Saturday, December 10, 2011

Market Line Insurance - Decline In Overall Market

Market Line Insurance

In October 2006, the in-force value of private individual life insurance policies in Japan hit an 18-year low, falling below US$10 trillion for the first time since March, 1990. This was primarily the result of a severe downturn in the traditional life insurance market, including whole life, term life, and endowments. Because this segment had accounted for over 50 percent of gross premium from non-Japan Post insurance, its decline created a significant drop in the total market size. Factors driving this downward spiral include a shrinking addressable population, market saturation, and shifting customer demand towards such alternative products as mutual funds.

Shrinking Addressable Market

Japan's 2012 population is projected to be 127.2 million, approximately 0.6 million less than in 2007. While this does not sound like a big difference, the population comprising life insurers' primary addressable market, that is those between ages of 15 and 64, is projected to be only 80.3 million in 2012, a drop of 3.5 million or 4.3 percent from 2007. At the same time, the population of all those over the age of 65 is expected to increase by four million people. With a shrinking population and a demographic trend that is not in favor of life insurance, the traditional life insurers' addressable market is steadily declining. 

Market Saturation

Customer surveys show that penetration of life insurance for death coverage has peaked. Around 70-80 percent of the population aged between 20 and 60 has some form of death coverage. The coverage ratio of males between 30 and 60 has already surpassed 90 percent.

Not only is the coverage ratio high, but in addition a Iot of middle-aged Japanese have actually come to realize that they have more death coverage than they need. In other words, they feel over-insured, particularly by whole-life products. Average benefits per whole-life policy have been continuously decreasing. Since whole life products account for nearly three quarters of sum assured from traditional individual policies, the decrease in average benefits has a severe impact on total premium intake from the traditional category. 

However, it is also interesting to note that term life has been on a slight incline, both in the number of policies and benefit per policy. Term-life growth is mainly driven by increasing penetration in the profitable small- and medium-size enterprise owner segment where policyholders can obtain tax benefits. However, a reduction in tax benefit from new regulations in February, 2008 is expected to cause same impact to this segment.  

Shifting Customer Demand

The decreasing fertility ratio is also a problem for insurers. As younger generations of Japanese choose to marry later and have fewer children, the fertility ratio dropped from around 1.5 in the early 1990s to less than 1.3 today. A declining fertility ratio shrinks demand for death protection as fewer potential customers have children for whom they are responsible.

Lack Of Economic Growth

Unlike other nations, Japan is expected to experience 1.6 percent real GDP growth per year between 2007 and 2012; in contrast, the other 12 countries will grow at an average annual rate of 6,8 percent, a key driver to fundamental demand for insurance. 

As a result of the above factors, gross premium in Japan is expected to remain at the same level over the next five years, as the aging population causes a depletion of insurance assets. This will cause some reshuffling of the industry while competition intensifies. Whole life and other traditional products are likely to be hardest hit, as has been the case in other more developed markets.

Large incumbents such as Nippon Life, Sumitomo, and Meiji Yasuda, whose portfolio are dominated by these products, will be increasingly pushed to reinvent their business models. Once a whole generation of loyal insurance customers reaches retirement age they will find it hard to create new business to make up for this depleting in-force book.
The Slow Decline of the Incumbents 

Nippon Life, Sumitomo, Meiji Yasuda, Dai-ichi Mutual, Mitsui Life - these are the names of what were, 15 years ago, the largest insurance companies in the world, The business of each of these companies exceeds that of the size of whole markets in most other Asian countries. However, due to the lack of growth and difficult economics, the future prospects for these companies are very challenging, as indicated by their market value. For example, Dai-ichi Mutual and Sumitomo ranked 16th and 23rd among all insurers by 2006 revenue, but only 33rd and 56th respectively by value. Their estimated values were US$21.6 billion and US$13.0 billion.
It is undeniable that these companies are in a state of decline, despite their impressive size and prestige. Some have even gone through a phase of facing bankruptcy because of the need to meet high-guarantee policies.
Their fate may have been worse if not for intervention from the Japanese government, which was loath to lose some of the nation's leading financial institutions during the long period of economic recession in the 1990s. By any standard these companies have weathered an economic environment that would test even the hardiest of contenders. It is, therefore, easy to understand why these companies have focused on survival and sustainability rather than expansion.
The weakness of Japanese insurance companies gave rise to a number of acquisitions of illiquid and bankrupt mid-size insurers in the late 1990s and early 2000s. GE led the way with the acquisition of Toho and was followed by AIG buying Chiyoda Life, AXA acquiring Nichidan, Prudential (US) buying Kyoei Life, and Manulife's successful acquisition of Daihyaku. This is a major change to the market; with foreign players cleaning up the companies in the last 3-4 years, these insurers are likely to become strong competitors to the large incumbents in the near future.

So why have local incumbents not taken action to revitalize their standing? First, local incumbents do not have a history of venturing into new product areas. They were not the first to enter the stand-alone medical market, nor were they eager to develop variable annuities. With a conservative investment outlook, the majority of these players' portfolios have remained in traditional life policies. Nippon Life, Sumitomo, and Meiji Yasuda together account for some 70 percent of the whole-life market, a sector that declined at an annualized rate of 7 percent from 2001 to 2006.

Second, these players' large sales forces are entrenched in their current form, making it very difficult for the sales forces to change their habits, including selling new products such as investment-linked policies. Japanese insurance companies own enormous housewife-based (seiho lady) sales forces, which were nurtured in the period after World War II, when societal pressures obliged large corporations to give women work. In 2006, Nippon Life had almost 51,000 agents, while Meiii Yasuda, the fourth largest insurer, had nearly 32,000 agents. Having invented this model for selling life insurance and seen it produce decades of success, they are now encumbered with a legacy that has come to haunt them.
Third, a conservative corporate culture with long, decision-making processes prohibits these companies from taking swift action when markets turn. Most of the major Japanese incumbents are "mutuals," owned by their policyholders. Consequently, they are not subject to shareholder pressure, leaving the management to its own devices with a weak governance culture. There has been much talk about demutualization and in 2002 Daido became the first company to demutualize, but so far, the larger players remain mutuals. 

In particular, given their stronghold in the still-large traditional sector, management may eschew opportunities in the variable annuity or medical insurance markets on the grounds that they are too small. To put this in perspective, Nippon Life earned US$46 billion in premium in 2006, when the entire medical insurance market was estimated to be worth no more than US$19 billion. To find out more, you can check Market Line Insurance.

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