Japan’s life industry as a whole has weathered the long yield winter remarkably well, staying profitable in an environment where interest rates and growth basically disappeared. Yet, we find that there is still some room for improvement within the local market, namely consolidation, even as life insurers start to hunt for growth overseas, mainly in Asia and China, arguably the biggest opportunity in the sector. The end of the bubble economy at the beginning of the 1990s heralded Japan’s long yield winter, which is now in its third decade. From its peak in September 1990 (8.3%), 10-year yields of Japanese government bonds (JGBs) started to decline relentlessly throughout the 1990s. Eight years later (September 1998), they reached an interim low of 0.8%. Since then, however, they never really recovered, staying continuously below the watershed of 2% and hovering around 0% for the last five years.

Declining interest rates dragged down investment returns, pushing them in some cases below the guaranteed minimum. At the end of the decade, these negative margins drove some insurers into bankruptcy, representing about 10% of total assets of the life insurance industry.  The overwhelming majority of the industry, however, coped quite well with the low-yield environment, which was also compounded by low growth: Over the last three decades, gross written premiums remained basically flat – with a temporary boost by the privatization of Japan Post that increased life premiums by more than 10% in 2007 and 2008. Against the backdrop of a deflating economy, however, this is nothing to sneeze at: Penetration (life premiums as percentage of GDP) remained comfortably above 5% and thus much higher than, say, in Germany (3.0%) or the US (3.1%, 2020 each).

In 2020, Japan’s life industry recorded a RoE of 11%.  Three management levers explain this Phoenix-like rising from the ashes: first, managing the product mix. Protection-type policies such as traditional life insurance and “third sector” products (medical, long-term care insurance)  offer better margins, based on mortality and prevalence assumptions, than savings-type policies that are investment-related. Therefore the industry has relentlessly shifted into these products, supported by more favorable regulation, which lifted the ban on life insurers’ participation in health insurance. Since then, life insurers have been able to benefit from high demand for medical coverage (e.g. against cancer), driven by the fact that the comprehensive public health insurance system requires co-payments that can be quite substantial in the case of critical illness. Another area of growth is care products that address Japan’s aging society and changing behavior – older people are increasingly taken care of by nursing homes and other facilities rather than by their own families. Moreover, insurers developed new types of products, e.g. products with wellness benefits, and specialized products, e.g. infertility treatment insurance. In 2020, these “third sector” products accounted for a quarter of all premiums.