Japanese life insurance market:
some historical and current perspectives
Michael Freeman
Japan Life Insurance market
–
Introduction and profile
–
Demographics and the impact of the
aging population
–
Interest Rates
–
Variable Annuity and Fixed Annuity
market
US 528 JP 372 US 442 JP 401 FR 85 CN 12 CN 177
Life premium volume in USD billions
● 2000 ●2014 FR 173 UK 235 UK 180
Source: Swiss Re / Sigma
Japan has the world’s second largest life insurance market.
Life insurance premium volume, USD billion
Premium Mix by category of insurer
Source: Statistics of Life Insurance Business in Japan and Zenkyoren (JA) data.
Japan Post 33% [CATEGOR Y NAME] [PERCENTA GE] [CATEGOR Y NAME] (17) [PERCENTA GE] Domestic 3% [CATEGOR Y NAME] (6) [PERCENTA GE] FY1995 [CATEGORY NAME] (Listed) [PERCENTAGE ] [CATEGORY NAME] (4) [PERCENTAGE ] [CATEGORY NAME] [PERCENTAGE ] [CATEGORY NAME] (5) [PERCENTAGE ] [CATEGORY NAME] (5) [PERCENTAGE ] [CATEGORY NAME] (4) [PERCENTAGE ] [CATEGORY NAME] (13) [PERCENTAGE ] FY2014 4
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 [%]
10 year JGB and Guarantee Rate
10 year JGB Yields (Yield to Subscribers)
Guarantee Rate
(Range of Typical Products)
Negative Yield Gap - Policies issued in later 1980’s
Bankruptcy case of life insurers
Company Date of failure Total Assets (Yen billion) Post-Restructure Guarantee RateRelief Company and
Sponsor Current
Nissan April 1997 2,100 2.75% Aoba (Artemis) Prudential Life
Toho June 1999 3,000 1.50% GE Edison (GE Capital) Gibraltar Life
Daihyaku May 2000 2,500 1.00% Manulife (Manulife) Manulife
Taisho August 2000 200 1.00% Azami (Yamato Life) Prudential Gibraltar Financial Life
Chiyoda October 2000 3,500 1.50% AIG Star (AIG) Gibraltar Life
Kyoei October 2000 4,600 1.75% Gibraltar (Prudential) Gibraltar Life
Tokyo March 2001 1,100 2.60% T&D Financial (Daido / Taiyo Life)
T&D Financial,
subsidiary of T&D Holdings Yamato October 2008 300 1.00% Prudential Financial Japan Prudential Gibraltar Financial Life
-952.3 -949.3 -897.5 -806.8 -739.8 -550 -286.7 -135.5 -276.8 -292.5 -196 -107.5 -37.7 246.3 -1200 -1000 -800 -600 -400 -200 0 200 400 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Combined negative spread of 4 large insurers
(1)(Yen billions)
7
(1) Nippon, Dai-Ichi, Meiji-Yasuda and Sumitomo Source: Life Insurance Association of Japan
Yen [Y VALUE] bn
Yen [Y VALUE] bn
Yen [Y VALUE] bn
USD 6.5 bn Yen [Y VALUE] bn
USD 5.9 bn Yen [Y VALUE] bn USD 14.8 bn Yen [Y VALUE] bn USD 0.2 bn Yen [Y VALUE] bn USD 14.0 bn Daido Life Taiyo Life T&D Holdings Lifenet Sony Financial Holdings Dai-ichi Life
Japan Post Insurance
2002 2003 2004 2007 2010 2012 2015
Listed Life Insurers, by listing date and current market capitalization
Market capitalization at March 29, 2016. Daido Life and Taiyo Life as at date of listing. T&D Holdings: Taiyo Life, Daido Life, T&D Financial Life
Sony Financial Holdings: Sony Life, Sony Assurance, Sony Bank
Life Insurance Acquisitions by Japanese Multi-nationals
in Australia and US (2011 onwards)
Year Acquiror Country Target Transaction Local CurrencyTransaction ValueUSD billion (1)
2011 Dai-ichi Life Australia . TAL Acquired additional 71%
to full ownership AUD 1.2 billion 1.2 2015 Dai-ichi Life United States . Protective Acquired 100% USD 5.6 billion 5.6
2015 Meiji-Yasuda United States . StanCorp Acquired 100% USD 5.0 billion 5.0
2015 Sumitomo Life United States . Symetra Acquired 100% USD 3.7 billion 3.7
2015 Nippon Life Australia . MLC Life To acquire 80% AUD 2.4 billion 1.7
TOTAL 17.2
(1) Based on USD exchange rate at date of transaction completion
•
Demographics and the impact of the aging
Sources: (Population projections) National Institute of Population and Social Security Research, as of January 2012; (Life expectancy) Analysis of Life Insurance Association of Japan (LIAJ) 2007 annuitant mortality table. The LIAJ annuitant mortality table reflects future mortality improvement. 0.5 1.0 1.5 2.0 2.5 2015 2020 2025 2030 2035 Milli o n p eo p le Projection year
Projected population aged 65
20.0% 25.0% 30.0% 35.0% 2015 2020 2025 2030 2035 Projection year
Percentage of total population aged 65 or greater
• The number of people reaching age 65
is projected to continue at a rate of approximately 1.5 million people annually.
