challenges faced by and corporate strategy of a japanese ... · secure mortality profit by...

24 April, Tashkent

Challenges Faced by and Corporate Strategy of a Japanese Life Insurer

For Uzbekistan-OLIS Life Insurance Seminar

Makoto (Mack) Okubo

大久保亮

General Manager, International Affairs Nippon Life Insurance Company

1

2

Fighting against low interest rates and negative spread problems

Contents

1

Regulation and valuation: Issues identified in the Asia Pacific region 3

Demographic chal lenges and opportunities and longevity risk 2

Ta o o f s u p e r v i s i o n a n d r i s k m a n a g e m e n t – Y i n a n d Ya n g 4

3

Interest rates remain low for a long time

Japan experienced a low interest rate environment

Governement / Treasury Bonds（10 year）　Interest Rate

0

2

4

6

8

10

12

14

1989/01/01

1991/01/01

1993/01/01

1995/01/01

1997/01/01

1999/01/01

2001/01/01

2003/01/01

2005/01/01

2007/01/01

2009/01/01

2011/01/01

Japan

GermanyUnited Kingdom

United States

4

¥0

¥5,000

¥10,000

¥15,000

¥20,000

¥25,000

¥30,000

¥35,000

¥40,000

¥45,000

'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

0.0％

1.0％

2.0％

3.0％

4.0％

5.0％

6.0％

7.0％

8.0％

9.0％

10year

JGB

Nikkei225 index

’

’

’

’

0.540%(May. ’ 03)

¥ 7,054(Mar.10. ’ 09 )

’

¥ 38,915(Dec.29. ’ 89)

8.220%(Sep. ’ 90)

Low interest rate coincided with poorly-performing stock prices

Stock market has been also disappointing

Negative spread problems in 1990s

0%

5%

10%

1970 20102000199019801970 2010200019901980

Bubble EconomyBubble Economy

10-year Interest Rate in Japan1010--year Interest Rate in Japanyear Interest Rate in Japan

Positive spread

Negative spread

Positive or NegativeSpread

7.79%(October, 1990)

0.83%(October, 1998)

0.81%(June, 2012)

1 2 3

1 2 3

After the collapse of the bubble economy, Japan experienced a long-lasting, severe investment environment with low interest rates and poor performing stock prices. This, combined with a market dominated by long-term insurance products with high guaranteed returns, led to negative spread problems in the mid 1990s, although most Japanese life insurers endured the severe business environment.

5

Reduce guaranteed interest rate

Secure mortality profit by enhancing protection-oriented products

Reduce operating expenses and personnel expenses

Change investment strategies to match the characteristics of

insurance liabilities, and sophisticate risk management

Accumulate additional policy reserves and enhance capital

Measures to reduce negative spreads

The following are some examples of the measures taken by our company to

reduce negative spreads during the difficult time.

6

0%

1%

2%

3%

4%

5%

6%

7%

Lowered guaranteed interest rate

6%

Guaranteed interest rate

Investment return

5.5%

3.75%

2.90%

2.15%

1.65%

1990 2010 2000

2.77%

Measure I: Lowering guaranteed interest rate

Reduced the guaranteed interest rate gradually for new policies

7

This system requires to calculate the minimum policy reserve by using an interest rate prescribed by the supervisory authority. (based on 10 year Japanese government bonds)

Where pricing is detached from the statutory interest rate, they may be significant additional reserving costs

Standard Reserve Valuation

System（Since 1996）

Regulatory incentives to reduce assumed interest rate

Continuity test – a mechanism to reflect the effect of rate change

This amended Insurance Business Law also requires life insurance companies to conduct future cash flow tests to ascertain whether there would be any difficulty with the firm continuing its operations

Japan’s Actuarial Standards of Practice allows covering negative spread by surplus from future new business when conducting the “continuity test”.

