Japan's life insurance sector sets example for managing low rates

| 25 Aug 2020

Japan's life insurance market provides insights into the future of insurers elsewhere concerning low interest rates as insurers in Japan have been affected by ultra-low interest rates for much longer than their global peers, Fitch Ratings says in a new report.

The report, titled "Japanese Life Insurance Is Blueprint for Managing Low Interest Rates", says that the coronavirus pandemic will prolong the ultra-low interest rates that Japanese life insurers have been faced with for more than two decades — and that US and European life insurers have been affected by since the 2008 global financial crisis. Policymakers and central banks will aid economic recovery and alleviate pressure on borrowers through the use of low interest rates — potentially for a long while after the pandemic eases.

Life insurers' investment margins become constrained by low interest rates. This reduces the insurers' ability to meet investment guarantees and weakens their earnings and capital. The pressure is increased by fairly narrow corporate bond spreads.

The Bank of Japan decreased interest rates significantly in response to the economic stagnation in the early 1990s, and rates have been low in Japan ever since. Japanese life insurers have mitigated the effects of these low rates by adopting various product, investment and business strategies. For the most part, they have maintained their credit ratings.

Other major insurance markets faced with persistently low interest rates — notably in Germany and the US — have developed similar patterns. Japan's life insurance market demonstrates that rating downgrades are not inevitable in a low interest rate environment, as long as insurers adapt their business models to the new operating environment.

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