Japanese life insurance market: some historical and current perspectives. Michael Freeman Willis Towers Watson

Transcription

1 Japanese life insurance market: some historical and current perspectives Michael Freeman Willis Towers Watson

2 Japan Life Insurance market Introduction and profile Demographics and the impact of the aging population Interest Rates Variable Annuity and Fixed Annuity market 2

3 Japan has the world s second largest life insurance market. Life insurance premium volume, USD billion UK 180 UK 235 FR 85 FR 173 CN 12 CN 177 JP 401 JP 372 US 442 US 528 Life premium volume in USD billions Source: Swiss Re / Sigma 3

4 Premium Mix by category of insurer [CATEGOR Y NAME] (17) [PERCENTA GE] [CATEGOR Domestic Y NAME] 3% (6) [PERCENTA GE] Japan Post 33% [CATEGOR Y NAME] [PERCENTA GE] [CATEGORY NAME] (4) [PERCENTAGE [CATEGORY ] NAME] (5) [PERCENTAGE ] [CATEGORY NAME] (13) [PERCENTAGE ] [CATEGORY NAME] (5) [PERCENTAGE ] [CATEGORY NAME] (Listed) [PERCENTAGE ] [CATEGORY NAME] (4) [PERCENTAGE ] [CATEGORY NAME] [PERCENTAGE ] FY1995 Source: Statistics of Life Insurance Business in Japan and Zenkyoren (JA) data. FY2014 4

5 Negative Yield Gap - Policies issued in later 1980 s [%] year JGB and Guarantee Rate year JGB Yields (Yield to Subscribers) Guarantee Rate (Range of Typical Products)

6 Bankruptcy case of life insurers Company Date of failure Total Assets (Yen billion) Post-Restructure Guarantee Rate Relief Company and Sponsor Current Nissan April , % Aoba (Artemis) Prudential Life Toho June , % GE Edison (GE Capital) Gibraltar Life Daihyaku May , % Manulife (Manulife) Manulife Taisho August % Azami (Yamato Life) Prudential Gibraltar Financial Life Chiyoda October , % AIG Star (AIG) Gibraltar Life Kyoei October , % Gibraltar (Prudential) Gibraltar Life Tokyo March , % T&D Financial (Daido / Taiyo Life) T&D Financial, subsidiary of T&D Holdings Yamato October % Prudential Financial Japan Prudential Gibraltar Financial Life 6

7 Combined negative spread of 4 large insurers (1) (Yen billions) (1) Nippon, Dai-Ichi, Meiji-Yasuda and Sumitomo Source: Life Insurance Association of Japan 7

8 Listed Life Insurers, by listing date and current market capitalization Dai-ichi Life Yen [Y VALUE] bn USD 14.8 bn Japan Post Insurance Yen [Y VALUE] bn USD 14.0 bn Daido Life T&D Holdings Yen [Y VALUE] bn USD 6.5 bn Sony Financial Holdings Yen [Y VALUE] bn USD 5.9 bn Yen [Y VALUE] bn Taiyo Life Yen [Y VALUE] bn Lifenet Yen [Y VALUE] bn USD 0.2 bn Market capitalization at March 29, Daido Life and Taiyo Life as at date of listing. T&D Holdings: Taiyo Life, Daido Life, T&D Financial Life Sony Financial Holdings: Sony Life, Sony Assurance, Sony Bank Dai-ichi Life: Dai-ichi Life, Dai-ichi Frontier Life, NeoFirst Life and overseas operations (TAL, Protective Life & others) 8

9 Life Insurance Acquisitions by Japanese Multi-nationals in Australia and US (2011 onwards) Year Acquiror Country Target Transaction 2011 Dai-ichi Life Australia. TAL Acquired additional 71% to full ownership Transaction Value Local Currency USD billion (1) AUD 1.2 billion Dai-ichi Life United States. Protective Acquired 100% USD 5.6 billion Meiji-Yasuda United States. StanCorp Acquired 100% USD 5.0 billion Sumitomo Life United States. Symetra Acquired 100% USD 3.7 billion Nippon Life Australia. MLC Life To acquire 80% AUD 2.4 billion 1.7 TOTAL 17.2 (1) Based on USD exchange rate at date of transaction completion 9

