Japan Warned On Rescue Proposal For Life Insurers
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.