1%

2%

3%

4%

Trends in the Standard Interest Rate

Standard interest rate

1.5%

2010 1996 1999 2001

2.77%

Investment return

8

2005 2010

Mortality profit 540 437.4

Undistributed earnings

236.8 231.2

Stable mortality profit Protection-oriented products

Death coverage Serious diseases and nursing care

coverage

Saving and retirement coverage

Medical coverage

Dread Disease

Endowment Medical

Whole life

Term life

Cancer Annuity

Nursing care

Customers can select insurance products

from a well-balanced product portfolio (Billions of Yen)

Measure II: Securing mortality profit

Secured stable mortality profit

Continued to develop protection-oriented products

9

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Trends of expenses

573.9

819.5

Operating expenses

Personnel expenses

556.3

263.2

380.7

193.1

(Billions of Yen)

Measure III: Reducing expenses

Reduced operating expenses and personnel expenses

10

2000 2005 2010

Average asset duration 6.1years 8.0years 10.9years

Investment return

Shift to long-term assets 2010 2000 2005

2.76% 2.77%

3.15%

Earn steady return

2000 2005 2010

Public and corporate

domestic bonds 27% 36% 46%

Loans receivable 29% 20% 18%

Domestic stocks 17% 22% 13%

Foreign securities 11% 10% 12%

(Market Conditions)

Long-term interest rates 1.28% 1.77% 1.25%

Nikkei Stock Average ¥13,000 ¥17,060 ¥9,755

Breakdown of asset portfolio

※hedged foreign bonds is included in the bond category.

※for public and corporate domestic bonds

Measure IV: Changing investment strategies

Changed investment strategies with more focus on ALM - increase in yen-denominated fixed income asset - extend asset duration

11

Regulatory Requirements and Internal Management

Inte

rnal M

anag

em

ent Assessing the amount of

risk stricter than

regulation requires

Ensuring appropriateness of ALM policies from medium- and long-term perspectives

Aims

Ordering early remedial actions

Confirming whether business activities can be continued for one year

Regulatory Requirements

Early warnings

Long-term vision

RBC

model

Economic

model

RBC model

Measure V: Enhancing risk management

For the purpose of internal management, developed and used both an RBC model (early warnings) and an economic model (long-term vision)

Stress scenario

JPY

appreciation

1. Recessions in developed countries

2. Collapse of a bubble economy

in developing countries

Decline in interest rates

JPY

depreciation

Stress Tests: Verify the adequacy of the ability to respond to a variety of events that could have a significant effect on profits

12

Accumulation of additional

policy reserves

Policy Reserves

Reserves set aside by "lock-in

method“ in accordance with the

laws and regulations

- For example, policies issued in

1990 are still evaluated at 6 percent,

their guaranteed interest rate.

Approx. ¥40trillion

Additional policy reserves

Accumulated additional policy

reserves approx. ¥1.2 trillion since

2006

Reduction of the

Negative Spread

Negative Spread

Improvement Effect

Approx. ¥1.2trillion

In terms of 2010

Amount ¥60

billion

Average guaranteed interest rate

24BP

Measure VI: Accumulating policy reserves

Accumulated additional policy reserves, corresponding to the estimated future effect of “negative spreads”

13

Enhancement of capital

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2014

Foundation funds

Reserves

2.8

3.3

1.2

4.5

1.6

3.0

The foundation funds, “Kikin”, is

similar to the surplus notes, but the

same amount must be set aside

from the revenue flow at the time of

repayment

Global financial crisis Great East Japan Earth quake

(Trillions of Yen)

Measure VII: Enhancing capital

Enhanced capital by accumulating internal reserves and pursuing external foundation funds

14

Trends of investment gains

2000 2005 2006 2007 2008 2009 2010

Difference between investment return and average guaranteed interest rate

(1.01%) (0.44%) (0.09%) +0.08% (0.10%) (0.14%) +0.07%

Impact of Negative Spread (340) (150) (30) +30 (40) (60) +30

Undistributed earnings 249 237 293 281 185 255 231

Reduce

guaranteed

interest rate

Change

investment

strategies, and

sophisticate risk

management

Accumulate

additional policy

reserves and

enhance capital

Measures to

reduce

Negative

Spread

(Billions of Yen)

Recovery from negative spread problems

After more than a decade struggle, negative spread problems have been almost overcome: Investment return > Average guaranteed interest rate

