Japan is the second largest life insurance segment in the world – behind the US – in terms of gross written premium. In terms of the industry’s outlook between 2012 and 2016 there are several positive trends, according to a report Life Insurance in Japan, Key Trends and Opportunities to 2016, which is available at the Insurance Intelligence Centre.
Japan’s aging population is expected to notably contribute to the growth of country’s life insurance segment between 2012 and 2016, and overall, the Japanese life insurance segment is expected to expand at a CAGR of 4.5% over the forecast period (2012?2016).
The reason why the older population is expected to drive the Japanese life insurance forward is that the older population has a tendency to purchase more life insurance products than the younger population as they plan for their retirement.
The average life expectancy at birth in Japan was 82.02 years in 2007, which is expected to reach 83.91 in 2012. Those aged 65+ accounted for 23.1% of the total population in 2011 and this, coupled with a rise in the number of single-person households to 16 million, is expected to positively affect the country’s life insurance segment.
Policies such as individual life, pension and term life are also expected to grow at higher growth rates than other life insurance products during this time due to the consumer demand for simple life protection and saving products.
The written premium of the Japanese life insurance segment increased from JPY26.5trn (US$231.9 billion) in 2007 to JPY31trn (US$392.6 bn) in 2011, at a CAGR of 4% during 2007-2011.
The individual life category accounted for the largest share of 49.7% of the segment’s total written premiums in 2011, with a value of JPY15.4 trillion (US$195bn). The term-life category was the second-largest category, with a written premium value of JPY5.7 trillion in 2011.
Looking ahead, the individual life category is expected to retain its position as the largest category in the life insurance segment over the forecast period, with an expected written premium of JPY21 trillion in 2016, after recording a CAGR of 6.4% over the forecast period.
Moreover, the term-life category is expected to be the second largest, with a written premium of JPY7.4 trillion (US$93.4 billion) in 2016.
Overall, the written premium of the Japanese life insurance segment is expected to increase from JPY 32.2trn in 2012 to JPY 38.7trn in 2016.
The main business drivers expected to fuel this growth in written premiums are:
– The demand for guaranteed life insurance products
– Lifting of asset investment ratio
– Increase in the number of sales representatives
– Growth beyond Japan
In the first place, Japan’s aging population supported the strong performance of guaranteed life insurance products during the years 2007-2011, as this demographic increased their investment in individual life and unit-linked products.
With people aged over 65 years of age accounting for 23.1% of the total population in 2011, the investment in general annuity and retirement products is expected to be a key driver of life insurance segment over the period 2012-2016.
Against a backdrop of social security and tax reforms, the Japanese life insurance segment is expected to be increasingly called upon to play a crucial role by providing private coverage to complement public insurance.
Secondly, in February 2012, the Financial Supervisory Agency of Japan introduced a revision in asset investment ratio regulations.
With the introduction of the new bill, the regulations concerning maintaining healthy assets among life insurers and limiting excessively speculative asset investment by setting a maximum amount for each type of holding asset calculated by multiplying the total assets of a certain ratio were lifted.
This means that domestic life insurers will be able to invest flexibly in overseas assets and benefit from extending their core business overseas.
Another business driver for Japan’s life insurance sector is the rise in the number of sales representatives.
The increase in the number of sales representatives recorded a downward trend until 2007 and is expected to support the growth of Japanese life insurance segment between 2012 and 2016. The number of sales representatives, which declined from 400,000 in 1990 to 200,000 in 2007, recorded growth during 2007-2010.
With this growth the total number of sales representatives reached 300,000 in 2010. This increase is expected to solve problems such as the non-payment of claims and support the growth of the Japanese life insurance segment.
Growth beyond Japan
Finally, the matured and consolidated Japanese non-life insurance segment has encouraged insurers to look towards foreign markets in search of growth. For example, Japan’s Nippon Life completed the transaction to acquire a 26 per cent stake – valued at INR 14.5bn ($261m) – in India’s Reliance Capital Asset Management (RCAM) in 2012.
In addition to rising life expectancy, another consumer driver expected to lead to the growth of Japan’s life insurance market also includes a rise in the number of single family households.
Between 2012-2016, there has been a rise in the number of single family households in Japan. These households are the result of changes in culture, lifestyle and a rapidly aging population. During the review period the percentage of one person household increased from 30.2% in 2007 to 31.5% in 2011. This percentage represents 16.1 million households in the country.
From a regulatory perspective, a significant development has been the new Japanese insurance Act, which was passed by the Diet in 2008 and came into effect in 2010.
This insurance act consists of five chapters covering general provisions, general insurance, life insurance, accident sickness insurance and miscellaneous and supplementary provisions.
The current insurance act will regulate all insurance contracts except marine insurance, which will be regulated by the Commercial Code.
With the implementation of insurance act in 2010, the Japanese insurance law got revised after 100 years.
The main objective behind the modification in the insurance law was to ensure and enhance the protection of policyholders. The act will invalidate certain provisions adverse to the policy holders and limit the duty of disclosure and timing of payments.
Other acts such as Consumer Contract Act, Financial Instruments Sales Act and Financial Instruments and Exchange Act (FIEA) also regulate insurance industry from the point of view of solicitation and sale of insurance contracts.
Furthermore, the Japanese insurance business and insurance contracts are also influenced by acts such as Prohibition of Private Monopolization and Maintenance of Fair Trade and Unjustifiable Premiums and Misleading Representations Act.
Overall, according to Japanese insurance regulation, any insurance company or its subsidiary cannot acquire or hold, on an aggregated basis, more than 10% of the total voting rights of all shareholders of any other company in Japan, except certain companies listed in the Insurance Business Act (IBA). The IBA also limits the various types of investments and exposure to any one person/entity.
Furthermore, in order to cover unexpected events such as catastrophic disasters or declining stock prices, a solvency margin ratio has been introduced as an index of administrative supervision.
In Japan, if the solvency margin ratio for a life insurance company is more than 200%, then no measures have to be taken by the company.
However, if the solvency margin ration is more than 100% and less than 200% then the life insurance company has to submit a business improvement plan to the FSA.
Furthermore, if it is between 0-100 percent then the insurer has to take measures such as the submission of adequacy solvency implementation plan, limitation of dividends and change in calculation method of premium for newly underwritten policies.
Finally, if the solvency margin ratio is less than 0%, the FSA can suspend the company’s operation fully or partially for a limited period.
The Japanese life insurance segment is highly concentrated with the ten leading insurers representing a market share of 87.4% of the total life insurance segment in terms of gross written premium in 2011, with the remaining 12.6% is divided among the other 34 life insurance companies.
The segment was led by Japan Post Insurance with a market share of 22.1% in 2011, followed by Nippon Life with a market share of 15.8% and Meiji Yasuda Life, with a market share of 12.7%.
Collectively, the five-leading firms accounted for a share of 68.8% of the total Japanese life insurance written premiums in 2011. The establishment of a sales promotion system with the help of Japan Post Network supported the business practices of Japan Post Insurance during the period 2007-2011.
The initiatives from the JPI, called the five pillars, address five different aspects of business that the company is looking to achieve. These include an increase in the number of customer contact points in order to multiply the volume of active policies, administrative reforms with regards to IT systems and customer service, financial soundness, management reforms with regards to control systems and efficient human resource departments.
Nippon Life Insurance, the second-largest Japanese life insurer, by market share from 2007-2011, has also emphasised a commitment to innovative and high-quality services for customer. In order to achieve this the company has made alliances with firms in the non-life insurance segment, operating in asset formation, medical and nursing care and industries related to life insurance.