Japan: Life insurers continue to be pressured by COVID-19 fallout

| 02 Jul 2021

The COVID-19 pandemic has dented life insurers' top-line growth while low interest rates have dampened their investment income significantly. Consequently, AM Best says that it is maintaining its negative market segment outlook on Japan's life insurance segment.

A new Best’s Market Segment Report, “Market Segment Outlook: Japan Life Insurance,” notes that Japan continues to face ongoing pressure domestically and abroad from the economic fallout from the COVID-19 pandemic.

AM Best’s negative outlook primarily reflects anticipation of headwinds for the near-term operating performance metrics of life insurers in Japan.

In AM Best’s view, the current and forecast macroeconomic conditions are likely to suppress top-line growth and profitability of most domestic life insurance companies. However, the global credit rating agency notes that most life insurers maintain very strong risk-adjusted capitalisation, and are expected to be able to withstand the potential impact on capital changes that may result from volatility in the global financial markets.

Life insurance sales

According to the report, domestic life insurance sales in Japan recovered gradually over the second half of the financial year ended 31 March 2021 (FY2020), on the back of a 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 tools to mitigate the impact of reduced face-to-face sales activity, as well as the promotion of new product features addressing heightened and emerging customer needs.

However, Japan’s real GDP for the period April to June 2021 is estimated to have decreased for a second consecutive quarter, mainly due to an extension of the country’s state of emergency over the COVID-19 pandemic. Downward pressure on economic activity may be exacerbated by uncertainty over the country’s vaccination rollout, although the risk of reduced activity is skewed toward business sectors that involve extensive face-to-face interaction.


AM Best remains confident that most Japanese life insurers will be able to maintain at least very strong levels of risk-adjusted capitalisation, in addition to financial leverage ratios that are generally more conservative than their global peers.

The amount of excess solvency margin held by most domestic insurance companies is also sizable relative to the value of equities and foreign bond holdings, which suggests that there is a significant amount of excess capital available to cushion against market volatility.

The major threat to Japan life insurers’ prospective economic solvency ratios continues to be the possibility of a steep reduction in domestic interest rates, especially excessive declines in super long-dated bond yields.