OFR_2016_Financial-Stability-Report

Market risk. Life insurers have increased their exposure to market risk. The
long-term decline of defined-benefit pension plans in the United States has
affected the insurance industry. The decline in defined-benefit plans has
resulted in insurers taking on many of the risks that had once been covered
by these plans.
First, the decline of defined-benefit pension plans led households to protect
themselves against longevity and market risk in retirement in different
ways. U.S. insurers increasingly offer retirement-related products that guarantee
policyholders a certain return. These include variable annuities (VAs)
with guaranteed living benefits. VAs with guaranteed living benefits have
grown since the late 1990s. The Insured Retirement Institute estimates that
more than $1 trillion of the $1.8 trillion of VA assets (about 56 percent)
are covered by lifetime income benefits (see Insured Retirement Institute,
to backstop the safety net. Although
the lending facility was not drawn
on, the announcement was viewed
as helpful in stabilizing policyholder
confidence (see Nakaso, 2001).
A long period of low interest rates put
pressure even on Japan’s strongest
life insurers. The industry responded
with more aggressive investments.
Insurers lengthened the maturity of
bond holdings to improve portfolio
yields. They modified new products
to protect against declining rates.
In 2013, interest margins for some
insurers finally turned positive. More
recently, negative rates on Japanese
government bonds are again putting
pressure on net interest margins.
Japan’s life insurers are connected
with U.S. firms. Most of Aflac, Inc.’s
business is in Japan. Prudential and
MetLife earn a substantial portion of
their revenue there. Conversely, three
major Japanese life insurers have
made large U.S. life insurance acquisitions
(see Figure 53). Interest rates
in Japan affect all of these insurers.
Figure 53. Significant U.S.-Japanese Cross-Border Life Insurance
Operations
Several large insurers have operations in both the United States and Japan
U.S.-based life insurers with
significant Japanese operations
Aflac, Inc.
MetLife, Inc.
Prudential Financial, Inc.
Japan-based life insurers with
significant U.S. operations
Dai-ichi Life Insurance Co.
Meiji Yasuda Life Insurance Co.
Sumitomo Life Insurance Co.
Source: OFR analysis
Japanese subsidiary
American Family Life Insurance Co.
of Columbus (branch)
MetLife Insurance K.K.
The Gibraltar Life Insurance Co. Ltd.
The Prudential Gibraltar Life
Insurance Co. Ltd.
The Prudential Life Insurance Co.
Ltd.
U.S. subsidiary
Protective Life Corp.
StanCorp Financial Group, Inc.
Symetra Financial Corp.
Key Threats to Financial Stability 61