TOKYO: When Japanese life insurers were selling their products a decade ago, they reckoned they could easily earn 5% or more a year on their investments to make the payouts they guaranteed to policyholders.
Now, with interest rates near zero and the Tokyo stock market trading at a quarter of its 1989 level, those now-generous promised yields are coming back to haunt them, putting the industry and perhaps even the whole financial system at risk.
The solution seems simple: change the law to allow the insurers to cut the promised yields. Everybody agreed? Not quite.
Even the shaky insurance industry has balked at proposals to cut guaranteed yields, saying the sector's credibility would take a hit, leading to mass cancellation of policies.
Ratings agencies said they would consider any reduction in the guaranteed payouts to be tantamount to a debt default.
And many analysts said politicians who were advocating such a move were simply trying to provide underhanded support to Japan’s wobbly banks, the insurers' biggest shareholders.
Yet, those pushing for a cut, currently allow only for companies that have filed for court protection, saying it is a better option than having a big insurer go under – an event that could have profound consequences for the financial system.
Senior Liberal Democratic official Hideyuki Aizawa told Reuters last Wednesday that Japan’s ruling coalition aimed to prepare a bill by this week that would allow insurers to cut the yields.
“Recent stock weakness is adding urgency to discussions on the issue as stocks held by insurers are quite large,” he said.
The politicians have been considering allowing insurers to cut yields to 3% – about half what they had had promised before Japan fell into its decade-long economic rut.
Many fear a collapse, or near collapse, of a big insurer could result in massive liquidation of assets that would roil financial markets.
Most experts, though, see little long-term benefit.
“The proposal is nothing but a measure to help banks,” said Keio University economics professor Mitsuhiro Fukao, who has written extensively on the insurance sector. “Other than that, there is no point in introducing such steps.”
The debate highlights the cosy but potentially risky mutual support relationship between Japan's banking and life insurance industries, both of which are suffering from falling stock prices, low interest rates and a weak economy.
Outstanding capital injected by banks into life insurers stood at 1.8 trillion yen (US$15.3bil) at the end of September while capital contributed to banks by insurers amounted to a whopping 7.4 trillion yen.
Banks routinely extend subordinated loans to insurers, which in turn buy bank debt securities to boost their capital.
Analysts say that what is particularly worrying is that the banks' investments are concentrated in a few insurers.
This investment would be at risk if the insurer went under.
Cutting yields would therefore ease, for a while at least, the pressure on the banks. Japan’s top seven banks already have some 24 trillion yen of bad loans.
About half, or 880 billion yen, of bank investment in the life insurance industry is concentrated in Sumitomo Life Insurance Co and Mitsui Mutual Life Co, whose big creditor bank is Sumitomo Mitsui Banking Corp.
“It’s more than apparent that cross-capital holdings are concentrated only in a few banks,” Fukao said.
Keiko Mizuguchi, an independent life insurance analyst, said cutting promised yields for high-yielding policies could be one solution to the industry's problems.
But she said banks would have to shoulder some of the burden.
“It will not make sense if only the banks did not receive any damage,” said Mizuguchi.
Specifically, analysts said, banks should be forced to forgive a portion of their loans to the insurers.
Japan’s coalition parties only last month abandoned the idea of cutting guaranteed yields because of concerns that it could spark a backlash from policyholders in the April local elections.
But with stock prices falling to levels unseen in 20 years, interest rates at record lows, and policy cancellations remaining high, Aizawa said insurers were facing a possible crisis that could spread through the entire financial sector. – Reuters