• The percentage of the population aged
65 or greater is projected to grow significantly over the next 20 years.
# of Households (millions) Change
(2025 vs 2015)
2005 Mix 2015 Mix 2025 Mix
Senior • Age 65+ 13.5 30% 18.9 38% 20.2 40% 7% Midd le Ag e Family • Age 30-65 • Married w/children 15.0 33% 14.2 28% 13.5 27% (5%) Couple • Age 30-65
• Married w/o children 4.6 10% 4.3 9% 4.2 8% (2%)
Single •• Age 30-65
Single 6.8 15% 8.2 16% 8.5 17% 4%
Youth • Age < 30 5.3 12% 4.6 9% 4.2 8% (10%)
Total 45.2 100% 50.2 100% 50.5 100% 1%
Demographic Shift by Number of Households
116 64 46 36 39 51 59 65 74 90 112 140 176 214 266 297 293 239 130 47 9 0 50 100 150 200 250 300 350
Lifetime Medical Expenses Yen 26.0 million
Under 70 50%
70 or over 50%
Lifetime Medical Expenses, Estimates in Fiscal 2013
Year Male Female Average period of a life without physical limitations Average period of a life with physical
limitations Average life expectancy Average period of a life without physical limitations Average period of a life with physical
limitations
Average life expectancy
2013 71 years 9 years 80 years 74 years 12 years 86 years
7.4 6.6 5.3 3.4 1.8 1.1 0.2 0.4 0.8 1.2 1.1 0.9 3.0 6.4 15.0 33.8 59.2 84.8 0.0 20.0 40.0 60.0 80.0 100.0 0 2 4 6 8 65-69 70-74 75-79 80-84 85-89
90-Population Number of People Certified Certification Rate
Long-Term Care Rates
Certification Rate of Long-Term Care by Age Group (2014)
Source: Ministry of Health, Labor and Welfare / National Institute of Population and Social Security Research
(millions)
2.9 6.1 7.7 7.7 7.9 13.0 53.1 58.5 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0
Long-term care expense Saving Accident Post-retirement Educational and marriage expenses of children Funeral expense Financial Protection for dependents Medical or hospitalization expense
Source: Japan Institute of Life Insurance Consumer Survey, 2015
15
Drivers of customer demand for life insurance coverages, % of respondents
Japanese Medical Insurance Example
(1) Up to 120 days covered per hospital stay for diabetes, high blood pressure, liver cirrhosis, and renal failure. Per-stay and cumulative total limitations are waived for cancer, myocardial infarction, or stroke``
(2) 5x for outpatient surgery, 20x for inpatient surgery
(3) Treatments defined by the Ministry of Health, Labor and Welfare
(4) Cancer benefit on first cancer diagnosis, or subsequent hospitalization for cancer treatment; myocardial infarction or stroke benefit on hospitalization for treatment. Limited to one payment per cause per year
(5) Limitation waived for certain surgeries, radiotherapies, thermotherapies, and chemotherapies
Whole of life coverage Premium pay to 60, 65, or whole life Limited cash value
No death benefit
Base coverage
• Yen 10,000 daily benefit for disease and accident hospitalization. Up to 60
days per hospital stay, with cumulative limit of 1,000 days(1)
• Lump sum of 5x or 20x daily benefit for specified surgeries(2)
• Cost of advanced medical treatment, up to cumulative limit of Yen 20 million(3)
Optional coverage
• Yen 1 million lump sum on cancer, acute myocardial infarction, or stroke(4)
• Yen 10,000 daily benefit for outpatient cancer treatment. Up to 60 days per
treatment(5)
Base premium Male age 40, pay to age 60
Yen 7,502 / month
Base + option premium Male age 40,
pay to age 60
Yen 13,502 / month
New Business Margins – 10 companies average
PV Profit (after tax) / PV Premiums from total new business issued
Japanese Fiscal Years
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2010 2011 2012 2013 2014
Source: Company disclosures and Willis Towers Watson analysis
Negative Interest Rate Policy (NIRP)
• At end January 2016, the Bank of Japan (BoJ) introduced negative interest
rate of 0.1% on the “policy rate balance” of reserves held by financial institutions at the BoJ.
