A 30% drop in Japanese stock prices has drawn attention to Japanese life insurers’ variable annuity minimum guarantee provisions.

Masahiko Miwa, an analyst in the Tokyo office of Moody’s Investors Services, discusses the guarantees and other issues in a review of Japan’s life insurance industry outlook.

A new Financial Instruments and Exchange Law has hurt sales of VA contracts with guarantees in Japan by discouraging aggressive sales of financial products by banks, Miwa writes.

Although the new law may be hurting VA sales, consumer uncertainty about stock prices should keep sales from falling further, Miwa writes.

“Some insurers have increased their reserves for variable annuities with minimum guarantees,” Miwa reports.

“However, equity holdings in general account assets have exhibited much higher risk, especially at the major Japanese life insurers,” Miwa writes.

The drop in Japanese stock prices has caused large drops in unrealized gains on general account securities, Miwa writes.

“With a smaller unrealized gains risk buffer, any further market drops could hurt insurers’ financial fundamentals more easily than before,” Miwa writes. “The plunge in the equity markets in [the fiscal year ending in March] negatively affected insurers, but not beyond current ratings expectations. However, another decline of the same magnitude in [fiscal year 2009] would be beyond current ratings expectations, and thus could result in negative ratings actions.”