Opportunity for gold gleams among Japanese insurers’ portfolios

While gold investments have been gaining popularity among Japanese households, both life, and property and casualty (P&C) insurers have made limited gold investments, despite the sheer size of the Japanese insurance market in terms of premiums and assets.

To unlock potential opportunities in this sector, we conducted market research and interviewed various insurance market participants in H2 2023, supported by Oliver Wyman, to understand the Japanese insurers’ asset management philosophy and current risk appetite for gold investments. This report aims to highlight the key considerations and potential benefits of including gold in insurance portfolios.

An overview of Japanese insurers’ asset allocation 

Despite Japan’s economic stagnation, beginning with the start of the “Lost Decade” in 1991, the total assets managed by Japan’s insurance industry reached JPY 610 trillion (US$5.3tn) by the end of 2021, second only to that of the US, according to the Financial Stability Board’s Global Monitoring Report on Non-Bank Financial Intermediation 2022 (Chart 1). Over 90% of these total assets are held by life insurers, and the rest by P&C insurers.

Japanese life and P&C insurers have distinct asset allocations, catering to their different needs. For instance, life insurers, who mainly offer whole-life insurance, health insurance, annuity products and other longer-term insurance products, allocate most of their portfolios (from General Account (GA)) into long-term fixed-income assets to meet their long-term liabilities and provide guaranteed rates of return (Chart 2). Meanwhile, they also make allocations to equities and alternative assets to enhance their yields. Notably, the presence of these assets has been rising amid the ultra-low interest rate environment in Japan that has lasted for years. 

 

Chart 1: Japan’s insurance industry is the second largest worldwide by asset size 

Top 10 countries by insurance industry asset size*

Japan’s insurance industry is the second largest worldwide by asset size

Japan’s insurance industry is the second largest worldwide by asset size
Top 10 countries by insurance industry asset size*
*As of December 2021. Source: Financial Stability Board, World Gold Council

Sources: Financial Stability Board, World Gold Council; Disclaimer

*As of December 2021. 

 

Chart 2: Fixed income accounts for the majority of life insurers’ assets 

General Account breakdown of top 4 life insurers*

Fixed income accounts for the majority of life insurers’ assets

Fixed income accounts for the majority of life insurers’ assets
General Account breakdown of top 4 life insurers*
As of March 2022. Source: Insurers’ disclosures, World Gold Council

Sources: Insurers’ disclosures, World Gold Council; Disclaimer

As of March 2022.

On the other hand, P&C insurers have a much greater room and risk appetite for securities and other return-enhancing assets (Chart 3). This is because most of their insurance products, including auto, fire, accident, and other casualty, are short term with no fixed obligations; interest surpluses arising from interest rate declines in the 1990s had a lower impact on them compared to life insurers. 

 

Chart 3: P&C insurers have larger allocations to securities and other return-enhancing assets 

All P&C insurers’ investment assets*

P&C insurers have larger allocations to securities and other return-enhancing assets

P&C insurers have larger allocations to securities and other return-enhancing assets
All P&C insurers’ investment assets*
*As of March 2022. Source: General Insurance Association of Japan, World Gold Council

Sources: General Insurance Association of Japan, World Gold Council; Disclaimer

*As of March 2022.

In addition, due to the unpredictability of catastrophic events, liquidity is their main concern. Since the burst of the economic bubble in the early 1990s, the Japanese economy has been mired in a prolonged ultra-low interest rate environment, further intensified by the negative interest rate policy introduced in January 2016. This has been challenging for insurers, particularly life insurers, causing them to take greater market risk and invest more actively in alternative assets for yield enhancement. In addition to the challenges rooted in the low interest rate environment, economic uncertainty and heightened geopolitical risks in recent years have led to volatility being more pronounced. In such, insurers require assets that can not only protect but also enhance their investment portfolios.

In our subsequent chapter we focus on how Japanese insurers currently view gold investments and demonstrate how investing in gold can be beneficial from their perspective.


Next: Japanese insurer's view on gold investments >>

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