At its April 2026 meeting, the Bank of Japan kept the country’s interest rate unchanged at 0.75%, the fourth consecutive hold.
While that figure may be lower than its Western counterparts, the increases that began in March 2024 have subsequently led to more activity in asset-intensive reinsurance (AIR) transactions by the country’s stock company life insurers as they look to minimise interest rate risk.
But activity in the market has also been supported by the Japanese life insurance industry’s transition to a new solvency regime; 31st March this year was more than just the end of another fiscal year, it was the formal transition point to the Economic Solvency Ratio (ESR), the country’s new insurance regulatory regime that requires insurers to value their assets and liabilities at current market rates. This marks a radical departure from the outgoing Solvency Margin Ratio (SMR) regime. For decades, the SMR permitted Japanese life companies to measure their long-term liabilities using a historical book-value approach.
Naturally, this impacts the balance sheets of Japanese life insurers. Under the ESR, the legacy blocks of business are now significant sources of capital volatility. For many domestic life insurers, the priority has shifted from simply holding these assets to managing the capital charges they now attract. This requires a fundamental rethink of Asset Liability Management (ALM) strategies to better align long-duration liabilities with investment portfolios.
“The new solvency requirement in Japan puts a lot of emphasis on ALM. Strong ALM can help reduce capital requirement and where ALM is difficult, AIR offers an alternative solution. For this reason, we expect that AIR will continue to be an option Japanese insurers will explore,” said David Wang, Principal and Consulting Actuary at Milliman.
Back in 2024, the Society of Actuaries published an article suggesting that the total volumes of AIR deals with Japanese cedants was around $20bn-30bn through the end of the third quarter of that year, numbers which will be higher now.
This activity has caught the attention of the regulator, the Japan Financial Services Agency (JFSA), which published a draft partial amendment to the Comprehensive Guidelines for Supervision for Insurance Companies in April. Law firm Sidley Austin said in an article that “Under the Proposed Amendment, the permissibility of a ceding insurer not to hold policy reserves for ceded insurance contracts should be determined comprehensively. The Proposed Amendment would, as a result, shift the focus for reducing reserves from merely the presence of formal contractual terms to whether risk has been effectively transferred, taking into account the contractual structure, economic substance, and which party genuinely bears risk.”
Wang says that the proposed amendments should be welcomed.
“This is a positive development and is consistent with actions some other APAC regulators have adopted (e.g., Singapore and Hong Kong). The new requirements are mostly related to how Japanese insurance companies should manage reinsurance risks; emphasis has been put on managing counterparty risk, asset concentration risk, liquidity risk, as well as managing potential recapture,” he said.
“When regulators, cedants and reinsurers work together to manage the potential risk behind using illiquid and private assets, we believe that this ultimately protects the best interest of the policyholders.”
Reinsurer Pacific Life Re would seem to agree.
“We believe these measures will encourage sound AIR practices across the market and promote greater transparency, discipline, and resilience,” said Soichiro Makimoto, Head of Japan Representative Office at the firm in an article published earlier in May.
Despite the structural support that the regulatory regime might appear to provide to the AIR market in Japan, there won’t necessarily be a glut of transactions that get signed, sealed and delivered in the next few years.
“Under the new Japan solvency regime, using AIR can help reduce interest rate risk capital but can lead to other risk capitals such as counterparty risk and asset concentration risk. There are other nuances as well impacting life insurers’ overall statutory/accounting performance. Japanese life insurers need to assess the overall benefits and limitations before they enter into an AIR transaction,” said Wang.
Add to that the potential for higher interest rates to give Japanese life insurers access to a higher return on domestic assets than they may not have had before, making it possible that Japanese insurers may move away from using AIR for some of their JPY-denominated products – with the caveat being that if reinsurers can offer more sophisticated JPY investments, such as alternative assets, AIR will likely still be an appealing option in these instances.
And while USD-denominated products have been commonly featured in Japan AIR transactions, their supply and demand in the AIR space will be influenced by the exchange rate and USD interest rates as well.
Going forward, the expectation in the market is that AIR deals with Japanese cedants will likely continue, thanks to these recent regulatory developments, but looking strictly at stock company AIR transactions understates the true scale of the opportunity set because the evolving Japanese life insurance landscape has the potential to open other avenues for global capital markets, driven by untouched market segments and an appetite for more sophisticated corporate structures.
“Some of the largest life insurers in Japan are mutuals and they have not taken any action in the AIR / block space so far. If mutuals do enter the AIR / block space, then it may change the landscape of AIR in Japan,” said Wang.
“We have also observed increased cross-border activities beyond just AIR. Japanese companies have been showing increased interest in exploring their own offshore captives or investing in sidecars. We’re also seeing activities such as joint ventures with – or equity investments into foreign companies increase.”
