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Summary
Many countries are suffering from current interest yields falling close to or below historic policy guarantee levels. This is nowhere more evident than in Japan, where the historic guaranteed interest rates in life insurance contracts far exceed the low yields available from Japanese government bonds today. This has created a "negative interest spread" which has caused an increasing number of Japanese life insurers to declare bankruptcy, and the government to consider allowing the remaining companies to reduce their contractual guarantees.
Japanese life insurance reserving regulations do not currently fully recognise the expected future losses from the negative spread on in-force business. The IASB is currently considering the introduction of a new international accounting standard to account for insurance liabilities at "fair value". Although the details and methodologies involved are not yet decided or fully tested, it currently appears likely that such new standards would lead to additional reserving requirements for some Japanese life insurers on their existing business.
Even for new policies that are currently being written, the guaranteed interest rate is similar to the risk-free return available. For participating policies much of the upside profit from excess investment performance is passed to the policyholder, but with the shareholder (in a proprietary company), or the other policyholders (in the case of a mutual), remaining liable for some downside risk (depending on the exact bonus calculation mechanism used). As in many countries, the expected cost of this embedded option may not be correctly allowed for in the pricing of the business, valuation of liabilities, or in future profits projections.
The paper will seek to: |
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The extreme nature of the economic position in Japan brings into sharper focus issues that will be applicable to many other life insurance markets. The paper will apply financial economic techniques that have been well documented in recent actuarial literature. The aim is to produce a paper that gives realistic examples, and raises practical issues, and which may be of interest to all professionals involved in the financial management of life insurance companies.
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