Japanese life insurers’ credit profile set for improvement

Fitch Ratings says insurers in Japan will continue to reduce risks in investments and benefit from improving underwriting fundamentals.

According to Teruki Morinaga, Director in Fitch's Asia Pacific Insurance team, Japanese life insurers' credit profile will gain from ongoing reduction of their exposure to domestic equities and the lengthening of assets' maturity to narrow their duration gap with liabilities.

However, the agency says interest rate risk will remain the biggest risk for most Japanese traditional life insurers and the risk derived from variable annuity type products will continue to be sizable over the next three to five years.

Fitch also expects Japanese life insurers to strengthen enterprise risk management ahead of new solvency margin regulation based on economic value. The biggest risks for most Japanese traditional life insurers are said to be not only exposure to high-risk assets such as domestic equities but also duration mismatch between assets and liabilities. Life insurers in Japan are expected to continue reducing risk in these areas.

“Risk reduction in investments, coupled with a surge in unrealised gains of Japanese government bonds (JGBs), has improved the statutory solvency margin ratio (SMR) of nine Japanese life insurers rated by Fitch to 628% at end-March 2012 from 573% at end-March 2011. Fitch expects the SMR to improve further on continued risk reduction and accumulation of capital, providing the JGB yield remains low,” said the agency.

According to Fitch, underwriting fundamentals are also expected to further improve for the rest of 2012 amidst improvement in surrender and lapse rates and as profitable third sectors such as health products continue to grow.