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More Than Insurance Jobs - Emerging Sizeable Opportunities in Certain Product Submarkets

More Than Insurance Jobs

The Japanese life insurance market is not known for rapid change - but there are some new opportunities, albeit emerging at a distinctive (that is to say, slow) Japanese pace. Given the size of the Japan market, these niche opportunities are quite significant - after all, the Japanese life market is expected to still be double China's market by 2012.

The Retirement Opportunity 

Japan has the single largest retirement market in Asia by far. In Japan, 21 percent of the population is over 65, as opposed to the rest of Asia where, on average, only 7 percent of the population is of retirement age. The proportion of people aged 65 or older is expected to further increase to 28.4 percent of the overall Japanese population by 2020.

A McKinsey retirement study showed that the next generation of Japanese retirees, those now between 40 and 55, does not have the same level of savings as the previous generation. Therefore, it is likely that a significant retirement gap will emerge. Post-retirement expense is estimated to be about US$800,000 in current dollars, but Japanese currently in their mid-40s will face a shortfall of US$200,000 at the time of retirement. This sum represents the gap between estimated financial resources and the cost of retirement.

Furthermore, the Japanese are well aware of the shortcomings of their public pension scheme. Poor investment returns have hobbled Japan's public pension funds. Although the Japanese Diet has enacted successive layers of pension reforms in recent years, there is a widespread lack of confidence in Japan's pension system. Between April 2007 and January 2008, 37 percent of eligible Japanese did not contribute to designated public pension schemes for the self-employed, farmers, fishermen, and students. There is a general skepticism among young adults on whether a public pension will still be in place at the time of their retirement.

Consequently, there is considerable awareness of this problem among the pre-retirement generation, leading to a widespread recognition of the need for post-retirement financial advice. As matters stand, none of the life companies has come forward with a holistic approach to meet this need, although annuities have exploited this opportunity on a stand-alone product basis. A survey by McKinsey in 2005 showed that 90 percent of Japanese do not have a financial advisor.

In markets with similar demographic characteristics, such as the United States, we have seen companies positioning themselves as retirement specialists. This has not yet happened in Japan, partially because large incumbent players have difficulty creating the advisory model required to succeed in this market. This gives rise to a significant opportunity for insurers and other financial institutions to brand themselves around the retirement theme, and develop a holistic retirement approach. This will include portfolio planning for different pre-retirement segments, consistent and periodic tracking of customers' evolving needs, products tailored to retirement needs, and a trained sales force that is able to provide the advisory services.  

Individual Annuities

Sales of annuities are particularly befitting Japan's aging population. Japan's first baby-boomer generation, known as dankai seniors, are in their late fifties. Consequently, a large cohort is about to approach retirement and will be seeking financial products that can provide them with a safe, steady income stream. Annuity, with its unique decumulation characteristics, is set to be one of the biggest beneficiaries in the coming years.

Premium from individual annuity policies grew US$47 billion, from US$19 billion in 2001 to US$66 billion in 2006; to put this in context, that growth was approximately equal to China's total market size in 2004. Such growth is likely to continue - we estimate the individual annuities market in Japan could be worth up to US$80 billion by 2010.

While all other product categories saw negative premium growth between 2001 and 2006, individual annuity clocked an annualized rate of increase of 28 percent. This phenomenon can be attributed to product deregulation that allowed the sale of variable annuities in 1999 as as the opening of the bancassurance channel to annuity sales in 2002.

The role of bank distribution has been very significant - 61 percent of individual annuities in 2006 were sold through banks. Meanwhile, in-force policies for fixed individual annuities grew by only 2 percent per year. In terms of sum insured from new policies, variable annuities grew 44 percent annually from 2002 to 2006, whereas fixed annuities grew 16 percent.

As interest in investment-type products grows among Japanese consumers, variable individual annuity is expected to be the stronger growth segment of the annuity market, even though it is dependent on the performance of equity markets and will have more volatile growth, especially during difficult market conditions.

