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Life Insurance in Japan


an actuarial perspective
Following the earlier article in Actuary Australia Living
with Low Interest Rates (May 2008) that profiled recent
trends in the life insurance markets of Hong Kong and
Taiwan, this article describes key drivers behind current
developments in the life insurance market in Japan
and some of the challenges being faced by actuaries.

Investment Markets
Interest rates have stayed low in Japan over many years. Ten-year
Japanese government bond yields have remained in a range of
1% to 2% throughout the last decade and stand at around
1.5% at the time of writing this article in September 2008 (see
chart). Interest rates on bank deposits are close to zero.
More remarkably, while the Australian stock market index
has gained 230% over the last 20 years (despite recent falls),
the Nikkei stock index is now at 50% of its value 20 years ago
(see charts).

By Michael Freeman

apan has the second-largest life insurance market in the


world, after the U.S. Total life insurance premium income in
2007 was $330 billion, representing approximately one-sixth
of total world life insurance premium income. This figure is also 10
times the premium income recorded by life insurers in Australia.

Shifting Demographics
Increased longevity, combined with the low birth rate, is making
Japan one of the most aged societies in the world.
At the current time, 43% of the population is aged 50 or over
and 22% of the population is aged 65 or over. By 2050, 59% of
the population is projected to be aged 50 or over and 40% to
be aged 65 or over.
This demographic shift has built demand for retirement
savings and protection products relevant to the needs of the
aging population. Most significantly, more than 80% of Japans
personal financial assets are held by people over the age of 50.
Australia, like many other developed countries, is also expecting
an aging of the population over the same period. However,
Australias proportion of the population aged 65 or over is
expected to reach only 22% in 2050 the same proportion as
exists today in Japan.
Proportion of population aged 65 or over
Australia
Japan
2005
13%
22%
2020
17%
29%
2030
20%
32%
2040
21%
36%
2050
22%
40%
Sources: Australian Bureau of Statistics; National Institute of Population
and Social Security Research, Japan

ACTUARY A U S T R A L I A December 2008

Providers
Providers in the life insurance sector in Japan can be grouped
into three categories Japan Post Insurance, the private sector
and the kyosai or co-operative insurance organisations.
Japan Post Insurance. Japan Post Insurance currently has
assets in excess of Yen 100 trillion (approx A$1 trillion)
and more than 100 million policies in force. The business is
currently government-owned but is to be progressively sold
to the private sector.

Private Sector. Despite the overall size of the life insurance

Product Trends

market, the private sector industry is remarkably consolidated,


with a current total of 44 registered life insurers. This number
has increased over the last two years, with six newlyregistered insurers in 2007/08.
Kyosai. These cooperative insurance organisations have
a significant role in the overall life insurance sector. The
largest, Zenkyoren (also known as Japan Agricultural or JA),
has assets of approximately Yen 44 trillion (A$490 billion). In
addition, there are numerous smaller co-operative insurance
organisations that until recently had been less-regulated. In
order to continue underwriting business, these kyosai have
been required to become either a fully-registered life insurer
or to establish themselves as one of a new category of smallamount, short-term insurers with licenses restricting the sum
assured and the term of business that can be written.

The continuing low interest rate environment and lowperforming equity market have naturally influenced the types
of products favoured by retail customers. Products that provide
a guaranteed return of 1.0% to 1.5% can still be attractive to
customers, when faced with the alternative of zero return on
bank deposits. Otherwise, variable (unit-linked) products that
offer the prospects of additional returns through equity and
international investments are most typically offered with some
form of guarantee (even if only that of a guaranteed return of
premium) to make them acceptable to consumers.
Most products are offered solely in Yen and some savings
and investment products offered in foreign currencies, including
US dollars, Euros and Australian dollars. In the case of these
foreign-currency-denominated products, the policyholder is
credited with higher interest rates than can be obtained in Yen
but also takes on the currency risk.

Mutuals and Demutualisation


In Australia at the start of the 1990s, three large mutual life
insurers dominated the life insurance sector. By the end of the
decade, all three had demutualised.
In Japan, six mutual life insurers remain, comprising between
them two-thirds of the life insurance assets of the private
sector providers but this represents a significant reduction
in the number of mutual insurers, down from 16 a decade
ago. The decline reflects demutualisation, consolidation and,
in some cases, insolvency and subsequent rehabilitation under
proprietary ownership.
Over more recent years, the financial status of the remaining
mutuals has strengthened significantly as a result of the
combination of stabilised asset values, internal reconstruction,
sales of profitable new business and the progressive run-off of
business with high interest rate guarantees. Solvency margin ratios
have increased, while the largest mutuals have strengthened their
reserves and annual losses from negative interest rate spreads have
declined to one-fifth of their levels at the start of the decade.
One of the six mutuals has announced plans to demutualise
during 2009. This mutual alone has some 10 million policyholders.
Regulation in Japan stipulates that share allocations on
demutualisation be made on a contribution basis, requiring a
detailed contribution analysis to be performed in respect of each
policy, with shares being allocated strictly in accordance with
contribution. Unlike in Australia, no component of the share
allocation is permitted on a per policy or per member basis.
Performing the required contribution analysis represents a major
actuarial and processing task.

