A Decade of Low Interest Rates – The Japanese Experience
The low interest rate environment is unlikely to end any time soon, despite some predictions to the contrary. Continuing low interest rates have big implications for life insurance companies, especially for those companies that sold products with relatively high guaranteed fixed interest rates in the past. Many companies experience challenges in realizing the guaranteed fixed interest rates in their underlying asset portfolios today.
Such a combination of guaranteed high interest rates for in-force policies and current low interest rates exists in a number of life markets, notably in South Korea and Germany.
The Japanese life insurance market offers itself as a case study because its insurers sold products with high guaranteed interest rates and then had to live in a low interest rate environment since the financial markets crashed there in the late 1990s. The experience of Japanese life companies might provide clues to companies in other markets that feel trapped in similar economic conditions and are looking for an appropriate business strategy.
Consumers themselves are likely to react to changed economic circumstances by questioning the cost of the product and whether they really need it. For that reason, life insurers have to manage their operational expenses carefully to keep product premium levels attractive. Companies also need to optimize their retention strategies to prevent policy terminations and consequently an erosion of the customer base, reduced mortality and morbidity profits due to anti-selective lapsing, and vanishing expense contributions to the profit.
Companies will also have to explore new and innovative distribution channels, such as the Internet, to attract customers.
One of the main takeaways from our study, however, was that product emphasis is important. The ability to sell profitable protection-type life insurance products, as opposed to savings-type products, is essential in a long-term low interest rate environment.
Read our publication for more on experiences from the Japanese Life Market.