The recent uptick in interest rates in Japan has provided valuable lessons for China’s life insurance sector, which is grappling with similar challenges amid a prolonged period of low interest rates.
According to insights from John Zhu, Chief Economist Asia Pacific, and Yaxin Chen, Economist, at Swiss Re Institute, Japan’s life insurance industry, long mired in what were termed the “lost decades,” has begun to see improvements with the recent increase in interest rates. This development serves as a strategic guidepost for Chinese insurers navigating comparable economic conditions.
In the first quarter of 2024, China’s life insurers reported a decline in investment yields to 2.16%, down significantly from over 300 basis points since 2020. This decline contributed to an estimated 20% year-on-year decrease in net profit for 2023.
Unlike their Japanese counterparts, Chinese insurers face limitations in overseas investment opportunities, exacerbating the pressure on investment returns.
To cope with prolonged low interest rates, Japanese insurers strategically pivoted towards foreign securities and protection-type policies, such as traditional life and medical insurance, which offer more favorable margins. This strategic shift, bolstered by deregulation efforts, proved effective particularly in light of Japan’s aging population.
The prudent management of mortality and morbidity risks has emerged as a critical buffer for profitability among Chinese insurers. In Japan, improvements in mortality rates have helped mitigate challenges associated with negative spreads. Moreover, higher-yielding foreign assets and rigorous cost-cutting measures have further bolstered profitability in the Japanese market.
Despite similarities between China’s current economic challenges and Japan’s experience in the 1990s—such as concerns over real estate expansion and banking risks—China remains an emerging market with robust growth potential, particularly in green technology and the digital economy. Notably, China’s GDP growth rate is expected to stabilize at a higher level compared to Japan during its lost decades.
However, China’s life insurance market penetration remains significantly lower than Japan’s was in the 1980s, indicating substantial room for expansion.
Both Japan and China are actively pursuing reforms aimed at enhancing corporate governance and strengthening financial systems. These reforms are expected to boost productivity and improve capital allocation in the coming years.
In summary, while Japan’s recent experiences offer valuable insights, China’s unique economic dynamics and growth opportunities underscore a potentially divergent path forward for its insurers, contingent upon effective adaptation and strategic maneuvering in a challenging global economic landscape.