– The majority of reserves, “basic balance”, continue to earn 0.1%
– The “macro add-on balance” earns zero %
• At start of March 2016, 10 Year JGB’s were auctioned at a negative yield of
0.024%.
• Objectives of NIRP
– Encourage bank lending and encourage investor shift from bonds to
riskier assets
– Counter Yen appreciation
– To reduce longer term yields to allow the Japanese government to
finance at (near) zero cost.
10 Year and 30 Year JGB rates from January 1, 2016
-0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 10Y 30Y ( % )Source: Ministry of Finance Japan
10 year JGB yield becomes
negative
Classification of bonds under Japanese statutory accounting
Categorization Comment Balance sheet
Held to maturity (HTM)
HTM bonds are not to be sold before redemption.
If a company sells HTM bonds, all HTM bonds are re-classified to AFS and the company is not allowed to classify to HTM for two years.
Amortized historical cost
Reserve matching (ALM)
ALM bonds may be used up to the level of policy reserves. ALM bonds must specify the policy group whose reserves are to be matched. The duration of the ALM bonds must lie between 80% and 125% of the corresponding liability duration, and bonds can be sold to reduce duration gaps.
Amortized historical cost
Available for sale (AFS)
- Market value
Life Insurance Reserving Overview
• Reserving bases reflect historical conditions at the time of policy issues and are not reassessed to reflect current or prospective investment returns, expenses, or claims rates.
• Policy reserves are the maximum of: – Surrender values,
– Reserves based on the assumptions for product pricing, and
– Standard valuation basis reserves.
• The standard valuation basis defined by the Financial Services Agency (“FSA”) is as follows: – Method: Net level premium.
– Mortality assumption: Mortality table prepared by the Institute of Actuaries of Japan and approved by the FSA. The current table is the Life Insurance Standard (LIS) Table 2007
– Valuation interest rate assumption: Rate determined by formula which differs by product type
– The same reserving assumptions are applied throughout the lifetime of a policy dependent on its issue date (“locked-in”).
• The appointed actuary’s opinion is required to perform an annual reserve adequacy test, if this test is not passed, reserves are required to be strengthened.
– For medical (“third-sector”) products, a separate reserve adequacy test may be required.
– For variable annuities (VAs), guarantee reserves are required.
• Solvency capital requirements based on specified RBC factors
Standard Valuation Interest Rate
• Regular premium policies: The standard valuation interest rate is
recalculated every 12 months, using 1 October as the calculation date.
• The base rate is calculated as the
– minimum of {Average JGB10 over the last 3 years, and Average JGB10
over the last 10 years}.
– A prudential margin (i.e., a “safety factor”) is applied to the selected
average rate. The prudential margin:
– 0.9 for the part of base rate between 0% and 1%, – 0.75 for the part between 1% and 2%,
– 0.5 for the part between 2% and 4%, and – 0.25 for the part above 4%.
• The standard valuation rate is then applied to reserves on business written
with effect from 1 April in the following year and applied throughout the lifetime of the policies written in the following fiscal year.
Standard Valuation Interest Rate
• Single Premium policies: The standard valuation interest rate is
recalculated every 3 months, using 1 January, 1 April, 1 July and 1 October as calculation dates.
• The standard valuation rate is then applied to reserves on business written
with effect from 3 months after the calculation date and applied throughout the lifetime of the policies written under the given valuation interest rate.
• Single Premium Whole of Life : The base rate is calculated as the minimum of {Average of (JGB10 + JGB20)/2 over last 3 months and Average of (JGB10 + JGB20)/2 over last 1 year}.
– Prudential margin is also applied.
• Single Premium Endowment and Annuities: The base rate is calculated as the minimum of {Average JGB10 over last 3 months and Average JGB10 over last 1 year}.
