Japanese Insurance Market

Insurance and Reinsurance Project

Prof: Badea Dumitru

Students: Gabriela DendeaRuxandra Geanta

Group 136, November 2014

Contents

Introduction

Japans Snapshot

Japans Profile

Japans Non-life insurance market in 2014

Japans Life insurance market in 2014

Japans The Prospects of the Life Insurance Market

Japan interesting facts

Japan interesting facts

1. There are 127 million people living in the Japan.2. There are over 200 volcanoes in Japan.3. There are more than 1,600 temples in Kyoto.4. The fortune cookie dates back to Kyoto, Japan during the 19th century.5. In Japan, snowmen are made of two large snowballs, not three.6. Japan is nicknamed the Land of the Rising Sun.7. Mount Everests oldest climber is Japanese Mr. Yuichiro Miura was 70 when he reached the summit, and 75 when he made the climb a second time.8. Japans Haiku poetry is the shortest in the world, consisting of only three lines.9. The only foreign language taught and mandated in Japanese schools is English.10. It is considered inappropriate to blow your nose in public.11. Many Japanese companies have morning exercise sessions for their workers.12. There is almost no immigration in Japan. The population is 98% ethnic Japanese.13. Japan has the worlds third largest economy behind the US and China.14, Japans unemployment rate is less than 4%.15. Japan consists of over 6,800 islands.

Introduction

It gives us great pleasure to have the opportunity to welcome you to ourpresentation, Japans Insurance Market 2014.

During fiscal 2013, the year ended March 31, 2014, the Japanese economyremained on a moderate recovery track as personal consumption was robust, reflecting improvement in the labor market and rising personal income, while corporate earnings increased against the backdrop of the positive impact of the Abe administrations economic policies and more favorable export conditions.

In the non-life insurance industry in Japan, net premium income trended upwardcentering on premiums from fire insurance and automotive insurance, supported by increases in the number of new housing starts and automotive sales, while also benefiting from the revision of insurance premium rates and insurance products. In the life insurance industry in Japan, both the number and the amount of new policies trended upward, reflecting brisk sales of medical insurance and whole life insurance. On the other hand, although the number of policies in force increased in line with buoyant sales of new policies, there was little growth in the amount of policies in force, in view of the recent trend toward greater emphasis on medical coverage and less emphasis on death protection.

In the reinsurance market, there was excess reinsurance capacity owing to the improved financial condition of reinsurance companies and the large amount of capital flowing into the reinsurance market. Thus, reinsurance premium rates softened, resulting in intensified competition among reinsurers.

In these circumstances, in accordance with the Forward 2014 medium-term management plan launched in 2012, the Toa Re Group implemented the initiatives described below to realize the corporate vision articulated in the plan. Utilizing sophisticated expertise and intelligence (E&I), we provide peace of mind with high-quality solutions and services with the goal of being a growing, profitable global reinsurance group trusted by all stakeholders.

In conclusion, we hope that our project will provide a greater insight into the Japanese insurance market and we would like to express our gratitude to all who kindly listened and learned something from our project.

Japans Snapshot

A Market Intelligence snapshot for this territory covering strengths and weaknesses of the econ-omy, a summary of the insurance market and a list of the most costly natural disasters.

STRENGTHS:

Well-developed and transparent tax system. Stable democratic government. Liberal policy on foreign investment and few formal restrictions on FDI. Advanced and non-discriminatory legal system.

WEAKNESSES:

Moderately high tax burden by regional comparison. Exclusive political and business networks can restrict investment from foreign investors and place overseas companies at a disadvantage when competing for contracts. A high overall cost structure makes market entry and expansion expensive for foreign inves-tors. Japan is at high risk of earthquakes and tsunamis.

MARKET TRENDS:

In the wake of The Great East Japan Earthquake, which struck the Tohoku region of Japan in 2011, market trends have begun to emerge that offer direct and reinsurance opportunities for (re)insurers looking to increase their presence in Japan. Firstly, whether to protect against high aggregation or to free up capital for overseas ex-pansion, most domestic insurers have been seeking additional onshore facultative reinsurance support.. Secondly, despite the ongoing catastrophe exposures, Japans commercial lines insurance market has been consistently profitable in the majority of lines of business, with premiums that are considered understated by the London market. Thirdly, with the expectation of flat or declining domestic demand Japanese companies are using their wealth in pursuing overseas growth. This growing trend for outwards investment isexpected to generate new specialist business opportunities both inside and outside Japan.

MARKET PLAYERS:

According to SONPO: As of July 1, 2013, a total of 53 general insurance companies were operating in Japan; a total of 30 companies were licensed as domestic insurers, including 6 foreign capital domestic insurers, while 23 companies were licensed as foreign insurers. The top three insurance groups (Tokio Marine, NKSJ, MS&AS) hold 87% market share.

