Setting up life insurance in Japan as a foreign national can be difficult at the best of times. Many Japanese domestic insurers do not offer coverage to foreign residents. Even among the Japan based insurance companies that do accept insurance applications from expats, they commonly do not offer contracts in English language (although this is probably more of a function of the law than discrimination). Insurance companies, like any other type of business, are effected by the overall economic climate of the country in which they operate. At present there are a number of factors that could potentially destabilise the Japanese insurance industry that do not receive coverage in news media. Any decision to buy an insurance product should be the result of careful consideration of not just the cost, but the external risks of the insurance company itself. After all, it does not matter how cheap the insurance premiums are if the insurance company is not around in the future to pay the family of the dead. If you have recently managed to sign yourself up for life insurance in Japan, or are considering applying for life insurance cover with a Japanese company you may wish to consider the following.
Japan’s Dependence On Government Bonds
Japanese Insurance companies and pension funds own (at the time of writing) a total of 21.6% of all of the outstanding Japanese government debt. Why is this? The answer -that will probably surprise nobody- is that Japanese people are risk averse. Traditionally, bonds offered attractive risk-adjusted returns to investors over the long-term. They lacked the price volatility of stocks and paid regular streams of income. The longer the duration of the bond, or the lower down the credit-ladder, or the lower the perceived stability of the issuer- the higher the coupon payments. Japanese Government bonds are as stable as they come…
Japanese insurance companies are in themselves gigantic structured products comprised of hundreds of thousands of contracts between the institution and the policyholder. In exchange for the premium payments from the policyholder, the insurance company agrees today, to pay out a pre-determined sum of money in the future upon certain events (e.g. death, retirement, fire etc.). For the corporate machine to continue to function, every year it has to take-in more money than it pays-out. Due to the uncertain nature of its pay-out liabilities in any given year, it is in the best interest of the insurance company to limit its risks to those that are absolutely necessary. Removing, or at least reducing its shortfall risk, by holding assets with pre-determined payouts, like bonds, was a fantastic way to achieve that this. The system worked well for decades- until the market got turned upside down by negative interest rates.
At present, a 5 year Japanese government bond has a yield of -0.11% p.a. The concept of “risk” is thrown out of the window when buying a fixed-interest asset is guaranteed to compound an annual loss until maturity. Japanese insurance companies are being forced to invest outside of their comfort zones (i.e everything other than government debt) and the results are mixed. The global financial crisis waved sayonara to a number of Japanese insurance companies who declared bankruptcy. At present, the Japanese M&A market is active with larger operations swallowing up the smaller ones who have been unable to stay afloat. While survival of the remaining players rests upon their ability to gobble up foreign assets with higher yields, what happens to them when the JPY strength abates, or the bottom falls out of the global market again?
Population Decline = Shrinking Populace
World media is keen to point out that Japan is undergoing grave changes in its population demographics. The population started contracting in 2005, when the number of deaths overtook the number of births but has continued in a systemic year-on-year decline since 1972. The proportion of people aged 60 or over has climbed dramatically in recent decades and the strain upon government support systems is tremendous (also of note is the emergence of new phenomena, like the increase in the number of elderly people so poor that they are committing crime so that they be sent to prison...). The insurance business is a long-term one and you don’t see many ‘new’ insurance companies that aren’t simply spin-offs of larger parent companies. In the same manner as the pension system, and even the banking system (those operating on the fractional reserve system, at least), insurance companies are reliant upon consistent flows of cash into the company on a regular basis. This money is then simultaneously deployed elsewhere as pay-outs (for both insurance companies and the pension systems– and as deployed loans for the banks).
A decrease to the flow of money coming in, invariably affects the sustainability of the flows of the money out. Without probing in to the annual statistical disclosures made by insurance companies to their regulators it is easy to understand why there will be a decline in the number of people taking out insurance policies in Japan moving forward. A lot of the policyholders that were on-boarded decades ago when things were still “normal” in Japan economically are still “on-risk” today (meaning fully insured and yet to be paid out). The problem that this poses for the insurance industry is the same as the one posed to the Japanese Government Pension System– as structurally they are similar, and victim to the same outliers. There are less people paying into the system now than ever before, yet the number of people awaiting a payout is the largest that it has ever been. This only goes so far as to exacerbate the problem of historically low interest rates and create a scenario whereby Japanese asset managers must seek out higher returns by courting more risk than ever before, and looking to assets that were previously off limits.
Japan Risk – The Nature Of Domestic Companies
The situation of low-to-negative interest rates does not affect only Japan. Europe is another area where insurance companies are competing with the previously unimaginable reality of debt investments that cost money to own. This is however where the comparison ends. The Japanese insurance industry, like the Japanese banking industry is highly protectionist. Foreign insurers active in the Japanese insurance market are only permitted to operate as a Japanese insurer would; what this means is that they are not allowed to release products that would provide them with a competitive edge over domestic players (and how would they -not- have a fundamental underlying advantage when their capital base is denominated in a currency which attracts a rate of interest that is not negative?). In Japan, despite seeing the same logo and sign above the door as your insurance market-leader from your home country, the ‘foreign insurer’ is actually a Japanese company, is legally a separate entity from its foreign father, and has its own range of products solely for distribution in Japan. The products themselves are usually eerily similar to the other products on offer from other Japanese providers; so much so that often they offer no “international” advantage whatsoever.
Many Japanese insurers have businesses and subsidiaries overseas, but not all of them do, and even the ones that do still source the vast majority of their premium revenue from here in Japan. Not only are Japanese insurers geographically positioned to be exposed to Japan’s waning economy and population, they are also exposed to its currency, it’s government debt and its negative interest rates. “Foreign” insurance companies, particularly the multi-nationals, are far more diversified in terms of products, policy-holder geography, currency risk, and most importantly, the investment assets they hold on their books to meet the cost of their obligations.
[ Sources ]
– Ministry of Internal Affairs and Communications’ Family Income and Expenditure Survey
– Current state of Japanese life insurance sector (1) – Daiwa Institute Of Research
– The Life Insurance Association Of Japan Monthly Statistics