AM Best remains stable on Japan’s life insurance sector amidst premium boom

Global credit ratings agency AM Best has maintained its stable outlook on Japan’s life insurance market segment, citing in part the growth in premium income and stable core profits that are supported by higher levels of investment income.

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According to the agency, premium income has increased considerably throughout the past two years, driven mainly by rising sales of single-premium savings-type products.

An increase in sales of savings-type products in a higher interest rate environment also reportedly led to a strong year-over-year surge in the annualised premiums of new policies in fiscal year 2023.

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It’s also worth noting, that despite Japan’s ageing and shrinking population, total annualised premiums of policies in force have been fairly stable in recent years.

All in all, AM Best states that it expects the sales of savings-types of products is likely to continue over the next 12 months, owing to the favourable interest rate environment both in Japan and overseas.

“The life industry is expected to experience continued growth in annualised premiums of new policies but sluggish performance in annualised in-force premiums. Overall, the industry’s premium income may still fall short of levels seen in fiscal year 2023, as the growth in premiums driven by savings-type product sales is typically transient and vulnerable to unfavourable fluctuations in interest rates,” AM Best said.

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The agency also notes that most Japanese life insurers experienced a substantial improvement in core profits throughout fiscal year 2023, which was primarily driven by the decline in benefit payments associated with COVID-19, which marks a stark contrast to fiscal year 2022 when the industry experienced a temporary but considerable surge in hospitalisation benefit payments linked to the pandemic.

Furthermore, AM Best also explained that Japan’s life insurance industry’s investment income and interest margins have been facing pressure throughout recent years due to elevated currency hedging costs, despite higher foreign interest rates.

In response to this, a large number of Japanese life insurers have adjusted their investment strategies in fiscal year 2023 by increasing purchases of long-term Japanese Government Bonds (JGBs), as domestic interest rates rose, and by also reducing holdings of hedged foreign bonds.

Overall, AM Best went on to note that it expects the life industry’s investment income to benefit from higher JGB yields over the medium term, and for the negative impact of higher hedging costs to gradually diminish, with a potentially narrowing gap between interest rates in domestic and foreign markets.