Moody’s Japan KK says in a new report that its stable 2020 outlook for Japan’s life insurance sector is supported by strong and stable underwriting margins that will continue over the next 12-18 months.
“Underwriting margins – which accounted for around 80% of our rated life insurers’ core profits over the last five years – will remain strong thanks to the industry’s substantial pricing power on both mortality and morbidity products,” said Mr Soichiro Makimoto, a Moody’s vice president and senior analyst.
Mortality margins will remain on a slow structural decline, but their impact will be muted by steady gains in morbidity margins, which collectively will offset the challenge from prolonged ultralow interest rates.
“In addition, life insurers’ capital will remain strong, supported by high profit retention and the issuance of hybrid bonds,” added Mr Makimoto.
However, investment risks will rise gradually as insurers seek to boost yields in a persistently low interest rate environment, but the risks will be offset by an increase in capital, which will serve as a buffer for potential losses.
Meanwhile, the duration gap improvement will stall. With regards to Japan’s ageing population, Moody’s expects the impact on life insurers to be mildly credit negative, as insurers are already adopting strategies to mitigate risks by shifting away from mortality products, and focusing instead on medical and retirement products, as well as gradual overseas expansion.