Variable annuities.
Retirees in Japan typically receive lump sums on retirement,
paid on a tax-concessional basis. The demand for appropriate
investment products for these lump sums and other accumulated
financial assets is now driving the growth in the variable annuity
market in Japan, with variable annuity funds under management
reaching approximately Yen 16 trillion (A$175 billion) in 2008.
Consistent with the high proportion of personal sector
financial assets that are held in cash and deposits, consumer
expectations of guarantees on variable products is driving the
form of products being offered.
All products provide a guaranteed minimum death benefit
(GMDB), with almost all providing one form or another of living
benefit guarantees. This can take the form of a guaranteed
minimum accumulation benefit (GMAB), guaranteed minimum
withdrawal benefit (GMWB) or guaranteed minimum income
benefit (GMIB). Funds are typically invested in both Japanese and
foreign assets (both bonds and equities) but in order for insurers
to be able to manage the guarantee risk, the mix of assets is
typically prescribed.
The pace of new product designs has quickened over the last
two years as insurers have vied for advantage in product offerings,
resulting in a highly-dynamic and competitive marketplace.
Challenges for actuaries engaged in the pricing and risk
management of these products include:
Modelling the form of guarantees accurately on a stochastic
basis, whether real world (for capital assessment) or marketconsistent (for pricing and value assessment).

A C T U A RY A U S T R A L I A December 2008

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Selecting appropriate models of policyholder behaviour

when most companies have less than five years of data


from which to assess experience not enough to generate
robust analysis.
Medical expenses coverage.
Japan provides wide-ranging medical coverage accessible to all,
funded from compulsory payroll contributions and co-payments
for medical services received. Nevertheless, medical, cancer and
personal accident coverage has become a major part of the
insurance market as consumers seek the comfort of receiving
additional benefits on hospitalisation or on other medical events.
Such policies offer fixed benefits, including daily benefits paid in
the event of hospital stay, lump sum payments in the event of
the diagnosis of cancer or other critical illness and fixed benefits
payable in the event of specified surgical treatments. Importantly
from a risk management perspective, premiums are fixed for the
term of the policy, which may be for 10 years or more or for
whole of life.
As with the variable annuity market, there is rapid turnover of
new products and product enhancements as insurers seek to
gain competitive advantage by adjusting the price and scope of
benefits offered.
For actuaries working on the pricing and reserving for these
products, risk management challenges include the assessment
of long-term trends in benefit outcomes, arising from the longterm fixed premium and benefit guarantees.

Financial Reporting
Reserving regulation for life insurers in Japan is primarily
based on prescribed methodology and parameters. Incremental
modifications to required solvency capital and reserves,
most particularly in respect of variable business, have been
implemented in recent years. Further changes within the current
framework are expected shortly.

In addition, the industry regulator, the Financial Services


Agency, is currently undertaking a comprehensive review of all
reserving and solvency requirements for the life insurance sector
following a provisional report published in 2007. The aim is to
move to requirements that reflect emerging global standards of
solvency assessment for life insurers.
There has been relatively little change in insurers primary
financial reporting requirements in Japan in recent years.
However, 19 insurers now include embedded value information
as part of their supplementary disclosures. Until recently, all
such disclosures were prepared on a traditional embedded-value
basis. In 2007 the three life insurance operating subsidiaries of
the publicly-listed T&D Holdings supplemented their traditional,
embedded-value disclosures by restating embedded values on a
market-consistent basis in conformity with European Embedded
Value principles.
Challenges for actuaries working in the preparation of
embedded values include:
Modelling the intricacies of benefits on products, both
traditional and variable.
Assessment of long-term claims and decrement assumptions
on products with fixed premiums and benefits.
The significant size of some business portfolios and the
required computer capacity and processing time.
The range of actuarial requirements and challenges means that
there is an increasing need for actuaries working in Japan to
specialise in order to be effective, whether in the pricing or risk
management of a particular product type or in the financial
modelling of options and guarantees or in contribution analysis.
As a result of increases in the breadth of financial analysis
being performed by insurers, coupled with new market entrants
and a fast-paced product landscape, the demand
for actuarial skills in the life insurance sector
in Japan has likely never been greater than it
is today.
Michael Freeman

Michael.freeman@towersperrin.com

ACTUARY A U S T R A L I A December 2008