10 Demographics and the impact of the aging populate

11 Million people Projected population aged 65 The number of people reaching age 65 is projected to continue at a rate of approximately 1.5 million people annually Projection year The percentage of the population aged 65 or greater is projected to grow significantly over the next 20 years. 35.0% 30.0% 25.0% Percentage of total population aged 65 or greater 20.0% Projection year Sources: (Population projections) National Institute of Population and Social Security Research, as of January 2012; (Life expectancy) Analysis of Life Insurance Association of Japan (LIAJ) 2007 annuitant mortality table. The LIAJ annuitant mortality table reflects future mortality improvement. 11

12 Middle Age Demographic Shift by Number of Households # of Households (millions) Change (2025 vs 2015) 2005 Mix 2015 Mix 2025 Mix Senior Age % % % 7% Family Age Married w/children % % % (5%) Couple Single Age Married w/o children Age Single % 4.3 9% 4.2 8% (2%) % % % 4% Youth Age < % 4.6 9% 4.2 8% (10%) Total % % % 1% Source: National Institute of Population and Social Security Research 12

13 Lifetime Medical Expenses, Estimates in Fiscal Lifetime Medical Expenses Yen 26.0 million Under 70 50% or over 50% Source: Ministry of Health, Labor and Welfare 13

14 Long-Term Care Rates Year Average period of a life without physical limitations Male Average period of a life with physical limitations Average life expectancy Average period of a life without physical limitations Female Average period of a life with physical limitations Average life expectancy years 9 years 80 years 74 years 12 years 86 years Certification Rate of Long-Term Care by Age Group (2014) 8 (millions) Population Number of People Certified Certification Rate Source: Ministry of Health, Labor and Welfare / National Institute of Population and Social Security Research 14

15 Drivers of customer demand for life insurance coverages, % of respondents Survey question: What was the main purpose to buy life insurance? (multiple answers) Medical or hospitalization expense 58.5 Financial Protection for dependents 53.1 Funeral expense 13.0 Educational and marriage expenses of children Post-retirement Accident Saving Long-term care expense Source: Japan Institute of Life Insurance Consumer Survey,

16 Japanese Medical Insurance Example Whole of life coverage No death benefit Premium pay to 60, 65, or whole life Limited cash value Base coverage Yen 10,000 daily benefit for disease and accident hospitalization. Up to 60 days per hospital stay, with cumulative limit of 1,000 days (1) Lump sum of 5x or 20x daily benefit for specified surgeries (2) Cost of advanced medical treatment, up to cumulative limit of Yen 20 million (3) Optional coverage Yen 1 million lump sum on cancer, acute myocardial infarction, or stroke (4) Yen 10,000 daily benefit for outpatient cancer treatment. Up to 60 days per treatment (5) (1) Up to 120 days covered per hospital stay for diabetes, high blood pressure, liver cirrhosis, and renal failure. Per-stay and cumulative total limitations are waived for cancer, myocardial infarction, or stroke`` (2) 5x for outpatient surgery, 20x for inpatient surgery (3) Treatments defined by the Ministry of Health, Labor and Welfare (4) Cancer benefit on first cancer diagnosis, or subsequent hospitalization for cancer treatment; myocardial infarction or stroke benefit on hospitalization for treatment. Limited to one payment per cause per year (5) Limitation waived for certain surgeries, radiotherapies, thermotherapies, and chemotherapies Base premium Male age 40, pay to age 60 Yen 7,502 / month Base + option premium Male age 40, pay to age 60 Yen 13,502 / month 16

17 New Business Margins 10 companies average PV Profit (after tax) / PV Premiums from total new business issued Japanese Fiscal Years 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: Company disclosures and Willis Towers Watson analysis 17

