Will drive Japanese government bond yields lower and increase volatility
HONG KONG, February 11, 2016—The introduction of the negative interest rate by the Bank of Japan (BOJ) should put pressure on insurers’ balance sheets and operating performances, according to a new A.M. Best briefing.
The Best’s Briefing, titled, “Bank of Japan’s Introduction of Negative Interest Rates Further Challenges Insurers,” states that the BOJ’s application of a negative interest rate of -0.1% on a portion of the excess reserves it holds will drive Japanese government bond (JGB) yields lower and increase volatility.
This should put increasing pressure on insurers’ profitability and capital management going forward, especially for life insurers, given their high exposure to JGBs. The JGB balance held by the life insurance sector reached about 43% of total invested assets at the end of November 2015.
A.M. Best expects the extent of the impact from a further decrease in rates to be partly offset by insurers’ efforts, including diversification of businesses and a reduction of asset risks.
The current low yields across all maturities will exert negative pressure on the insurers’ operating performance and, eventually, balance sheet strength, as they would have to reinvest at lower yields.
In addition, the negative rate could lead insurers to turn to alternatives that offer higher yields at the expense of credit quality.
Rated insurers recognize that their overall risk profile is skewed toward asset risks, prompting the major insurers to take more underwriting risks by reallocating capital from asset risks, as evidenced by the move of large-scale investments into the overseas insurance markets last year.
Although the scale of the international businesses remains small relative to the domestic operations in Japan, the move toward geographical diversification could provide an additional buffer against the adverse impact from the BOJ’s introduction of negative rates.
To access a copy of this briefing, please visit here.
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