Negative Interest Rate Affects Life

The Bank of Japan’s negative interest rate decision has started affecting the life insurance market, with sales of some products such as whole-life insurance policies being suspended following the announcement.

Life insurance companies invest a large portion of premiums collected from policy holders into Japanese government bonds. However, as long-term interest rates are at their lowest ever, it has become difficult for life insurance companies to gain sufficient investment returns.

“Very severe conditions will continue for the time being,” Nippon Life Insurance Co. President Yoshinobu Tsutsui, who also serves as chairman of the Life Insurance Association of Japan, said at a press conference Friday with a stern expression on his face.

On Tuesday, Dai-ichi Frontier Life Insurance Co., a subsidiary of Dai-ichi Life Insurance Co., suspended sales of some of its yen-dominated, single-premium whole-life insurance policies. Fukoku Mutual Life Insurance Co. plans to suspend sales of some of its single-premium whole-life insurance products from March. Other life insurance companies are also discussing similar actions.

Moves to raise insurance premiums on new contracts will also likely spread.

If actual investment returns become lower than the yield rates life insurance companies guaranteed to policy holders at the time of contracts being signed — the assumed interest rate — then they will have to cover the shortfalls with their own money to pay the promised yields. If such a negative phenomenon increases, it could deal a heavy blow to the business management of life insurance companies.

To avoid that negative spread, life insurance companies would need to lower the assumed investment rate. Then, if policy holders wished to receive the same amount of insurance benefits as those offered in the past, life insurance companies would require higher insurance premiums, which fund their investments, because returns would have become lower.

Because yields from Japanese government bonds have been falling, life insurance companies need to make more effort with their investments. They have begun shifting to foreign bonds, in which higher yields can be expected, for new investments. An increasing number of life insurance companies have also started extending loans for work in fields in which growth can be expected, such as infrastructure projects.

However, such moves have higher investment risks than Japanese government bonds. An official of Nippon Life Insurance Co. said life insurance companies’ “skills in investments will be tested more strictly than ever.”