Japanese life and non-life insurers’ underwriting fundamentals are likely to remain healthy overall in 2024, mainly because of waning effects from claims arising from the Covid-19 pandemic, according to Fitch Ratings report. As a result, Fitch has a neutral sector outlook for Japanese insurers.

Japanese life and non-life insurers continue to have large exposures to financial-market risks, although they maintain sufficient capitalisation.

Any significant stress in financial markets – especially in domestic equities and, to a lesser extent, foreign bonds and currencies – may hurt their capital adequacy.

Japanese non-life insurance market

Japanese non-life insurance market

Japanese non-life insurers are also likely to achieve adequate profitability in domestic underwriting in 2024, due partly to continued premium rate hikes in property insurance, reinforced by a virtual oligopoly.

However, non-life insurers will have to cope with significant natural catastrophe risks in Japan.

Fitch believes Japanese non-life insurers’ pricing of premium rates will continue to be favourable.

Premium rates for property insurance are likely to continue to rise to cope with insured losses from catastrophes, which will boost insurers’ results over the medium term.

Fitch expects Japanese non-life insurers to maintain strong capital adequacy, backed by accumulated core capital, including retained earnings and capital reserves.

Japanese life insurance market

Japanese life insurance market

Fitch Ratings believes Japanese life insurers’ earnings will be stable in 2024, even after considering the negative impact from volatile global financial markets, and they will maintain capitalisation at healthy levels in the near future.

Investment spread has become a larger portion of total earnings than before, at approximately 50%, due mainly to secular growth of positive investment spread and continued declines in average guaranteed yield.

Earnings from profitable protection-type insurance underwriting (such as health insurance and death protection), which are quite stable and much more profitable than in most jurisdictions outside Japan, still represent the major part of the total earnings.

Japanese life insurers suffered from sizeable insured losses caused by “deemed hospitalisation” as more people fell ill due to the Covid-19 Omicron variant.

This lasted until the first half of 2023, but halted after the government changed the rule related to these hospitalisations in May 2023.

Japanese life insurers’ earnings from underwriting started recovering from mid-2023

Fitch believes Japanese life insurers are likely to continue increasing their investments in super-long Japanese government bonds in 2024 instead of currency-hedged foreign bonds, driven by a moderate rise in Japanese-yen bond yields and increased currency-hedging costs.

As a result, Fitch expects Japanese life insurers’ interest-rate risks caused by asset and liability duration mismatches to further reduce.

Japanese Life Insurance Industry Forcast

Japanese Life Insurance Industry in 2026

Japanese life insurers face a series of tough challenges over the next five years because of the country’s ageing demographic and economic factors, according GlobalData report.

Japanese life insurance industry is expected to grow at a compound annual growth rate (CAGR) of 2.6% from $280 bn in 2022 to $315 bn in 2026, in terms of direct written premiums (DWP).

This CAGR is mainly due to sluggish sales of term life and savings products, and it is comparable to the 2.4% growth registered in 2022, which came after two consecutive years of decline in 2019 and 2020.

The industry growth is expected to remain sluggish in 2022 and 2023 as the term and savings products are not sought-after life insurance products among the older population.

Rating Outlook Distribution

The insurers are rated between ‘A-‘ and ‘AA-‘. Insurers with better credit profiles tend to have access to quality business, and apply prudent underwriting strategies in both Japan and overseas.

A healthy solvency buffer, sound profitability and operating stability are also key influencing factors.

Fitch believes overall profitability is likely to bounce back in FY2024, driven by the recovery in underwriting profitability as the Japanese government eased pandemic-related restrictions in 2023 and changed the “deemed hospitalisation” rule.

Investment income has also been sluggish due to a recent rise in currency hedging costs. Aggregate core profits at the Japanese traditional life insurers decreased to JPY1,541 billion (-41% yoy) in FYE23 and positive investment spread also decreased to JPY699 billion (-41% yoy) in FYE23, mainly due to the substantial rise in insured losses resulting from “deemed hospitalisation” for the Omicron Covid-19 variant.

by Nataly Kramer
You May Also Like