15

Secure

mortality

profit, and

reduce

expenses

16


Contents

1




17

0

20

40

60

80

100

120

140

0%

5%

10%

15%

20%

25%

30%

35%

40%65-

20-64

0-19

65-wt

65- 4.1 5.4 7.3 10.7 14.9 22.0 28.7 34.6 34.8 36.3 35.9

20-64 41.1 50.7 62.5 70.6 76.1 78.9 75.6 68.6 64.5 56.6 49.8

0-19 38.0 37.4 33.9 35.8 32.6 26.0 23.1 20.9 18.3 16.4 14.9

65-w t 4.9% 5.7% 7.1% 9.1% 12.1% 17.4% 22.5% 27.8% 29.6% 33.2% 35.7%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

(Source: National Institute of Population and Social Security Research “Japan’s projected population”)

（Unit: 100 million）

Japanese population: 127 million 760 thousand as of 1 October, 2005, a drop of 0.02% from the previous year and decreasing since then

Aged 65 and older reached 25.6 million, which exceeded for the first time 20% of total population and increasing since then

Japanese population demographics

Percentage of 65 Years and Over Population (1950 - 2010)

0

5

10

15

20

25

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Japan

Germany

Italy

France

UK

Canada

US

Russia

Korea

China

Brasil

India

18

(Source: Statistic Bureau, Data is based on United Nations, "World Population Prospects," The 2010 Revision Note: Data for Japan is based on "Population Census of Japan“)

Japan was in the lower-rankings until the 1980s, in the middle in the 1990s, and is already the highest in the early 21st century

Rapid aging

(%)

19

Total fertility rate has dropped from 4.54 in 1947, to 1.91 in 1975, and to 1.26 in 2005

Baby Boomers reaching retirement age!

Lower fertility rate - Trends in number of births

(Source: Ministry of Health, Labor and Welfare, Vital Statistics）

0

500

1,000

1,500

2,000

2,500

3,000

Year

Nu

mb

er

of

bir

ths (

00

0s)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

To

tal

Fe

rtil

ity

Ra

te (

%)

1950 1960 1970 1980 1990 2000

1.58

in 1966

4.54

in 1947

1.91

in 1975

1.26

in 2005

1.37

in 2008

Postwar baby boom

[1947-49]

Second baby boom

[1971-74]

(Year)

Male

Female

Source: Ministry of Health, Labour and Welfare and National Institute of Population and Social Security Research ; courtesy of Swiss Re Japan.

Female

Male

M F

Longer lifespan

Japanese life expectancy is among the highest in the world.

Many Japanese women live alone for around 10 years after their husbands pass away.

20

21

Savings per household by age in 2010

Savings are 2.7 million yen for a householder under age 30

8.5 times larger at 23.14 million yen for a householder age 60 or older

Liabilities to be higher as age increases up to the ages 40 to 49, at which age they peak and begin to decrease

0

500

1,000

1,500

2,000

2,500

～ 29 30 ～ 39 40 ～ 49 50 ～ 59 60 ～ 69 70 ～

Savings

Liabilities

Yearly income

(Source: Annual report on the family income and expenditure survey. Income and expenditure, Statistics Bureau, Ministry of Internal Affairs and communications 2010 )

(million yen)

Savings higher as age increases

22

In recent years, the baby boomers became aged over 50 with independent children, and needs are shifting from death protection to medical and post-retirement coverage

20-29 30-39 40-49 50-59 60-69

20-29 30-39 40-49 50-59 60-69

Death protection

Medical coverage

Post-retirement coverage -

Nursery care

Medical coverage

Post-retirement coverage

- Nursery care

〔Men〕

〔Women〕

Death protection

(Source: Japan Institute of Life Insurance “Survey on coverage”)

Changing life insurance needs

23

（職業により上乗せ）

Type-1 insured persons


Defined contribution pension (for individuals)

Defined benefit pension

National Pension (Basic Pension)

Self-employed individuals

Public officials Private salaried workers

Supported spouses of


Employees’ pension insurance

for substitution

Employees' Pension fund

National pension fund

Defined contribution pension (for corporations)

Mutual

aid pension

Tax-qualified pension plan (until 2011)

additional part by occupation


(Source: Ministry of Health, Labor and Welfare)

Roles of life insurers in the pension system are evolving

Structure of the pension system in Japan

Pension system Typical form of payment Other features

① National Pension whole life annuity -

② Employees’ Pension Insurance

whole life annuity survivor’s pension

③ Corporate Pension

lump-sum retirement allowance or fixed-term annuity

some companies provide whole life annuities with a guaranteed term

④ Self-Private Pension

fixed-term annuity options for whole life annuity with guaranteed term and lump-sum are available

The public pension provides a whole life annuity and the corporate pension provides a supplement in the form of a lump sum retirement payment or fixed-term annuity

(Source: Ministry of Health, Labor and Welfare)

Longevity risk is mainly borne by government, employers, and individuals.