18 Interest rates

19 Negative Interest Rate Policy (NIRP) At end January 2016, the Bank of Japan (BoJ) introduced negative interest rate of 0.1% on the policy rate balance of reserves held by financial institutions at the BoJ. The majority of reserves, basic balance, continue to earn 0.1% The macro add-on balance earns zero % At start of March 2016, 10 Year JGB s were auctioned at a negative yield of 0.024%. Objectives of NIRP Encourage bank lending and encourage investor shift from bonds to riskier assets Counter Yen appreciation To reduce longer term yields to allow the Japanese government to finance at (near) zero cost. Source: Jefferies Analysis 19

20 10 Year and 30 Year JGB rates from January 1, 2016 ( % ) Y 30Y year JGB yield becomes negative Source: Ministry of Finance Japan 20

21 Classification of bonds under Japanese statutory accounting Categorization Comment Balance sheet Held to maturity (HTM) HTM bonds are not to be sold before redemption. If a company sells HTM bonds, all HTM bonds are re-classified to AFS and the company is not allowed to classify to HTM for two years. Amortized historical cost Reserve matching (ALM) ALM bonds may be used up to the level of policy reserves. ALM bonds must specify the policy group whose reserves are to be matched. The duration of the ALM bonds must lie between 80% and 125% of the corresponding liability duration, and bonds can be sold to reduce duration gaps. Amortized historical cost Available for sale (AFS) - Market value 21

22 Life Insurance Reserving Overview Reserving bases reflect historical conditions at the time of policy issues and are not reassessed to reflect current or prospective investment returns, expenses, or claims rates. Policy reserves are the maximum of: Surrender values, Reserves based on the assumptions for product pricing, and Standard valuation basis reserves. The standard valuation basis defined by the Financial Services Agency ( FSA ) is as follows: Method: Net level premium. Mortality assumption: Mortality table prepared by the Institute of Actuaries of Japan and approved by the FSA. The current table is the Life Insurance Standard (LIS) Table 2007 Valuation interest rate assumption: Rate determined by formula which differs by product type The same reserving assumptions are applied throughout the lifetime of a policy dependent on its issue date ( locked-in ). The appointed actuary s opinion is required to perform an annual reserve adequacy test, if this test is not passed, reserves are required to be strengthened. For medical ( third-sector ) products, a separate reserve adequacy test may be required. For variable annuities (VAs), guarantee reserves are required. Solvency capital requirements based on specified RBC factors 22

23 Standard Valuation Interest Rate Regular premium policies: The standard valuation interest rate is recalculated every 12 months, using 1 October as the calculation date. The base rate is calculated as the minimum of {Average JGB10 over the last 3 years, and Average JGB10 over the last 10 years}. A prudential margin (i.e., a safety factor ) is applied to the selected average rate. The prudential margin: 0.9 for the part of base rate between 0% and 1%, 0.75 for the part between 1% and 2%, 0.5 for the part between 2% and 4%, and 0.25 for the part above 4%. The standard valuation rate is then applied to reserves on business written with effect from 1 April in the following year and applied throughout the lifetime of the policies written in the following fiscal year. 23

24 Standard Valuation Interest Rate Single Premium policies: The standard valuation interest rate is recalculated every 3 months, using 1 January, 1 April, 1 July and 1 October as calculation dates. The standard valuation rate is then applied to reserves on business written with effect from 3 months after the calculation date and applied throughout the lifetime of the policies written under the given valuation interest rate. Single Premium Whole of Life : The base rate is calculated as the minimum of {Average of (JGB10 + JGB20)/2 over last 3 months and Average of (JGB10 + JGB20)/2 over last 1 year}. Prudential margin is also applied. Single Premium Endowment and Annuities: The base rate is calculated as the minimum of {Average JGB10 over last 3 months and Average JGB10 over last 1 year}. Prudential margin is also applied. 24