Medical Insurance 

Medical insurance is often overlooked as a niche sector within Japanese life insurance due to its small share; however, this niche market is vastly greater than its equivalents anywhere else in Asia. Furthermore, there is potential for even more growth as public medical system policy changes give rise to the need for more private medical care.

Japan did not have a medical insurance industry, prior to the 1970s as the government offered a universal healthcare system. A government committee set the fee schedule for medical services, and patients chose their physicians and facilities, based on preference. Japanese nationals chose to participate in either an employer's health insurance program or a national health insurance program administered by local governments.

However, as medical needs grew, the demand for supplementary insurance to the public healthcare system also increased, and insurance companies started offering private medical insurance schemes. It should be noted that medical insurance in Japan does not provide indemnity cover; instead it makes fixed, per diem payments to the hospitalized insured and helps offset surcharges and other expenses.

Our estimates show that healthcare products such as medical insurance, cancer insurance, and nursing-care insurance could be worth an estimated gross premium of around US$20 billion by 2010, which would be almost 20 percent of the premiums from private insurers' traditional policies.

The health insurance market in Japan consists of three different segments: Cancer insurance only covers cancer, while medical insurance covers illness and injury in general. Medical insurance has a limit on the number of hospitalized days covered, while cancer insurance does not have such a limit. The third segment, nursing insurance, covers the costs for medical and other services to patients who need constant care at home or in a nursing home. 

Medical insurance is the fastest expanding segment of the healthcare insurance market; its number of in-force policies grew at an annualized rate of 5 percent from 2001 to 2006. Penetration is very low today - starting from a base of 2.7 million new policies each year or 2.1 percent of the population, this product line is well-positioned to continue its growth trajectory. 

Within medical insurance, stand-alone life medical insurance, which covers medical expenses for life without death coverage, is one of the faster growing products. In 1974, AFLAC started a unique medical insurance that covered medical expenses for cancer. This became the first stand-alone medical insurance approved by the ministry. In 1984, other foreign and local small- and medium-sized life insurers were allowed to underwrite cancer insurance, but the large domestic incumbents could not. 

From the beginning of the 1990s, the Japanese government considered deregulating third sector insurance (covering medical, nursing, etc.) as a trial run to full-scale deregulation of life and non-life insurance. However foreign players who had a presence in the third sector (especially medical) opposed the plan and lobbied the Japanese government. The government eventually compromised and proceeded with the deregulation of life and P&C by allowing insurers to establish subsidiaries in other sectors. 

Domestic insurers were not allowed to underwrite stand-alone medical policies until 2001 when a US-Japan agreement was made. Stand-alone insurance has grown rapidly since then with increased competition from the local players such as Sumitomo, Dai-ichi Mutual, Meiji Yasuda, and Nippon Life. However, foreign players remain the leaders in this area, with AFLAC, ALICO, and AXA taking almost 50 percent of market share.

Other healthcare subsectors, such as cancer insurance and nursing care insurance, are less promising and have registered negative growth, along with the rest of the insurance market. Without further product innovation, it is unlikely that there will be much growth in these subsegments.

As in most medical insurance markets, public policy will drive the growth of medical insurance in the coming years. At today's status quo, medical insurance will, at minimum, rise at the same rate as medical costs.
Japan's Ministry of Health, Labor, and Welfare (MHLW) estimates that the total national cost of medical care will rise to somewhere between US$425-530 billion by 2025, representing a moderate growth rate of 2 percent per year.

However, it is likely that some healthcare reform is on the horizon. Given the aging population and funding strains, similar to those found in many Western markets, it is unlikely that the public healthcare system can continue to maintain today's coverage. Patients' co-payments and public funds have already taken up some of that slack.
This is where private health insurance may be able to exploit an opportunity as Japanese patients find themselves increasingly required to pay for medical services. 

Government reform will create instant opportunities: for example, the recent policy change in 2003, which increased the ratio of out-of-pocket medical expenses for company employees (salarymen) from 20 percent to 30 percent caused a spike in gross premium the year the policy was implemented, but then the growth rate flattened out in subsequent years. To find out more, you can check More Than Insurance Jobs.