Speaker Name & Country :

Topic:

Susumu Sato , Daichi Tanaka

The Institute of Actuaries of Japan

How Japanese insurance companies and corporate

pensions operate in a low interest rate environment

0. Overview - Contents
Corporate Pension

Life Insurance
Low Interest Rate
Consequences
Measures

Life Insurers Bankruptcy

Cut Down GIR
Investment Strategy

Fund Deficit
Cash Balance Plan
Shift from DB to DC

Negative Interest Rate

Consequences
Measures

Loss of Investment & Reserve

Product Development
Asset Management
Capital Strengthening, etc

Fund Deficit / Liability Increase

Further Shift from DB to DC
Risk Sharing DB

0. Overview - Past Situation

After the burst of the economic bubble, JGB yields continue to drop.
Japanese life insurers and corporate pensions made various steps
to operate in this market situation.

JGB Yield After Burst of Japan Economic Bubble

Burst of Japan
Economic Bubble

10%
5%
0%

1989

1994

1999
5 yr

2009
2004
10 yr
20 yr

2014
3

Agenda
Contents
Introduction

Life
Insurance

Corporate
Pension

p.6

p.10-11

Current Situation

p.7-8

p.12-13

What happens Influence of

Negative Interest Rate
How we adapt Actions

p.20

p.15-16

p.21-25

p.17-18
4

Agenda
Contents
Introduction

Life
Insurance

Corporate
Pension

p.6

p.10-11

Current Situation

p.7-8

p.12-13

What happens Influence of

Negative Interest Rate
How we adapt Actions

p.20

p.15-16

p.21-25

p.17-18
5

1. Introduction - Life Insurance (1/1) Product Mix

Savings-oriented products are popular not only in Japan
but also in major Asian countries.
Main products in other Asian Countries
Country

Main Products

China

Participating endowment
Traditional saving products

South
Korea

Personal illness
Whole life
Annuity

Singapore

Endowment
Whole life
Term life

India

Traditional products with

survival benefits
Unit-linked products
6

2. Current situation - Life Insurance (1/2) Low Interest Rate

After the burst of the bubble, the investment losses caused
several life insurers bankruptcy.
Insolvent Life Insurers

JGB Yield

10%

(unit: JPY billions)

Asset at
Net Asset at
insolvency insolvency
2,100
(303)

Year

Company

1997

Nissan

1999

Toho

2,800

(650)

4%

2000

Daihyaku

2,100

(318)

2000

Taisho

200

(37)

2%

2000

Chiyoda

3,500

(595)

2000

Kyoei

4,600

(690)

2001

Tokyo

690

(73)

Burst of Japan
Economic Bubble

8%
6%

0%

1989

1994 1999 2004 2009

5 yr
10 yr
20 yr

2014

2. Current situation - Life Insurance (2/2) Past Efforts

Three major adaptations
1. Cut Down Guaranteed Interest Rate for new business

Guaranteed Interest Rate

(Standard Rate)

5.0%
0.0%

1990

1995

2000

2005

2010

Improve profitability
of new business

2015

2. Make Asset Duration Longer

18
14
10
6

Liability
Asset
2004

2006

Source: Bank of Japan Review (summation of 9 life insurers)

2008

Seek higher yield

Reduce duration gap

2010

3. Increase Foreign Asset holdings

(Trillion Yen)

200
100

1994

2004

2014

45.0%

Foreign

25.0%

Domestic

5.0%

Ratio of Foreign
Source: LIAJ

Seek higher yield

Diversify portfolio
8

Agenda
Contents
Introduction

Life
Insurance

Corporate
Pension

p.6

p.10-11

Current Situation

p.7-8

p.12-13

What happens Influence of

Negative Interest Rate
How we adapt Actions

p.20

p.15-16

p.21-25

p.17-18
9

1. Introduction Corporate Pension (1/2) Pension System

Public pension benefit decreasing, Corporate pension is getting more
important.

