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Japan Life Insurance Market Share - Rewards for Innovative Players with Perseverance

Japan Life Insurance Market Share

Throughout Japan's life insurance history, innovations in products or channels have bumped the market upwards. Foreign players came to dominate the variable annuities and medical insurance submarkets, which have been the fastest-growing sectors in recent years. In 2006, AFLAC, ALICO, and AXA were the top three players in the healthcare sector by number of policies, while The Hartford, Metlife, and ING led the market for variable annuities.

We have already seen how SONY and Prudential (US) cracked the stagnant life insurance market by meeting Japanese consumers' demands for consultative selling. Even after the break-up of their partnership in 1987, each side of the joint venture continued to grow using a financial advisory model. The number of SONY Life Planners exceeded 3,700 in 2007, and by 2006, SONY logged in a US$5.4 billion in premium income while Prudential (US) reaped US$3.6 billion. Prudential (US) also acquired Aoba Life in 2005.

Another innovator in the Japanese market is the American insurer The Hartford which built a significant share of the variable annuity market over a period of 10 years. The company entered the market in 2000, when assets under management were less than US$1 billion and there were only five players. By 2006, The Hartford had a 22 percent share of a US$137 billion in-force, sum assured pool and was ranked first in terms of in-force policy amount for variable annuities. 

The Hartford was able to break into the variable annuity market by securing its sales channel through banks, paying high commissions to agents, providing the right training, and developing innovative products such as balanced-funds-backed variable annuities. Japan Life Insurance Market Share

However, other followers have quickly imitated The Hartford's approach. Most notably, Tokio Marine & Nichido Financial Life Insurance overtook The Hartford as the sixth-largest player in Japan by gross premium in 2006, through beating The Hartford at its own game.

In individual health insurance, ALICO (an AIG subsidiary), and AFLAC grew by offering newly developed products through the right channels. ALICO was the first to offer medical insurance in 1976, and poured large amounts of money into advertising and promotion to build brand awareness. AFLAC was the first to launch cancer insurance in Japan, in 1974, and as a result, its Japanese business grew to be larger than its business in the US.

It is important to note that in all these success stories, the players viewed the Japan business as a long-term investment. Japan is notorious for its high start-up costs and time to reach a break-even point. It took SONY and Prudential (US) 13 years to reach break-even point after the joint venture was established. Similarly, AFLAC took eight years to break even. 

Most other players also took around nine years to reach this threshold, as it takes time to build proprietary distribution channels from scratch.

Given the time it takes to start earning profits with a greenfield approach, acquiring incumbent companies may be an attractive alternative. But acquisitions have not proved easy to manage, especially in Japan with its distinctive corporate culture. In addition, there are not many high-performing local insurers available for sale, and prices are often high.

Failure cases are plentiful. For example, the purchase of Kyoei by Prudential (US) and the AXA merger with Nippon Dantai were disappointing investments. Both companies' gross premium actually declined during their first four years of new ownership. Players who are most likely to make acquisitions work are those who have introduced distinctive products and new distribution models. An example of this is Manulife which bought Daihyaku and launched a variable annuities product using its expertise gained in the North American market. It also developed the bancassurance channel for sales. As a result, the company's gross premium shot up more than six times in a short span of four years.

The Future Outlook

If we were to fast forward Japan's insurance market to 2020, the market landscape would differ greatly from today, given the forces presently at work. A dramatic shift will occur in product and revenue mix as retirement, medical, and investment products outgrow the rest of the market. Japan Life Insurance Market Share

Similarly, channels will evolve such that the traditional tied-agent sales force will most likely be smaller and much more professional compared to today, and an even larger portion of sales will come from other channels, induding banks, brokers, and other direct channels.

With the growing power of bancassurance and variable annuities, attackers - both foreign and local - will most likely gain a more significant share. Whether local incumbents will be able to adapt to the new business opportunities or remain rooted in traditional products remains to be seen, but without massive, drastic changes in their operations and distribution, the market share of large domestic incumbents will probably continue to shrink. The top five incumbents' share of private life insurance premium was down to 52 percent in 2006 from 68 percent in 2000. It is not inconceivable that the share of these incumbents could be down to one-third in 10-15 years time.

New powerful players will emerge based on their strength in third party channels, integrated propositions in areas such as retirement, or business models based on lower cost delivery. Not only will these take a large share of the top line, but they are likely to be more profitable than traditional players. With leaner operations, lower commissions, and cross-selling synergies, margins from these players would be more attractive than those from traditional insurance models.

What is clear is that there are still many opportunities to be captured, by the right players, in the largest Asian market. The basic facts have not changed - Japan remains a very difficult market to enter and it does not have the same growth rates as the rest of Asia. But the sheer size of the market and the emerging growth opportunities make it worthwhile, or even necessary, for those with large Asian ambitions and long-term horizons to secure a position in Japan. In fact, given the fundamental trends driving the Japanese life insurance landscape over the next several years, there may be no better time to make a big move in this market. To find out more, you can check Japan Life Insurance Market Share.