BROKER MARKET:

Despite the introduction of competing channels, agents remain the bedrock of insurance distribution in Japan. Broker statistics are hard to come by but brokers are widely held to ac-count for approx 1% of the non-life market in Japan.

OUTLOOK:

The Japanese population is ageing and its numbers are falling, and as a consequence conventional non-life insurance is in long-term decline. With no prospect of significant domestic market growth, insurers such as Aioi, NipponKoa and Nissay Dowa have been forced to merge with larger rivals. These mergers are likely to change the competitive dynamics of the local mar-ket and may therefore open opportunities for niche players to enter the market, though there has been recent M&A activity outside Japan as these major players look to grow overseas.

NATURAL DISASTERS:

Japans Profile

FULL NAME / CAPITAL CITY: Japan / TokyoLANGUAGE: Japanese

GDP (PPP): US$ 4,576tn (Global Rank #5) POPULATION: 127m (Global Rank #11)IMF CATEGORISATION: Developed

Archaeological research indicates that people lived in Japan as early as the Upper Paleo-lithic period. The first written mention of Japan is in Chinese history texts from the 1st century AD. Influence from other regions, mainly China, followed by periods of isolation, particularly from Western European influence, has characterized Japan's history. From the 12th century until 1868, Japan was ruled by successive feudal military shoguns in the name of the Emperor. Japan entered into a long period of isolation in the early 17th century, which was only ended in 1853 when a United States fleet pressured Japan to open to the West.

Nearly two decades of internal conflict and insurrection followed before the Meiji Emperor was restored as head of state in 1868 and the Empire of Japan was proclaimed, with the Emperor as a divine symbol of the nation. In the late 19th and early 20th centuries, victories in the First Sino-Japanese War, the Russo-Japanese War and World War I allowed Japan to expand its empire during a period of increasing militarism. The Second Sino-Japanese War of 1937 ex-panded into part of World War II in 1941, which came to an end in 1945 following the atomic bombings of Hiroshima and Nagasaki. Since adopting its revised constitution in 1947, Japan has maintained a unitary constitutional monarchy with an emperor and an elected legislature called the Diet.

A major economic power,[2] Japan is a developed country and has the world's third-largest economy by nominal GDP and the world's fourth-largest economy by purchasing power par-ity. It is also the world's fourth-largest exporter and fourth-largest importer. Although Japan has officially renounced its right to declare war, it maintains a modern military with the world's eighth largest military budget,[10] used for self-defense and peacekeeping roles. Japan ranks high in metrics of prosperity such as the Human Development Index, with the Japanese popu-lation enjoying the highest life expectancy of any country in the world and the infant mortality rate being the third lowest globally.

Japans Non-life insurance market in 2014

Features of Japans Non-Life Insurance Market

Fiscal 2013 net premium income for the 27 non-life insurance companies that are members of the General Insurance Association of Japan totaled 7,771.3 billion. The size of this market has not changed significantly over the past decade. Automobile-related insurance accounts for a major share by line of business. In fiscal 2013, automobile insurance (48.4%) and compulsory automobile liability insurance (12.8%) together accounted for around 60% of the overall non-life market, in which number of automobile owne ship and new vehicle sales would significantly affect the scale of these markets. The next larg-est segment by volume was fire insurance (14.8%), which is affected by the number of housing starts and corporate spending trends. Next came casualty insurance such as liability insurance (11.9%), accident and health insurance (8.8%), and marine and transport insurance (3.3%).

The profitability of the non-life insurance market has trended downward over the past sev-eral years due to factors such as increases in the number of automobile accidents and natural disasters. Consequently, the combined ratio exceeded 100% from fiscal 2008 through 2012.

Improving these relatively low profitability circumstances requires enhancing theprofit from automobile insurance, which accounts for the largest share of the market.This is a major priority for the entire non-life insurance industry. While raising rates,non-life insurance companies have steadily improved profitability in ways such asreviewing* the age-based rating scheme and introducing a new class rating scheme forpolicyholders who have had accidents.

Japans Life insurance market in 2014

The needs of consumers in Japans life insurance market are evolving as a result ofchanges in social structure. This article discusses circumstances in the focus areas ofnursing care, medical care and savings.

1) Public and Private Healthcare Insurance Programs

Social security system in Japan adopts what is called universal insurance andpension coverage policy and it is compulsory for every citizen in Japan to participatein the public social healthcare insurance program. This program serves to decrease the burden of payment for medical treatment borne by individual patients, sharing the cost derived from illness and injury on a societal level and, furthermore, assuring an equal opportunity for every-one to receive high quality advanced medical treatment. Also, there is a ceiling for the amount of monthly payment for medical treatment borne by individuals according to their ages and income levels. This makes it possible to keep the payment of individual participants below the ceiling amount for any medical treatment as long as the treatment is within the coverage under the program, regardless of the actual amount of treatment expenses.

