Changes, Opportunities and Challenges in the Japanese Insurance Market

Q&A with Katherine Wong, FIAA, head of Pricing and Guideline Asia Pacific at SCOR Interview by Masu Ma


Katherine Wong, FIAA

Can you tell us a bit about yourself?

I am an Australian-qualified actuary and have worked at direct life insurance and reinsurance companies in Asia for more than 15 years. I moved to Japan around four years ago due to family reasons. I am the head of Pricing and Guideline Asia Pacific at SCOR, a major global reinsurance company, and my primary responsibility is reinsurance pricing. In addition, I have been leading local marketing initiatives for the Japanese market.

What demographic and customer trends have you observed in Japan during your time there?

Japan is one of the fastest-aging societies in the world, accelerated by low fertility rates and having one of the longest life expectancies in the world. The median age in Japan is 48. Currently, about 30% of the population is over 65, and this percentage will increase in the future. Wealth is trapped in the older age segment, with more than 50% of assets belonging to ages 65 and older.1 Because of this, and despite efforts to open new markets, such as through internet channels, the key target market segment remains unchanged over time.

Who are the major players in the Japanese insurance market? What is insurance penetration like in the market?

Japan’s insurance market is the third largest in the world by insurance premiums. It is a mature and well-penetrated market, with around 90% of Japanese households carrying life insurance—in contrast to 70% in the United States and 38% in the United Kingdom.2 There are 42 registered life insurance companies in Japan: 25 domestic companies, 13 foreign insurers and four subsidiaries of nonlife companies. Historically, local life insurance companies have dominated the market, contributing around 70% of first-year annualized premiums in FY2021. In the past decade, a few domestic companies set up subsidiaries to focus on certain distribution channels to optimize operational efficiency. For example, Daiichi group created Daiichi Frontier Life to service the bancassurance channel and Neo First Life to service the insurance shop channel.

The aging population is not a problem in Japan only. What are the primary products sold in the market with this demographic structure? What are the preferred platforms and channels in the industry?

The most popular products are endowment and whole life products, but medical products are increasing in popularity.3 Protection need for living benefits was further fueled by the COVID-19 pandemic. In Japan, most products have whole-life guarantees, and this is expected to continue in the future.

As for distribution, the agency channel dominates the life insurance market, contributing to more than half of the sales—although insurance shops have increased their market share steadily. However, sales volume has declined during the pandemic due to various COVID-related measures to limit face-to-face contact to curtail virus transmission. Some companies quickly adapted to the situation by offering hybrid online and offline solutions to address the gap. Sales almost have recovered to the pre-pandemic level at the time of writing (August 2022).

Are there any recent regulatory or compliance changes that heavily affect the insurance market in Japan?

Yes, there are four key changes.

  1. Implementation of Economic Value-based Solvency Regulation. Japan will implement the Economic Value-based Solvency Regime (ESR) by April 1, 2025, in line with the Insurance Capital Standard implementation schedule. This is a deviation from the current valuation approach to value some liabilities based on book value. Instead, the approach will move toward a system where both assets and liabilities are measured on economic value. Life insurance companies are conducting impact studies and working with the regulator to finetune the rules. We expect the new regime will have significant impacts on the management of various aspects of the life insurance business. For example, product development would favor products with a lower guarantee or investment risks passed back to the policyholders. Internally, ESR will demand further refinement for greater sophistication in modeling, with a greater focus on asset-liability management (ALM).
  2. Strengthening of life insurance sales regulation. In 2019, there was a huge sales scandal involving Japan Post, the second largest life insurance company in Japan, for questionable sales practices as agents were under enormous pressure from their superiors to fulfill their sales quotas. The Japanese regulator, Financial Services Agency (FSA), issued a business suspension order to Japan Post. In response, Japan Post suspended new business sales of financial products at post offices nationwide. As a result, there is greater scrutiny by the regulator on sales conduct across the industry. For example, there is more caution, particularly around selling large single-premium insurance products to the elderly. In addition, FSA has issued guidelines on standardization of sales disclosure that put more responsibility on the distributor to ensure the product is well-understood before sales, among other recommendations.
  3. Tax treatments on corporate-owned life insurance (COLI) business. On Feb. 14, 2019, Japan’s National Tax Agency revamped the tax treatment for COLI business in country, called the “Valentine’s shock.” The change intended to curb the use of insurance sales as a means of tax optimization. As a result, companies with product concentration in the COLI business—like Daido, NN, Manulife and FWD—have lost 50% to 85% of their new business sales after the regulation was introduced. The FSA is conducting audits on select companies selling COLI products to save money on taxes, which contravenes the FSA’s guidelines for life insurance.
  4. International Financial Reporting Standard (IFRS) 17. Lastly, worth a brief mention is the impending implementation of IFRS 17 by Jan. 1, 2023. However, IFRS 17 is not compulsory in Japan, as official disclosure requirements are still reported based on Japan’s generally accepted accounting principles (JGAAP). It will affect some foreign insurance companies, including FWD, Manulife and NN, whose head offices are in countries where IFRS 17 adoption is compulsory.

Besides regulation change and demographic trends, several significant events occurred recently such as the COVID-19 pandemic, wars, low interest rates and so on. Can you share your insights on the impact of these events on the Japanese market and lessons learned?

