HONG KONG--(BUSINESS WIRE)--A new Best’s Special Report states that although the ultra-low level of interest rates would be a negative factor to the insurers’ financial strength in the long term, a repeat of the late-1990s, when some companies became insolvent due to sudden and material changes in financial market conditions, is not expected.
The Best’s Special Report, titled, “How Have Japanese Life Insurers Coped with Ultra-Low Interest Rates Over Two Decades?” states that over this two-decade period, rated life insurers have coped with increasing pressure on capitalization by developing more sophisticated risk management tools and adopting a conservative risk appetite by shifting the focus of new sales toward protection-type products, such as traditional death coverage or products with living-benefit features, to achieve stable profitability. Life insurers also have strengthened reserves and lengthened the asset duration to mitigate the liability mismatching risk.
Although foreign securities and alternative investments have become more attractive to life insurers due to higher yields amid, a shift away from Japanese government bonds would not be material in the near term due to the current regulatory environment.
A.M. Best believes that the near-term impact on earnings and capitalization of life insurers from the recent introduction of negative interest rates would be limited as relatively long-term asset duration implies that reinvestment at lower yields will take time to impact earnings and capitalization. In addition, the companies have proactively controlled the sales volume of interest rate-sensitive products to mitigate the widening negative interest spread.
The financial strength of the Japanese life insurers continues to be monitored by A.M. Best based on the active interaction with the rated entities to gauge the impact from the continued low interest rate environment. In addition, given recent mergers and acquisitions, especially overseas, diverse market risks and underwriting risks upon their development in these overseas markets will be taken into account.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=248215.
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