Japan Warned On Rescue Proposal For Life Insurers

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In a preemptive strike on a proposal by a Japanese policy advisory board to allow life insurers in the country to cut their guaranteed yield payments to policyholders, Standard & Poors, Tokyo, has warned that it would issue a downgrade, possibly to the point of declaring default, against any such move.

The Japanese government is considering the proposal made by the Financial System Council. The countrys life insurance industry is trapped between rising policyholder claims payments and falling investment returns. “Major Japanese life insurers are paying an average of 3.5%-4% returns on outstanding policies while they earn about an average of 2%-2.5% on their investments,” says Runa Ichihari, analyst with S&P, Tokyo, in an interview with National Underwriter. These negative spreads pushed five life insurers into bankruptcy last year alone, she notes.

“Once signed into law, the councils proposal will allow strapped life insurers–most of which are likely to collapse–to stay afloat by reducing the burden caused by rising claims payments,” says Ichihari.

With the countrys benchmark Nikkei index at a 17-year low, it does not appear as if the spreads will narrow anytime soon. Additionally, recent key indexes suggest the economy will slide further into recession.

The financial woes caused by widening negative spreads are serious enough to hamper any attempt at improving Japanese life insurers finances. “For many life insurers, negative spreads are a big burden and make efforts to improve their operating performance prohibitively costly,” says Hideyuki Ito, analyst with Moodys Investors Service, Tokyo, in an interview. He is the co-author of Japanese Life Insurance 2001 Industry Outlook.

Moodys also warns that any reductions in payouts to policyholders by a Japanese insurer will cause a downgrade.

The current financial woes, which will spell more misery for many Japanese insurers, are likely to give international insurers an opportunity to cut further into the worlds second-largest life insurance market.

“International insurers dont have any negative spreads issue,” says Ichihari. They control about 10% of the market and turn a profit despite the gloomy economy (see NU, Feb. 19).

“International companies will have a good opportunity to expand their business in Japan,” says Ito. Japan’s efforts to export its way out of recession by devaluing the yen will make international inroads into the countrys life insurance market much easier, note the analysts.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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