From Moody's Japan K.K. - official statement
The direct negative effects of lower long rates include a reduction in economic capitalization, an exacerbation of negative yields and reinvestment risk, as well as delays in efforts to reduce duration mismatches.
These observations were outlined in Moody's just released special comment, "Ultra-Loose Monetary Policy Means More Problems for the Japanese Life Insurance Industry."
The report also notes that recent monetary developments are putting more pressure on life insurers and incentivizing policyholders to alter behavior in ways that negatively impact the industry.
First, the overall risk in life insurers' investment portfolios will rise owing to increased investments in foreign-currency securities.
At the same time, insurers will partly offset the rise in their portfolio risk by reducing their investments in domestic equities.
Second, the low rates offered on both new policies and alternatives will lead to lower-than-expected surrender rates of legacy policies that offer higher returns. Policy-reserve durations will also lengthen.
All these factors will worsen negative spread and duration mismatches.
From the perspective of new business, the impact of lower yields is manageable, as the rates on new products are set in line with market rates.
A side effect of lower rates on new policies may be a reduction in sales, although the appetite for longevity products remains strong.
Moody's notes that the sector's reaction to these developments will vary from company to company.
However, one feature is certain, that is Japanese life insurers all face a dilemma: either maintain their well-established strategy of purchasing low-return assets, mainly Japanese Government Bonds (JGBs), locking in larger negative spreads, or increase risk in pursuit of higher returns.
Financially stronger entities will have more leeway to pursue higher investment yields, as they can deploy their higher capitalization levels to support the consequent higher level of risk.
Among Moody's-rated Japanese life insurers, Meiji Yasuda Life and Nippon Life exhibit the highest capitalization, while Mitsui Life displays the weakest.
The new policy of aggressive monetary easing was announced by the Bank of Japan on 4 April at the conclusion of the first monetary policy meeting.
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