Can Japan's life insurers keep growing at home?

Revised solvency rules are prompting insurers to rethink capital management.

Japanese life insurers are increasingly looking overseas and relying more on reinsurance as they confront slowing growth at home, raising questions about whether these strategies can offset the challenges of a shrinking and ageing population.

"[We expect] Japan's life insurance sector to remain well capitalised and increasingly globally oriented," CreditSights, Inc. said in a research note in July.

Insurers are also making greater use of reinsurance as they prepare for Japan's revised solvency regime and manage the risks associated with long-term policies and investment portfolios.

The share of premiums ceded to reinsurers, which assume part of insurers' risks, rose to more than 24% in 2023 and 2024 from just under 10% in 2020, A.M. Best Company, Inc. said in a June report.

The increase coincides with Japan's biggest overhaul of life insurance regulation in three decades. The Japan Insurance Capital Standard (J-ICS), which took effect in March, is more sensitive to market conditions.

Under the standard, insurers' capital positions are more exposed to changes in interest rates, policyholder behaviour, asset-liability mismatches, and longevity and mortality risks.

"Japanese life insurers have been increasingly using asset-intensive reinsurance to transfer investment, longevity, and insurance risks from capital-intensive annuity and long-term life insurance blocks to third-party reinsurers ahead of the implementation of J-ICS," Cynthia Ang, a senior industry research analyst at AM Best, said in the report.

Whilst reinsurance reduces capital requirements for insurers, it also exposes them to counterparty risk if reinsurers fail to meet their obligations or if liabilities return to the insurer.

AM Best said reinsurance ceded as a share of industry capital and surplus rose to 14.8% at the end of 2024 from 4.8% in 2020.

Dai-ichi Frontier Life Insurance Co. Ltd., Prudential Gibraltar Financial Life Insurance Co. Ltd., and MetLife Insurance K.K. each reported ratios exceeding 500% in 2024.

Despite the increase, only about 1% to 2% of Japan's individual life insurance and annuity policies were reinsured in 2023 and 2024.

Japan's Financial Services Agency is planning closer oversight of these arrangements, focusing on private equity involvement, asset liquidity, cross-border collateral arrangements, and the financial strength of reinsurers.

Reported solvency ratios have declined under J-ICS compared with the previous framework, largely because the standard is more responsive to market risks rather than because insurers have become financially weaker.

Major insurers continue to report solvency ratios above the regulatory minimum of 100%.

Higher interest rates have also resulted in unrealised losses on insurers' bond portfolios, although they also reduce the value of long-term liabilities and improve reinvestment yields as assets mature.

Questions to ponder:

• Can overseas expansion offset Japan's limited domestic growth prospects?
• Does greater use of reinsurance boost insurers' resilience or introduce new risks?
• How should Japanese life insurers balance capital efficiency with financial stability under J-ICS?