CP
EPI
NP

Member

Pension
Age

Replacement
rate

Specific
Employees

60~65

Employees
All persons

6065
6065

Economic stagnation
Decreasing population
Longer life expectancy

[2014]
62.7%

[2044]
51.0%

Benefit
Adjustment

Corporate Pension
Public pension
1.Employees Pension Insurance
2. National Pension

Public pension benefit is

expected to decrease
10

1. Introduction Corporate Pension (2/2) DB vs DC

Employer bears the investment risk for DB while
Employee bears it for DC.
DB (Defined Benefit plan)

DC (Defined Contribution plan)

Number
(EOY2014)

13,883 plans

4,635 plans

Benefit

Determined in advance

According to investment experience

Employer
Investment
Additional
loss
contributions

Employee

Investment
risk bearer

Investment
loss
Expected
investment yield

Expected interest rate

Investment
performance

Investment
performance
Save up

Benefit
reduction

Payment

Save up

Payment 11

2. Current situation - Corporate Pension (1/2) Low Interest Rate

(%)
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00

Lower Interest Rate on DB causes Fund deficit.

Structurally, DB is exposed to interest rate risk.
3.30

2.95

1.55

Gap

1.75

2007

1.76

Gap

1.93

1.19

10-yr JGB yield

2006

2.50

Expected Interest Rate

2008

2009

2010

0.57
2011

2012

2013

2014

Employer avoids the loss

Expected Interest
Rate Assumption
Actual Yield

Lower
Interest
Rate

Slightly Down
Down

Wider
Gap

Fund
Deficit
12

2. Current situation - Corporate Pension (2/2) Past Efforts

Measures taken to mitigate DB employers risk

Cash Balance Plan

Scheme

Expected interest rate

Contribution

Risk transferred

Deficit

Investment
performance

Additional
contribution

Benefit

Save up

Payment

Shift from DB to DC

Number of Corporate
Pension Members
(million)

10
5

0
(End of FY)

8.0

7.3
3.7
2010

4.2

2011

8.0
4.4

2012

7.9
4.6

2013

7.8
5.1

2014

DC
DB
13

Agenda
Contents
Introduction

Life
Insurance

Corporate
Pension

p.6

p.10-11

Current Situation

p.7-8

p.12-13

What happens Influence of

Negative Interest Rate
How we adapt Actions

p.20

p.15-16

p.21-25

p.17-18
14

3. What happens Background of negative interest rate

10%
8%
6%
4%
2%
0%

JGB Yield After Burst of Japan Economic Bubble

Burst of Japan
Economic Bubble

1989

1994

Negative Rate Policy

Introduced (2016)

1999
2004
2009
5 yr
10 yr
20 yr

Impact of Negative Rate Poicy

1.5%
1.0%

Announced
(2016/1/29)

0.5%

2015/10/1

5 yr

Applied
(2016/2/16)

<Background>
Extended period of deflation
Poor economic growth
In early 2016
Unstable financial markets
caused by volatile global
situations (oil price, )
Accelerating monetary easing
policies

0.0%
-0.5%

2014

The Bank of Japan

Monetary easing policies
to achieve price
stability target (+2%)

10 yr

20 yr

Negative
Interest Rates

15

3. What happens Corporate Pension (1/1) Influence on DB

Negative Interest Rate further increases Fund deficit and Liability increase.
Investment performance
20.0%
15.0%

Employers' risk

14.3%

11.0%

10.0%
5.0%

0.1%

0.0%

8.7%

10.9%

1.2%

2.0%

Fund Deficit

5.0%

2009

2010

2011

2012

2013

2014

2015

Yield curve of the discount rate

Liability Increase
91 trillion

5.1% UP

Before negative interest rate policy

After negative interest rate policy
period

Further shift from DB to DC

Funds with alternative asset
Introduction of Risk Sharing DB

2015.3

2016.3

16

4. How we adapt - Corporate pension (1/2) Current Plan

On current DB and DC, the risk is one-sided to either the Employer

or the Employee.
Problem of DB & DC
DB Structure
Additional
Contribution

Expected interest rate

Employers
Risk

Investment
performance
Payment

Save up

DB

DC Structure

Expected
investment yield

Benefit
Reduction

Employees
Risk

Investment
performance
Save up

DC

Payment

17

4. How we adapt - Corporate pension (2/2) New Plan

New Plan helps Employer and Employee to share the risk.