– Prudential margin is also applied.
Standard Valuation Interest Rate
At 1 April 2016
, the standard valuation interest rates are:
•
Regular payment products:
1.0%
–
Likely to reduce to 0.25% at 1 April 2017
, based on current
JGB yields.
•
Single premium whole life (SPWL):
0.75%
–
Will reduce to 0.25%
at 1 July 2016
•
Single premium endowment (SPE) / single premium annuity
(SPA):
0.5%
–
Will reduce to zero
at 1 July 2016
•
Responses of life insurers:
–
Diversify investment portfolio away from JGBs, but
alternative strategies are limited by additional risk
costs
–
Products: withdraw Yen-denominated single premium
products
–
Increased focus on non-Yen denominated products
–
Protection business continues to provide strong
The distribution of insurance products through banks and securities
companies was implemented over several phases of market deregulation
28 October 2002 – • Individual annuity insurance, including variable annuities and
fixed annuities
December 2005 – • Single premium whole life insurance
• Single premium endowment insurance
• Short-term regular premium endowment insurance
• Saving type pure endowment insurance December 2007 – • Term insurance
• Regular premium whole of life insurance
• Long-term regular premium endowment insurance
Sales of Single Premium Products
(FY)
Source: Statistics of Life Insurance in Japan 29
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Single premiums written over fiscal year (Yen billion)
Sales of Variable Annuity Products
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (USD bn) (FY)• In the early 2000s, popular VA products in the had an accumulation phase of 10 years with a GMAB guarantee
• Typical fee levels were 2.35% pa plus asset management fees.
• Fund switching allowed free of charge up to a specified number of times per year
31
Illustration of typical VA product
Upfront fee: 5% of single premium Death benefit Fund value = surrender value Base sum assured
Case 1: If fund value exceeds the base sum assured, the fund value is the annuity fund
Case 2: If fund value is less than the base sum assured, the base sum assured is the annuity fund
The annuity fund can be received as a lump sum or as annuity
payments
An additional 10% of the base sum assured is paid out upon accidental death
The accumulation phase can be chosen from a minimum of 10 years up to a maximum of age 90
Si n gle p rem iu m In vest ed am o u n t C ase 1 C ase 2
• Due to low yields on Japanese government bonds and market sentiment toward yen depreciation after some years of yen appreciation, foreign currency FA
business also gained popularity.
32
Illustration – Foreign Currency FA Product with 5,7 or 10 years interest guarantee period
Selected currency of US dollars or euro Accumulation phase can be extended to a maximum of 40 years, up to age 90. Surrender value is subject to a MVA Annuity fund can be received as a lump sum or as annuity payments.
The lump sum payment can be received in US dollars, euro, or yen. The annuity payments are in yen.
The policyholder bears exchange rate risk.
Bonus additional crediting rate of 1% in first policy year
Single premium (in selected currency) Annuity fund (in selected currency) Fund value (in selected currency) D eat h b enefit A cc ide nt al de at h be ne fi t (110% o f fun d val ue )
Issue date End of first policy year Annuitization date
Accumulation phase
+1% crediting rate
Yen/USD Exchange Rate.
(FY) 33 40 50 60 70 80 90 100 110 120 130 140 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Exchange rates at end of fiscal year
USD/JPY
(Yen)
Yen appreciation
• Example hybrid between a foreign currency FA and a VA.
• A certain portion of the single premium is invested in a foreign currency (FA
portion), which covers the GMAB, by earning the guaranteed interest rate.
• The remaining (VA portion) is invested in a mutual fund including equities.
34
Illustration – VA/FA Hybrid
Currency of the FA portion is selected between AUD and USD
The AUD version allows choice of GMAB of 100% or 110% of single
premium (only 100% for USD)
The surrender value is subject to a MVA. Sin gle p remiu m (i n sele ct ed cu rr en cy ) FA portion 100 % o f sin gle p rem iu m (in se lect ed cur rency) Extra return VA portion No upfront fees Death Benefit
Fund Value Surrender Value
Surrender value in yen
• Aging population is driving the profile of insurance needs in Japan, including demand for medical expenses products
• Ultra-low / negative interest rates are eliminating the viability of Yen-based
savings products
• Low Yen yields have driven consumers towards foreign currency denominated
products
• Large Japanese life insurers are now expanding their businesses outside
Japan
