Heightened market risk amid low interest rates and prolonged economic uncertainty likely will hamper insurers’ ability to achieve sustainable and consistent corporate value growth, according to AM Best.
As discussed in the Best’s Market Segment Report, “Japan Life: Insurance’s Reduction of Market Risk Increasingly Crucial to Sustain Corporate Value Growth,” AM Best is of the view that Japan life insurers’ operating return on embedded value (operating ROEV) —a gauge of an insurer’s ability to raise its corporate value or embedded value in the absence of economic and other non-operating variances—will remain suppressed over the short to medium term, as the social and economic impacts from the COVID-19 pandemic, as well as the adverse effects of low-interest rates domestically and overseas, are likely to persist for at least several years.

In light of this, Japanese life insurance companies have recognised the burgeoning need to reduce their exposure to market risk, and have sought to mitigate such risk further by enhancing asset-liability management.

AM Best notes that most major domestic life insurance companies have taken steps to reduce the market risk in their investment portfolios. Most insurers have been proactively expanding their purchases of super long-dated Japanese government bonds to narrow the duration gap, while several have continually cut back on their holdings of domestic equities and unhedged foreign currency bonds.

With the expected reduction in market risk, AM Best has observed that more of major Japanese life insurers’ capital has been allocated proportionally to take on more credit risk by increasing overseas corporate bond investments to earn a higher expected spread to improve the overall risk-return profile.

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