As domestic growth opportunities for Japan’s insurance industry remain constrained by a shrinking and aging population, Japanese insurers are increasingly turning to reinsurance deals and international markets for long-term expansion. With a saturated domestic market, many insurers are looking beyond Japan’s borders to sustain growth.
Premium income in Japan has remained strong since 2021, largely driven by the sale of single-premium savings products. However, demand for traditional life insurance products has been weakening, with new business sales expected to remain steady but growth in existing premiums anticipated to slow. According to AM Best, while savings-type products continue to perform, their sales are sensitive to interest and exchange rate fluctuations and tend to offer slimmer profit margins, limiting overall growth potential.
Despite these challenges, Japan’s life insurance sector saw an increase in after-tax profitability in 2024, continuing a generally upward trend over the past five years, except for a decline in 2023. However, with Japan’s non-life insurance sector being highly consolidated and limited by stagnant domestic economic growth, insurers are seeking to diversify their revenue sources, including expanding into international markets such as the United States, Australia, and other developed economies.
Reinsurance Deals Gain Traction
To improve capital efficiency and manage interest rate risks, Japanese life insurers are increasingly turning to asset-intensive reinsurance (AIR) transactions. These deals typically involve transferring large blocks of reserves to reinsurers, often based offshore. While these arrangements offer a way to optimize capital, they also introduce counterparty credit risks.
To mitigate these risks, insurers are employing strategies such as diversifying counterparty relationships, using collateral, and relying on ratings-based triggers to protect against reinsurer insolvency or recapture events. Although AIR transaction volumes remain modest relative to total liabilities, the capital freed up from these deals supports profitability and can help fund new growth initiatives. This capital is generally used for broader strategic purposes rather than mergers and acquisitions, with large insurers expected to continue using AIR transactions as part of their long-term capital management strategies.
However, as AIR transactions become more common, Japan’s Financial Services Agency (FSA) is conducting a survey to evaluate the risks associated with the growing use of reinsurance agreements, especially those involving reinsurers backed by global investment firms. The FSA is reportedly gathering details on the scale of these transactions and the types of contracts involved, with a particular focus on reinsurers based in Bermuda, a key hub in the global reinsurance market.
Non-Life Insurers Focus on Capital Growth
Japan’s major non-life insurance groups, including Tokio Marine, MS&AD, and Sompo, are also pursuing strategies to bolster capital reserves in the coming years. Under direction from the FSA, these companies plan to accelerate the divestment of strategic equity holdings, with the goal of reducing such holdings to zero over the next five to six years. The capital raised from these sales is expected to strengthen the insurers’ balance sheets and support future growth.
While international expansion and reinsurance strategies offer significant growth potential and diversification, they also present credit-related challenges. Acquisitions overseas can introduce execution risks, particularly if integration proves difficult or if acquisition premiums do not align with long-term value.
AM Best highlights that successful growth strategies depend on insurers maintaining robust risk management practices and strict underwriting standards. Insurers that strike a balance between pursuing growth and managing risk effectively may enhance their global business profiles without compromising their credit quality.
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