Session 7a Life Insurance Product Trends in Japan Tom Burke
Life Insurance Product Trends in Japan Tom Burke Prudential Holdings Japan June 26, 2014 1 Japan Key Statistics Population: 126,757,591 GDP per person: US$35,618 Average Life Expectancy Overall: 84.6 years Male: 82.0 years Female: 87.3 years Currently oldest population in the world Population peaked in 2008 85% of households have life insurance Source: World Health Organizationm World Bank, World Population Review 1
Life Insurance Industry in Japan First insurance company established in Japan in 1881. Industry grew steadily. Early products were Whole Life and Endowment Post war period saw significant growth of the insurance industry. Distribution typically by door to door agents. Main products included Endowment with Term Rider and Whole Life. Collapse of bubble economy in early 1990 s had significant adverse impacts on insurance industry: Overall industry decrease in sales Declining interest rates lead to negative spread problem. This in turn led to the bankruptcy of 7 insurance companies in 1997 2001. Regulator responded by strengthening regulations such as introduction of appointed actuary role and introduction of solvency margin. 2000 s saw deregulation of insurance product sales through banks. This lead to significant increases in sales of variable annuities. Recent trends include increased sales of single premium whole products through banks and increased sales of corporate products. 3 Key Factors Influencing Life Insurance Products in Japan Economy Interest Rates Equity Markets Demographics Customer Preferences Regulatory Environment 4 2
Economy 5 Economic Indicators for Japan 9.00 45,000.00 8.00 40,000.00 7.00 35,000.00 6.00 30,000.00 5.00 4.00 3.00 25,000.00 20,000.00 15,000.00 10 Year JGB Nikkei 225 2.00 10,000.00 1.00 5,000.00 1/1/1988 1/1/1989 1/1/1990 1/1/1991 1/1/1992 1/1/1993 1/1/1994 1/1/1995 1/1/1996 1/1/1997 1/1/1998 1/1/1999 1/1/2000 1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 Source: Bloomberg 6 3
Implications for Insurance Products Collapse of equity market led to lack of trust in many customers of insurance products tied to stock market. Decline in interest rates weakened many companies. Bankruptcy of 7 companies in a short period created anxiety with many customers over the insurance industry s ability to honor guarantees made to customers. Low interest rates limit both product profitability and customer value. 7 10.00 Guaranteed Interest Rate vs. Market Interest Rates 9.00 8.00 7.00 6.00 5.00 4.00 10 Year JGB 3.00 Guaranteed Interest Rate 2.00 1.00 0.00 8 4
Demographics 9 Life Expectancy by Selected Countries 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 Overall Male Female 20.0 10.0 Monaco Japan Singapore Hong Kong South Korea Taiwan United States Malaysia Thiland China Philippines 1 2 4 5 26 31 35 66 76 97 112 Source: World Health Organization, 2013 10 5
Japan Population Distribution by Age 140.0 120.0 100.0 80.0 60.0 75+ 65 74 20 64 Under 19 40.0 20.0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 Source: Japan Ministry of Internal Affairs and Communications 11 Change in Japan Population Age Distribution 1960 2010 2060 2% 4% 40% 10% 15% 17% 27% 13% Under 19 20 64 65 74 54% 57% 13% 47% 75+ Source: Japan Ministry of Internal Affairs and Communications 12 6
Projected Change in Japanese Population Pyramid 2010 2060 Source: National Institue of Population and Social Security Research in Japan 13 Implications of Demographic Changes on Insurance Products Greater need for retirement and nursing care products. Decreased need for death protection products. Aging of population leads to challenges for traditional distribution systems. 14 7
Customer Preferences 15 Customer Preferences In general, Japanese customers tend to be conservative. Experience of stock market collapse has caused many customers to be wary of products with potential risk. Customers put high value on guarantees and certainty. Flexible premium products have not become popular in Japan. 16 8
November 2012 Survey of Consumer Behavior from Japan Consumer Affairs Agency Is a financial product with a low return acceptable as long as there is a guarantee of principle? 44% Yes Would a low risk financial product with a higher potential return, but no principle guarantee, be acceptable? 17% Yes What do you view as important in choosing a financial product? Understanding product features? 77% Yes Trust in sales person? 76% Yes 17 Regulatory System 18 9
