OFR_2016_Financial-Stability-Report

The experience of Japan’s life insurers during the late 1990s is informative
(see Low Interest Rates and Declining Equity Prices Drove Failures of
Japanese Life Insurers). European regulators also ran a stress test of their
insurers in 2014 that included a low-rate scenario. The results showed that
roughly one quarter of European Union (EU) insurers would have trouble
meeting their obligations to policyholders in 8 to 11 years. Importantly,
the scenario assumed interest rates well above those currently prevailing in
Europe. The stress test also included a more severe scenario that assumed
low rates and falling asset prices. In that scenario, 44 percent of EU insurers
would not have enough capital (see EIOPA, 2014). European regulators are
running another stress test this year. U.S. regulators need consolidated data
to stress-test U.S. insurance companies to evaluate the impact of falling asset
prices while interest rates remain low.
Low Interest Rates and Declining Equity Prices Drove Failures of Japanese
Life Insurers
Japanese life insurers have been dealing with low interest
rates and declining equity markets for two decades. Their
experience may offer a window into the future of the U.S.
life insurance industry.
Seven Japanese life insurers failed from 1997 to 2001
(see Figure 52) (see Kobayashi, 2014). These failed firms
accounted for about 10 percent of the industry’s assets
(see A.M. Best, 2016). The 1997 life insurer failure was the
first in Japan in more than 50 years (see Yamashita and
Finnegan, 1997). That failure at first was considered an
isolated event, unlikely to be followed by more failures.
As other insurers failed, though, policyholders withdrew
money to avoid losses.
Figure 52. Failures of Japanese Life Insurance
Companies (assets in trillion of yen)
Seven life insurers failed in Japan between 1997 and 2001
Company Date of Failure Assets
Nissan Mutual April 1997 ¥1.8 trillion
Toho Mutual June 1999 ¥2.2 trillion
Daihyaku Mutual May 2000 ¥1.3 trillion
Taisho Life August 2000 ¥0.2 trillion
Chiyoda Mutual October 2000 ¥2.2 trillion
Kyoei Life October 2000 ¥3.7 trillion
Tokyo Mutual March 2001 ¥0.7 trillion
Low rates and declining asset prices squeezed Japanese
life insurers’ net interest margins. Margins turned negative.
Some insurers paid more to policyholders than they
earned on supporting assets. To stabilize the industry,
Japan’s government took several actions. A voluntary
industry guaranty fund was created, then a mandatory
guaranty fund. Ultimately, the Japanese government
announced up to ¥400 billion ($4 billion) in government-guaranteed
loans the Bank of Japan could extend
Total
Note: Assets are as of date of failure.
Source: The Geneva Association
¥12.1 trillion
60 2016 | OFR Financial Stability Report