In this regard, the medical and health insurance provided by the private insurers in Japan typically compensates the damages for the self-borne medical costs exceeding the ceiling amount and non-covered costs under the program, for example, travelling and living expens-es related to treatment or hospitalization, loss in income due to long- term hospitalization or expenses for advanced medical treatment which are not recoverable under the program. The sum insured in the private medical and health insurance is typically determined as a fixed amount.

(2) Population and Households

Japan has been experiencing a lowering birth rate and aging demographic, and fac-ing a declining population. The beginning of a declining trend in the working age population (age 15 to 64) was already identified back in 1996, and the nations overall population has been on a downward trend since 2005. As of October 1, 2013, the total population in Japan was 127.3 million, of which the number of people aged 65 or over against total population (population aging rate) was 25.1%. In the future, the number of people in the over 65 years old group, especially the over 75 years old group is expected to grow, while the population of the 30 to 49 years old group is anticipated to decline, indicating a potential shrinkage in thedomestic private consumption.

Amid a trend in declining population, there has been a change in the composition of a family as well. A typical family used to comprise parents and two children four in total. Currently, the number of single-person families has shown a rising trend and its proportion of the total has been increasing; notably it has been the largest group of family type since 2007. In the future, the number of single-person families is expected to increase further as the number of unmarried persons aged 50 or over significantly grows.

Changes in Life Insurance Market in Japan

(1) Aging Population

The total population of Japan is decreasing, while the proportion of the total relating to people aged 60 or over continues to increase. As the people in that age group are likely to be more concerned with risks associated with longevity rather than death, insurance products targeting elderly people, such as whole life medical insurance, are expected to be more popu-lar in the market. In anticipation of the coming of an aging society, there are growing needs for more credible and value added customer services.

(2) Young Generation is Reluctant to Buy Life Insurance in Japan It is notable that the number of life insurance policyholders, especially in the young age group, has been on a declining trend. Several reasons for this reluctance could be consid-ered, including: (1) As the security level in the office or the work place, such as the ID check at the entrance, have been tightened, it has become more difficult for individual sales agents to access the young people who will be potential customers; (2) Diversity in lifestyle leads more young people to be unmarried or young families to remain childless; and (3) A worsening envi-ronment in terms of disposable income makes the purchase of life insurance less affordable.

Changes in Life Insurance Market in Japan

(3) Distribution Channels

Historically, the majority of life insurance products were sold by sales agents tied with a single life insurance company. However, a growing number of products are now being sold through new channels including bancassurance, insurance outlets and Internet, thereby provid-ing those who are seeking to purchase insurance policies with more diversified channels.

In terms of the distribution channels through which consumers took out insurance policies, as the most recent survey underlines, consumers can choose insurance from a wider range of channels than in the past. However, the tied agent channel remained the largest distribution channel in Japan as nearly 70% of consumers still purchased policies through this channel.

Japans The Prospects of the Life Insurance Market

Historical Growth

Insurance penetration measured by taking premiums as a percentage of GDP, is quite high in Japan, close to 10%. [5] In comparison, the U.S. has a penetration of just 4%. Premium growth, measured in U.S. dollar equivalents was close to 15% in 2010 and 2011. But monthly statistics from The Life Insurance Association of Japan indicate a 3% year on year decline in premiums measured in yen in 2012. Claims and benefits are around 61% of premiums.

Although life insurers in Japan have earned profits in the last few years, the average gross profit margin is more than 20%. The weakening of the yen in the last few months has hurt foreign insurers as the yen has fallen around 20% against the dollar since November 2011. [6] Due to the uncertainty regarding the yen, we will not be considering further currency fluctuations for this article.

Investment Income

Investment income is critical for life insurers. Close to 70% of the revenues earned by life insurers in Japan comes from investment income. Fixed maturity securities account for 80% of the invested assets in Japan with government bonds accounting for 55% of these. Close to 10% of the assets invested in securities are invested in corporate bonds with 6% in stocks and 5% in local government bonds.

Our Forecast

While Prime Minister Shinzo Abe has undertaken measures to provide monetary stimulus, and the full effects from a weakening yen have yet to be realized. The countrys GDP fell by 0.4% in the last quarter following a 3.8% decline in the previous quarter. [8] The Japanese government has provided a projection of 2.5% GDP growth for the fiscal year starting in April. [9] For our forecast, we take a more conservative projection for the Japanese economy with an expected annual average growth of 2%. Assuming insurance penetration around the historical average of 9%, we expect the Japanese life insurance market to grow to $533 billion by 2019.

The Final Take

Uncertainty regarding the yen makes any forecast regarding the Japanese market a matter of speculation rather than calculation. The forecast we have provided above does not take currency fluctuations regarding the yen.