Exchange Rate and Life Insurance Companies
Japanese yen has been rapidly depreciating. As of September 1, 2022, it fell to 140-yen
level against the US dollar. This is its lowest level in 24 years, and it has fallen more than
20% since the beginning of this year. The primary cause is said to be the interest rate gap
between Japan and the U.S. The governmental decision that the U.S. is trying to put
inflation under control by raising interest rates whereas Japan maintains its easy monetary
policy prompts investors to sell yen and buy dollars.

(yen)

Yen-Dollar Exchange Rate （JPY/USD）

No one knows whether the yen will continue to weaken; however, there is no doubt thatthe impact on the Japanese economy, which relies heavily on imports for fuels such as
crude oil, electronic devices such as semiconductors, and food, will be significant. Not
only companies but also individuals and households will be hit hard. Rising prices ofgasoline, daily necessities and groceries will bring a great impact on the Japanese
economy centered on consumer spending.
On the other hand, the depreciation of the yen works positively on export companies
and the tourism industry in Japan. As for the tourism, although there are still some entry
restrictions imposed due to the COVID-19 pandemic, the weakening of the yen will be atailwind for the Japanese government, which aims to build Japan as a tourism nation, toattract inbound travelers. In fact, overseas travelers visiting Japan must feel prices arequite cheap. Souvenir shop clerks calling in Japanese travelers by yelling “Come andlook! Cheap!” in Japanese---this used to be a familiar scene back in the days when wetraveled abroad; however, this time it would take place in Japan with the reversed position.

When it comes to Japanese life insurance companies and the exchange rate, it recalls
about the news that life insurance companies recorded a huge exchange loss on foreign
bond investments made a sensational headline because of the abrupt appreciation of theyen from the mid-1980s onward. There’s more to the story on this. The companies madeup for the loss with the gain on stock transactions since the stock prices back thencontinued to rise amid the bubble economy. Japanese life insurance companies
aggressively invested overseas with their ample funds and drew attention as institutionalinvestors. It was all around the time when Japanese life insurance companies were called
The Seiho and increased their presence in the foreign financial market.
Another related matter to the foreign exchange rate, there is foreign currencydenominated insurance products which didn’t exist in the life insurance industry of the1900s but today. In foreign currency denominated insurance, insurance contracts are madein foreign currencies instead of the yen. Among those foreign currencies are mainly theUS dollar, euro, and Australian dollar. In principle, premiums are paid in foreign
currencies such as the US or Australian dollars and euros, and any payouts including
insurance money and surrender value are also made in respective foreign currency. Main
products include foreign currency denominated individual annuity insurance, foreign
currency denominated whole life insurance and foreign currency denominatedendowment.
Japan’s low interest rate is the driver behind the sales of foreign currency denominatedinsurance products. Life insurance companies have increased the number of sales bydeveloping foreign currency denominated products with a higher expected return rate to
attract customers because they are unable to develop any attractive yen denominatedproducts with this current low interest situation.
However, the increase in the number of complaints related to foreign currency
denominated products is getting problem. According to the Life Insurance Association ofJapan, the numbers of complaints against the new business for foreign currency
denominated life insurance or individual annuity products sold through independentagencies such as banks are as follows.

（件数）(Number of Complaints)

FY2014FY2015FY2016FY2017FY2018FY2019FY2020
FY2021
2014年度
2015年度
2016年度
2017年度
2018年度
2019年度
2020年度
2021年度

922

1,239

1,665

1,888

2,543（Source）The Life Insurance Association of Japan Website

2,822

1,866

1,375

Many customers complain that they were not explained about the exchange risk or thepossibility of a loss of principal. Values of any payouts, insurance money or surrender
value, obviously fluctuate with a currency exchange rate, when policyholders received
them in yen. Since the policyholders are the ones who take the exchange risk, it isimportant for them to understand it before signing a contract for such foreign currency
denominated products. The elderly particularly need special attention to understand theexchange risk and other important matters. When Japanese life insurance companies sell
the products with the market risks such as the exchange risk to the elderly, from theperspective of preventing trouble, they take special measures such that their family
members who are 69 years and younger should be present with them or schedule themeeting multiple times. Each company makes endeavors to provide better services to theelderly.
With the sharp depreciation of the yen as it is happening today, it is not hard for life
insurance companies to predict a surge in the number of surrendering policies because of
the increase in the surrender value converted into the yen; however, is it actually influence
the policyholders’ behavior toward the policy surrender? Is their behavior different fromthat of owners of other financial instruments such as foreign currency investment trust?
Although no official data on them is disclosed at this moment, the result might beinteresting.