Insurance Needs in Times of Low Interest: 3 Pointers from Japan

The American College of Financial Services
December 14, 2020

Many insurance companies must navigate the impact of today’s low interest rates on their businesses. However, specific examples from the past several decades, both within the US and across the world, could provide the key to resolving the cash value and viability problems facing life insurance companies.

The approach of insurance companies in Japan provides a prime example of how the insurance industry here in the US can adapt to a world where low interest rates are the new normal. After an economic downturn that started in the late 1980s and continued into the 1990s, Japan's central bank lowered interest rates to try to boost growth, much as the US Federal Reserve slashed rates to stop the bleeding caused by the COVID-19 pandemic. While some in the US hope for a more complete economic recovery, and Japan has shown some growth over the last 30 years, Japan has never returned to its previous highs and evidence suggests this may be the case for the US as well.

The good news is that, as a consequence, Japanese life insurance firms have grappled with the reality of low interest rates for a long time, and have found many ways to adapt and survive.

 

1. Exploring New Product Combinations

 

Rather than continuing to offer long-term whole life or permanent life insurance policies, Japanese insurers have pivoted toward business models focusing on term life insurance. By choosing protection-oriented products, insurers in Japan ensure their policies generate earnings based on underwriting profitability rather than banking on nonexistent investment returns in a low interest rate environment. In addition, universal life insurance and unit-linked products that shift investment risk from companies to policyholders have proven to be helpful in maintaining profitability for the insurance industry.

 

2. Revising Investment Strategies

 

To adjust to low to negative rates of interest on their products, Japanese insurers shifted their asset mixes to include a broader range of options, including foreign currency to take advantage of favorable interest rates elsewhere in the world. US insurers have been following suit in many cases by accepting higher levels of credit risk when engaging in life insurance underwriting, as well as by diversifying into commercial real estate, collateralized loan obligations (CLO), or asset-backed securities (ABS) when applicable. These new strategies, while possibly narrowing product options for individual advisors, could be necessary tools for major insurance companies to weather the low interest rate environment.

 

3. Diversifying Globally

 

Japan is a small island nation, and companies there have decided to look beyond their own shores for help reimagining their approach to life insurance. Aside from taking advantage of more favorable offshore interest rates, moving into new foreign markets can allow insurers to discover new and untapped pools of assets, populations, and insurance needs.

It should be noted, however, that of all the options presented, this one comes with the most risk for companies: when moving offshore, regulations get more complicated, start-up costs get higher, and the potential for exposure to geopolitical issues grows. While globalization is regarded by many as the future of business, it comes with its own difficulties and drawbacks, so executives and field leaders should approach it with care.

 

Helping Industry Leaders Adapt to New Insurance Realities


With low interest rates looking like they're here to stay, it's time for life insurance industry leaders to adapt to the changing environment and investigate alternative life policies and strategies, such as those employed by Japanese insurers. These and other takeaways can be found in our white paper, “Lower Rates for Longer: What Does Fed Policy Mean for the Life Insurance Industry?” Download now and visit TheAmericanCollege.edu/CLU for more information on how you can refine your business’s approach to 21st-century life insurance.

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