As actuaries, we always have anticipated pandemics and other so-called 1-in-200-year events. We make allowances for them in managing our business, be it reserving or capital in pricing. The unexpected elements of the COVID-19 pandemic include the wide-ranging impacts of different government actions, access to health care, impact on mental health and the speed with which vaccines can be put in place. The new messenger ribonucleic acid (mRNA) technology not only helped with COVID-19 but also could apply to cancer treatments and the treatment of autoimmune, metabolic and respiratory inflammatory diseases.

We have learned the importance of risk management measures to avoid unintended benefits coverage. For example, we have products that pay daily hospitalization benefits with whole-life guarantees in Japan. However, due to the increasing strain on public hospitals, the industry was pressured to change the definition of inpatient hospitalization to include those treated outside the hospital, including in hotels and at home. While this was still bearable for the Delta strain of COVID-19, the Omicron variant has caused hospital claims to increase by almost 10 times (year ending March 2021 vs. March 2022). Almost 90% of hospital claims are not actually inpatient hospitalization but treatments outside of hospitals.

We also learned about being prepared for market contingencies and embracing changes, as COVID-19 may be with us for the long haul. Reports show that a significant proportion of patients who survived infection continue to suffer from health problems months after the acute phase of the disease is over, typically known as “Long COVID.” However, the findings are still preliminary, and the impacts vary among studies. The most common symptoms are fatigue, shortness of breath, loss of taste and smell, difficulty concentrating or brain fog, headaches, trouble sleeping and anxiety. Lingering effects also may include organ dysfunction, residual inflammation, neuropsychiatric symptoms, thrombosis with microangiopathy and the reactivation of another virus, according to Dr. Regina Rosace, VP and medical director at SCOR. Finally, from an insurance perspective, Long COVID may lead to increased costs in health care and increased cost in incapacity insurance if patients cannot resume their normal work. It also may have long-term implications on mortality.

On a more positive note, there now is greater awareness of health and wellness, including mental health, which may result in behavior changes. In turn, this could have potential long-term benefits.

Innovations and technology continue to be hot topics. Have any recent insurance innovations or technology shifts been observed in the Japanese market?

Besides enabling online sales channels to provide an enhanced customer journey, we are seeing life insurance companies offer free services to their policyholders. Such services are wide-ranging—for example, allowing policyholders to access a specialist doctor for a second opinion and artificial intelligence (AI)-engineered mobile applications to manage chronic illnesses in people’s daily lives.

Greater sophistication also is seen in underwriting, extending the risk appetite and accepting risk at more competitive rates. These are driven by a better understanding of the client’s risk profile with knowledge derived from data analysis using AI and machine learning from the increased availability of customer data.

But overall, Japan’s technological development is much slower than other countries in the region. Further, the new product development cycle is relatively long compared to other Asian markets, as new products need to be filed and approved by the regulator. According to SCOR’s industry product development survey, the product development cycle typically takes one to two years.

Based on your observations of the market, what are the potential challenges and opportunities Japan’s insurance industry will face in the future?

In my opinion, the issues facing the Japanese life insurance industry are as follows:

  • There has been a persistent low interest rate environment. This is one of the contributors to sluggish sales of savings products. A decade ago, the market tried to leverage the higher return overseas by selling foreign currency-denominated products. U.S. dollar (USD) and Australian dollar (AUD) products were popular.
  • The population is aging and shrinking. Japan has the highest dependency ratio among all the Organisation for Economic Co-operation and Development (OECD) countries,4 putting a lot of strain on supporting future health care and pension costs on a pay-as-you-go basis. Related to longevity risk is health care support. Japan has an excellent public health system that covers the entire population. There are growing insecurities in Japan that government support will diminish as the dependency ratio goes up. This will, in turn, create an opportunity for the private insurance sector to fill this health protection gap.

Apart from the challenges mentioned, there will be a shift in focus to capital efficiency in traditionally well-capitalized insurance companies following the introduction of ESR, the prioritization of ALM, and product development with a focus on the cost of guarantees. In the long run, the weak fundamentals of the Japanese economy will reduce distributable income and purchasing power for insurance, affecting both new business sales and attrition rates on the in-force business. The aging population will drive demand for health care, medical services and supplies—and hence the cost—while supply diminishes simultaneously. Current medical products in the market are not inflation-proof. Fixed benefits may erode their effectiveness in times of medical inflation along with the need for insurance.

But changes also create opportunities. In the future, technological advancement may enable earlier illness detection, and a quicker prognosis eventually will lead to lower mortality. Opportunities, therefore, will lie in products for the older population. Services for this segment currently exist but are not popular in the market. Longevity also will point to a need for wellness and a greater focus on living benefits rather than the traditional death coverage.

Can you provide advice for actuaries interested in moving to Japan?

Japan is well known for its beautiful weather, great food, richness in culture and friendly people.

It is amazing to find that things work as they should in Japan. The train system is probably the most reliable one in the world. I find Japan very easy to live in. Perhaps it would be helpful to learn some basic Japanese and to ask a local friend for help with the tax return.

Katherine Wong, FIAA, is the head of Pricing and Guideline Asia Pacific at SCOR.
Masu Ma is chair of SOA Asia Editorial Sub-Committee.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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