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Best’s News & Research Service - October 25, 2016 11:13 AM (EDT)

A.M. Best Briefing: Negative Rates Drive Japanese Life Insurers to Ramp Up Foreign Investment

  • October 25, 2016 11:13 AM (EDT)
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Hong Kong //BestWire// - Japan’s life insurance companies have increased their allocations into foreign-currency-based investments over the past five years, currently accounting for 22% of total invested assets compared with 15% in 2011, according to a new A.M. Best briefing.

The Best’s Briefing, titled, “Expansion into Foreign Investment By Japanese Life Insurers,” notes that Japanese insurers have increased their overseas investments in search of higher returns, as government bond yields have decreased over the long term, and have been further exacerbated by the introduction of negative interest rates. Most recently, foreign investments grew by 7% year-over-year to JPY 78.7 trillion through March 31, 2016. The majority of these foreign assets are bonds, which can receive favorable treatment under the country’s regulatory solvency regime if they are currency-hedged.

Recently, the Bank of Japan introduced a “yield curve control,” which is expected to stabilize Japanese government bond (JGB) yields. This program, together with the current quantitative and qualitative monetary easing program, are instruments designed to control the yield curve by keeping the 10-year yield at 0%, close to the current market rates, in order to avoid excessive yield curve flattening. On the other hand, the central bank stated that it will intervene with the fixed-rated bond purchase action if the long-duration JGB yields spike and deviate significantly from the current levels. The new measure is expected to help stabilize the JGB yields while it will limit further steepening beyond the 10-year duration.

While stabilization in long-duration bonds with yields above zero should provide a positive impact on insurers’ earnings and ultimately balance sheet strength, the limited steepening in the yield curve necessities Japanese insurers to further increase overseas investments for higher returns.

Not only enhanced investment yields, but also changing demands on product scheme lead to increased investment into foreign assets. The prolonged ultra-low-rate environment has discouraged insurers from promoting traditional life insurance products such as single premium whole life insurance, which has a large savings component. The current low or negative rates mean insurers are not able to offer attractive yields on the savings portion. Insurers are experiencing increasing difficulty in achieving strong returns against the offered crediting rates, which are already low. However, the decrease in sales in these products is partially offset by an increase in sales of foreign-currency-based insurance products. These investments attract a growing retirement plan market looking for higher returns.

As these types of products are priced based on foreign currencies such as the U.S. or Australian dollars, insurers are able to offer relatively high crediting rates by using the government bond yield of the United States or Australia. Policyholders could earn the higher cash value or payment when the Japanese yen depreciates against the foreign currencies. In contrast, the amount of the payments policyholders receive would decrease in Japanese yen terms if the yen strengthens. Although there remain ongoing concerns regarding the potential introduction of tighter regulation to disclose commissions on sales of these types of life insurance products through banks, the foreign-currency-based products are likely to remain a formidable alternative for insurers to support top line.

However, the extent of growth in foreign assets would vary based on the insurers’ balance sheet strength. Insurers with solid capitalization and strong financial flexibility could see better choices with regard to credit quality and hedging ratios on foreign assets.

To access a copy of this briefing, please visit >http://www3.ambest.com/bestweek/purchase.asp?record_code=255083 .

A.M. Best is the world’s oldest and most authoritative insurance rating and information source.



Japan International Bonds (Securities) Hong Kong Press Release Asia Currencies Insurance


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