A Demutualization Proposal to Alleviate the Negative Spreads of Life Insurers

Hiroshi Aketa 


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The failures of Chiyoda Life and Kyoei Life in October brought the tally of failed life insurers to four in just this fiscal year — and six counting from Nissan Life’s failure in 1997.

While banks have been suffering from asset erosion due to problem loans, life insurers have been afflicted by a structural problem of deteriorating earnings caused by negative spreads. Under ultra low interest rates, actual asset management returns of approximately 2% have consistently under-per-formed scheduled yields promised in individual insurance policies and annuities in force (averaging approximately 4%).

Even financially sound life insurers are struggling with negative spreads, a problem that extends beyond the scope of management. This problem, combined with the separate earnings related problem of declining policies in force, are steadily eroding the financial soundness of life insurers. A swift and effective remedy is increasingly crucial to their survival.

Meanwhile, the Financial Big Bang has stimulated competition and alliances across industry bound-aries, enhancing the need to bolster equity capital. Under these conditions, some observers believe that demutualization is a pressing issue for life insurers.

Although the revision of the Insurance Business Law in June defined technical guidelines for demutu-alization, life insurers thus far have not moved ahead. The main obstacle is that given the massive neg-ative spreads, the stock market may be unreceptive to IPOs of life insurers.

In this paper, we present a demutualization proposal that addresses both these problems by alleviating the negative spread problem.

Hiroshi Aketa

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