclusions are contained in its just-released report, "Can Japanese life insurers show global peers the way forward in an era of low rates?".
Interest rates have started rising in the US, which may lead to similar trends in other economies over time, but Moody's expects them to remain below historical levels for some time.
Japanese life insurers have developed effective liability management strategies to weather perennially low rates, and high-margin protection-type products have been instrumental in mitigating the impact of low rates. Life insurers in Japan and many other countries have been lowering the guaranteed rates of new policies, which coupled with the expiration of some older policies with high guaranteed rates, has resulted in declines in average guaranteed rates.
On the asset side, Japanese insurers are increasing exposure to riskier investments, such as unhedged foreign bonds, to enhance yield, though not as aggressively as Taiwanese life insurers. This asset-side strategy is credit negative.
Shifting to less rate-sensitive products also helps mitigate the impact of low rates, although Japanese insurers do not pursue this strategy actively.