Japanese insurers' capitalisation and profitability strained by coronavirus, says Moody's

Moody's has changed its outlook for Japan's life insurance industry to negative from stable, reflecting the strain on insurers' capitalisation and profitability from growing uncertainties in the domestic and global capital markets amid coronavirus-related disruptions.

The agency stated that the risk for capital erosion has risen despite its assessment that insurers currently maintain relatively strong economic capitalisation despite the latest drop in domestic stock prices.

"The Japanese life insurers could see their otherwise strong capital position erode over the next 12-18 months amid increased capital market volatility," said Soichiro Makimoto, a Moody's vice president and senior analyst.

The agency noted that the insurers have meaningful exposure to domestic equities and unhedged foreign-currency positions, leaving them vulnerable to declines in the Japanese stock market and a sharp appreciation in the Japanese yen.

"Moreover, disruptions from the coronavirus outbreak will add further pressure on the industry's investment yields by maintaining already ultralow domestic interest for longer, while sales activities will be disrupted through reduce in-person interaction," Makimoto added.

However, Japanese insurers' premium base remains supported by their large number of existing policies with long durations, which will partially mitigate the impact of a sharp drop in new sales.

Moody's expects the G-20 economies will experience an unprecedented shock to economic growth this year, with for Japan's real GDP to contract by 2.4 percent in 2020 before rebounding to 1.4 percent in 2021.