Regulatory System Concerns about financial stability of post bubble insurance industry led to enhanced regulatory structure in 1996. Unfortunately, these changes came too late to save some companies. Current regulatory focus is on both ensuring company solvency and customer protection Solvency focus leads to some conservative rules Customer protection focus has indirect and direct impacts on product design. 19 Japan Individual Life Insurance Sales excluding Japan Post Insurance Source: Life insurance association of Japan, Statistics Book. 10
Individual Annuity sales Death Protection Product Trends in Japan 22 11
Trends in Death Protection Product Sales Growth in sales of corporate products (provide tax favored funding of retirement benefits for small/medium sized businesses). Decline in popularity of interest sensitive products. Traditional products with fixed premiums remain popular. Flexible premium products have yet to gain popularity. Some companies have offered foreign currency denominated life products. Reduction in statutory valuation rate in 2013 led to overall premium increase for the industry. 23 Savings Product Trends in Japan 24 12
High Level Trend in Savings Products Traditional Annuities, Endowments Variable Annuities, MVA Fixed Annuities Reduced Death Benefit Single Premium Whole Life, MVA Fixed Annuities 1990 s 2000 s 2010 s 25 Typical Market Value Adjusted Annuity Structure 26 13
Typical Structure of Reduced Death Benefit Single Premium Whole Life Accidental death benefit Cash Value Single pay Death Benefit Death Benefit The 1 st insurance period (5 years) The 2 nd insurance period (whole life) 27 Trends in Savings Products Low interest rates continue to put serious constraints on JPY denominated savings products Variable Annuities have fallen dramatically from their peak in the prior decade. Small sales recovery recently: Volatility rebalancing products Foreign currency denominated Variable Annuities Reduced death benefit SPWL showed significant sales in 2011 2013, but some products have been withdrawn due to risk concerns. Foreign currency market value adjusted fixed annuities remain popular (AUD and USD in particular). 28 14
Nursing Care Product Trends in Japan 29 Nursing Care Product Sales 500000 450000 400000 350000 300000 250000 New Sales 200000 150000 100000 50000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sales on Policy Count basis. Source: 生 命 保 険 統 計 号 30 15
Consumer Concerns in Japan Concerns for the Future % 50.0 45.0 40.0 35.0 30.0 25.0 20.0 18 and 19 20~29 30~39 40~49 50~59 60~70 15.0 10.0 5.0 0.0 Death Hospitalization Nursing Care Saving Work Disability Education Source: Japan Institute of Life Insurance 31 Nursing Care Concerns in Japan Concerns about Nursing Care % 80.0 70.0 60.0 50.0 40.0 30.0 18 and 19 20~29 30~39 40~49 50~59 60~70 20.0 10.0 0.0 Social program is not enough Unknown costs for nursing care Stress for family Expense for nursing care Burden for family Source: Japan Institute of Life Insurance 32 16
Current New Products in Japan New Products Launched in FY2012 Products Number Whole life (Single payment WL) 9(8) Term 7 Variable annuity 3 Fixed annuity 2 Medical / Nursing care 21 Simplified issue medical 4 Others 3 33 Current New Products in Japan Typical Nursing Care Product Design Linked with national social insurance system Typically fixed benefits paid (no reimbursement of actual cost) Premiums typically guaranteed at issue Lump sum benefits or annuity benefits can be paid Product can have full cash value, reduced cash value, or no cash value Nursing care benefits sold both on a standalone and packaged basis 34 17
Risks Medical and Nursing Care Increasing morbidity Change in social programs Family situation Nursing care Medical innovation mainly cancer Longevity 35 Recent Trends in Nursing Care Products Some new products provide benefits at less severe nursing care statuses. Some companies have been looking to differentiate by providing services. At least one insurance company has acquired a nursing care company. 36 18