Life insurers are subject to longevity risk, in case where the option for whole life annuity is chosen by policyholders for self-private pension.

24 The pension system in Japan and longevity risk

25

NowNow FutureFuture

Not covered

by public

insurance

Covered by

public

insurance

Not covered

by public

insurance

Covered by

public

insurance

Portion

covered by

public

insurance

SelfSelf--paymentpayment

Public Public

insuranceinsurance

Public health insurance costs will

rise significantly alongside advance

of the aging population with

shrinking birthrate

Increased self-payment burden

Expanded needs in the fields of amenities,

advanced treatment, and prevention

Expanded role of private Expanded role of private

health insurancehealth insurance

Expanded role of private Expanded role of private

health insurancehealth insurance

Not covered

by public

insurance

Covered by

public

insurance

Not covered

by public

insurance

Covered by

public

insurance

Portion

covered by public

insurance

SelfSelf--paymentpayment

Private insurancePrivate insurance

Separate roles of public and private health insurance are evolving to respond to the aging population

Evolving roles of public and private health insurance

26

Offsetting between longevity risk and mortality risk

Japanese life insurers’ exposure to longevity risk is limited but gradually increasing

Changes in product portfolio and longevity risk

(Source: Life Insurance Association of Japan)

Changes in Product Portfolio (Number of Policies in Force)

Longevity risks only

on whole-life

medical/pensions

Mortality risks

27

Longevity Risk Transfer

Buy-out & Buy-in

Longevity Swaps

Longevity as asset class for investors?

Other measures to mitigate longevity risk

Longevity Hedge Transaction Structure

(Source: Deutsche Bank AG)

28


Contents

1




Unintended consequences might occur if banking regulations were copied for insurers

Insurers play an important role as long term investors

Life insurers play an increasing role in the social security system

Diversity needed to support a sound development of the environment

Economic-based regime should have a long-term vision

If a short-term-minded solvency regime were implemented

Significant volatility for long term products

Driven to transfer risks over to customers

Refrain from investing in non-fixed income assets

（Photo – Sydney, Australia)

（Photo – New York, USA) （Photo – Buenos Aires, Argentina)

Issues identified during the Asia Pacific Symposium 29

Investment-type products Protection-type products

Lo

nge

vity

risk

Mo

rtality

risk

“One-size-fits-all” model would not work

Different business models by jurisdiction

Consumers’ risk preference

Expected roles of the insurers

State of development of financial markets

Issues identified during the Asia Pacific Symposium 30

31


Contents

1




32

Macroprudential Framework would not mean merely monitoring of systemic risks, but should holistically

cover all the key dimensions

Macro

economy

Macro

economy

Sustainable

development

Sustainable

development

Insurance

coverage

Insurance

coverage

Insurance industryInsurance industry

Financial

stability

Financial

stability Social

security

Social

security

Macroprudential

Framework

Macroprudential Framework

33

Tao of supervision and risk management with a holistic framework

Some words from Taoism

Be aware that the world is cyclical

Don’t go to the extreme, otherwise you will fall

Bring the balance of yin and yang to the universe

In order to manage the world, you should control yourself

In order to implement international standards, you should first know your own country （Photo – Tao Garden, Chang Mai, Thailand)

Conclusion: yin and yang

34

For Uzbekistan-OLIS Life Insurance Seminar Makoto Okubo, General Manager, International Affairs,

Nippon Life Insurance Company

Any questions? email to [email protected]

or visit www.insurance-finance.com

Challenges Faced by and Corporate Strategy of

a Japanese Life Insurer

challenges faced by and corporate strategy of a japanese ... · secure mortality profit by...

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