25 Standard Valuation Interest Rate At 1 April 2016, the standard valuation interest rates are: Regular payment products: 1.0% Likely to reduce to 0.25% at 1 April 2017, based on current JGB yields. Single premium whole life (SPWL): 0.75% Will reduce to 0.25% at 1 July 2016 Single premium endowment (SPE) / single premium annuity (SPA): 0.5% Will reduce to zero at 1 July

26 Responses of life insurers: Diversify investment portfolio away from JGBs, but alternative strategies are limited by additional risk costs Products: withdraw Yen-denominated single premium products Increased focus on non-yen denominated products Protection business continues to provide strong margins

27 Variable / Fixed Annuity Market

28 The distribution of insurance products through banks and securities companies was implemented over several phases of market deregulation October 2002 Individual annuity insurance, including variable annuities and fixed annuities December 2005 Single premium whole life insurance Single premium endowment insurance Short-term regular premium endowment insurance Saving type pure endowment insurance December 2007 Term insurance Regular premium whole of life insurance Long-term regular premium endowment insurance Medical / nursing care insurance, etc. 28

29 Sales of Single Premium Products 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Single premiums written over fiscal year (Yen billion) Individual Insurance Individual Fixed Annuity Individual Variable Annuity (FY) Source: Statistics of Life Insurance in Japan 29

30 Sales of Variable Annuity Products (USD bn) (FY) Source: Statistics of Life Insurance in Japan 30

31 Single premium Invested amount Case 1 Case 2 In the early 2000s, popular VA products in the had an accumulation phase of 10 years with a GMAB guarantee Typical fee levels were 2.35% pa plus asset management fees. Fund switching allowed free of charge up to a specified number of times per year Illustration of typical VA product Upfront fee: 5% of single premium Case 1: If fund value exceeds the base sum assured, the fund value is the annuity fund Case 2: If fund value is less than the base sum assured, the base sum assured is the annuity fund Base sum assured Death benefit Fund value = surrender value The annuity fund can be received as a lump sum or as annuity payments An additional 10% of the base sum assured is paid out upon accidental death The accumulation phase can be chosen from a minimum of 10 years up to a maximum of age 90 31

32 Death benefit Accidental death benefit (110% of fund value) Due to low yields on Japanese government bonds and market sentiment toward yen depreciation after some years of yen appreciation, foreign currency FA business also gained popularity. Illustration Foreign Currency FA Product with 5,7 or 10 years interest guarantee period Bonus additional crediting rate of 1% in first policy year Single premium (in selected currency) +1% crediting rate Fund value (in selected currency) Annuity fund (in selected currency) Selected currency of US dollars or euro Accumulation phase can be extended to a maximum of 40 years, up to age 90. Surrender value is subject to a MVA Annuity fund can be received as a lump sum or as annuity payments. The lump sum payment can be received in US dollars, euro, or yen. The annuity payments are in yen. The policyholder bears exchange rate risk. Accumulation phase Issue date End of first policy year Annuitization date 32

33 Yen/USD Exchange Rate. (Yen) 140 Exchange rates at end of fiscal year Yen appreciation USD/JPY Yen depreciation (FY) 33

34 Single premium (in selected currency) FA portion 100% of single premium (in selected currency) Example hybrid between a foreign currency FA and a VA. A certain portion of the single premium is invested in a foreign currency (FA portion), which covers the GMAB, by earning the guaranteed interest rate. The remaining (VA portion) is invested in a mutual fund including equities. Illustration VA/FA Hybrid No upfront fees VA portion Death Benefit Fund Value Surrender Value Surrender value in yen Extra return Currency of the FA portion is selected between AUD and USD The AUD version allows choice of GMAB of 100% or 110% of single premium (only 100% for USD) The surrender value is subject to a MVA. Accumulation phase (10 years) 34

35 Summary Aging population is driving the profile of insurance needs in Japan, including demand for medical expenses products Ultra-low / negative interest rates are eliminating the viability of Yen-based savings products Low Yen yields have driven consumers towards foreign currency denominated products Large Japanese life insurers are now expanding their businesses outside Japan 35

36 Thank you for your attention