Scheme of Risk Sharing DB

Benefit Reduction
(Employees Risk)

Expected interest rate

Risk
share

Investment
performance
Save up

Additional Contribution
(Employers Risk)
Payment

Positioning of Risk Sharing DB

Features of Risk Sharing DB

Employers' risks

DB: Defined Benefit

Plan

Law

Accounting

RS: Risk Sharing DB

DC Defined Contribution

Employees risks

18

Agenda
Contents
Introduction

Life
Insurance

Corporate
Pension

p.6

p.10-11

Current Situation

p.7-8

p.12-13

What happens Influence of

Negative Interest Rate
How we adapt Actions

p.20

p.15-16

p.21-25

p.17-18
19

3. What happens - Life Insurance Reserving Regulation

Lock-in reserving is required by the regulations in Japan.
Valuation interest rate is determined by JGB yields.
JGB yield and Valuation interest rate

1.60%
1.40%
1.20%

Regular Prem

1.00%
0.80%

Single Prem (long

term)

0.60%
0.40%

Single Prem (short

term)

Boost Liability

0.20%

10-yearJGB rate

0.00%
-0.20%
2012.3

2012.9

2013.3

2013.9

2014.3

2014.9

2015.3

2015.9

2016.3
20

4. How we adapt - Life Insurance (1/5) Product Development

Many companies have repriced or stopped selling savings-oriented products.
Immediate actions are required for single premium products.
Repricing / Stop Selling
Cash Flow of Single Premium Policies

Premium

Benefit

investment

Buy bonds
at issue date
GIR matches bond yield
at issue date

Cash Flow of Level Premium Policies

Benefit

investment

Buy bonds
at premium payment
GIR matches bond yield
in accumulation period

21

4. How we adapt - Life Insurance (2/5) Product Development

To avoid JPY interest rate risk, segregated account and foreign currency products
are being introduced.
Variable Life insurance / Variable Annuity

Foreign currency denominated insurance

Investment performance

Death Benefit

Maturity Benefit

Premium

Policyholders gain the chance of high

return
Insurance companies can transfer
investment risk

Maturity Benefit

premium

Death Benefit

High yield

Policyholders gain the high yield

Insurance company can transfer FX risk
22

4. How we adapt - Life Insurance (3/5) Asset Management

Many companies are increasing investment in riskier assets in order to
obtain a higher return on assets.
Changes in Asset Mix
[Trillion]

Sum total

350

Other
300

Foreign security

250
200

32.8%

Domestic
stocks

23.9%

150

Domestic
bonds

100
50
0

2011

2015

future

Required to monitor the risk regularly

23

4. How we adapt - Life Insurance (4/5) Actions for Regulation

Because the liability is likely to increase due to lower discount rate,
companies need to put in place measures.
Regulatory issues and measures

B/S

Decline in JGB yields result in decreasing net

asset
Asset

Liability

Net asset
Negative interest rate continues

Asset

Liability

Net asset

Shift to products that are not applicable to the

reserve valuation regulation
Issue subordinated debt
The issuance of subordinated debt
Year/
Month

Company

Amount

2015/10

Daiichi

\ 283 billion

2016/1

Nippon

$ 1.5 billion

2016/4

Nippon

\ 100 billion

2016/6

Sumitomo

\ 100 billion
24

4. How we adapt - Life Insurance (5/5) Economic Value

Actions for Economic Valuation
trillion
25

MCEVEEV / Required Capital

MCEVEEV

20
15

Required
Capital

10
5
0

2015.3

2016.3

Change sales strategy to improve profitability :

Stop products that have less economic value. (e.g. Single Premium Whole Life)
Shift to shorter-term products
Secure economic capital : Issue subordinated debt
Change extrapolation method : Introduce UFR (ultimate forward rate).
25

5. Wrap-up
Corporate Pension

Life Insurance
Low Interest Rate
Consequences
Measures

Life Insurers Bankruptcy

Cut Down GIR
Investment Strategy

Fund Deficit
Cash Balance Plan
Shift from DB to DC

Negative Interest Rate

Consequences
Measures

Loss of Investment & Reserve

Product Development
Asset Management
Capital Strengthening, etc

Fund Deficit / Liability Increase

Further Shift from DB to DC
Risk Sharing DB

26

Thank you for your attention.

Questions

22 November 2016

Comments

27