The Japanese annuity market is an interesting case study.
Japan's combination of challenging economics and demographics could be a harbinger for how other developed countries react to longevity risk and capital market risk.
Similar to most other developed countries, Japan is demographically challenged with a rapidly aging population and relatively low fertility rates.
Japan has also struggled through more than two decades of asset deflation and ultra-low interest rates. The Japanese equity market cratered in 1990 and remains--twenty years later--at roughly twenty five percent of its 1990 value.
While Japan has a relatively high savings rate, savers are reluctant to put their savings at risk in the capital markets.
It makes sense, then, that the aging population in Japan would gravitate towards products that promise safety of principal combined with the ability to invest in something that has the potential to yield more than the ultra-low rates offered on savings.
In other words, it seems natural that there is strong demand for annuity products in Japan.
The extent of this demand, however, is surprising. As discussed in a recent post, variable annuity assets in Japan grew at an astounding 70 percent compound annual growth rate between 2003 and 2008.
As indicated in the chart below, sales of fixed annuities have also been strong in Japan over the past decade.
While other factors such as the general level of risk aversion and how insurance products are sold certainly come into play, one has to wonder if the Japanese are simply ahead of the curve in terms of adjusting their personal risk management preferences to fit a highly volatile world where people live a long time.
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