AFCA Working Paper
Asian Insurance Companies in the Era of Population Aging
I. Background
The aging process has been gradually accelerating in Asia, especially in countries and regions such as Japan, South Korea, Singapore, and China.
In June 2022, the US National Bureau of Investigation released a report which discovered that population aging in Asia was faster than other regions. It predicted that in the next 40 years, Asian countries will have three times as many elderly people as they do today. In every 10 people in the world, there is one senior Asian. At the same time, countries such as Japan, South Korea, and China are beginning to have fewer children.
With the acceleration process of population aging with fewer children, annuity finances have been squeezed to varying degrees in all countries. Facing the annuity fiscal gap that has emerged or will emerge soon, countries are actively taking measures, such as delaying the age of receiving annuities, increasing contribution rates, and increasing the amount of treasury transfers, so as to cope with the pressure of underfunding and eliminate or narrow the funding gap.
This paper attempts to explore how commercial insurance companies in Japan, the country with the highest level of population aging in Asia, provide humanized services for the aging society. This includes how these companies provide future retirement funds for young and middle-aged people, assistance funds for fertility and infertility treatment, and various insurance services for them when they enter old age. On top of this, this paper seeks to find out how Asian insurance companies can learn from Japan’s experience to overcome risks and find opportunities to provide various insurance products and services in the face of various challenges brought by the aging society.
II. Overview of Population Aging and the Problems Faced in Asian countries
1. Overview of Population Aging in Asian countries
According to the World Population Prospects (2019) and National Survey (2020) issued respectively by the United Nations and the Ministry of Internal Affairs and Communications of Japan, the trend of aging in East Asian countries has been growing stronger year by year from 1950 to 2020.
Take the proportion of the population aged 65 (hereinafter referred to as the “aging rate”) in Japan as an example. The rate was 7.0% in 1970 as the country officially became an “aging society” , 14% in 1994 as the country became an “aged society”, over 21% before 2010 which made Japan one of the first countries in Asian to become a “super-aged society”, and as high as 28.6% by 2020. South Korea and Singapore respectively became aged societies in 2018 and 2021.
Table 1: The Proportion Change of Senior Citizens Aged 65 and Above in Major Asian Countries Over Time
Source: The Japan Institute for Labor Policy and Training International Labor Comparison Database Book in 2017(データブック国際労働比較2017)
See Figure 1 for the years it takes for major countries to move from aging societies to aged societies.
Figure 1: Years Taken for the Aging Rate in Major Countries to Increase from 7% to 14%
Source: Japan Cabinet Office’s White Book on Aging Society, Heisei 30 Year Edition (2018)
2. Common Problems Faced by Countries
As population aging accelerates, some Asian countries are already facing the problem of insufficient financial resources for pension annuities.
The lack of annual social pensions, including the insufficiency of national social security funds and funds for individual pensions as well as for the treatment of serious illnesses, leads to the increased occurrence of the phenomenon of “poverty due to illness”.
3. How did Japan Cope with the Problems?
Japan is the first country in Asia to become an aging society and is now a “super-aged society”. The country has been trying to cope with the aforementioned problem for a long time. Japanese life insurance companies take the challenge by endeavoring to overcome the business risks associated with a declining population, actively seeking opportunities for growth, and maintaining the momentum of sustainable development.
The overall strategy of Japanese life insurance companies to cope with population aging is mainly manifested in two areas: reserving funds for retirement and providing financial support when affected by the three major illnesses.
III. How Japanese Insurance Companies Responded to the Challenges of Population Aging Society with Falling Birth-Rate
Since the 1990s, a trend featuring both population aging and fewer childbirth swept through Japan, imposing the risk of a decline in the number of insured people due to a declining population on life insurance companies. To respond to this challenge, Japanese life insurance companies referred to the experience of Nordic countries with a high degree of aging and developed a unique Japanese life insurance product line and service strategy based on elements such as the country’s culture, customs, traditions, socio-economic development status and consumers’ financial capacity.
1. Insurance Products Offered Directly to Consumers
1) Pension Funds Accumulation
Japanese life insurance companies designed products for “pension insurance” and “individual annuity insurance” from the perspective of accumulating pension funds.
The “pension insurance” is a dual life and death insurance, which guarantees that the insured will receive a survival benefit after the contract expires and that the surviving family will receive a death benefit in the event of the insured’s death.
The product’s highlights are as follows. First, when the users are diagnosed of less than six months of remaining life, they can receive all or part of the death benefit in advance. Second, when they are diagnosed of three major diseases (cancer, myocardial infarction, and stroke), they can be exempted from the unpaid premiums.
The “annuity insurance” provides an annuity benefit at a specified age after paying premiums in installments or as a lump sum. If users die during the insurance period, the accumulated premiums will become the death benefit.
The main features of annuity insurance are as follows. First, planned accumulation of funds for old age. Second, tax benefits for the premiums paid. And third, changeable receiving age and period for the annuity. The insured can choose the time and method of receiving according to their needs.
2) Health Management
In terms of health management, it is worth noting the “three major diseases insurance” and “cancer insurance” in japan. These two products are different from the “Critical Illness Insurance” that covers dozens or hundreds of diseases in other countries as they focus on the three high morbidity diseases, namely, cancer, myocardial infarction, and stroke.
First, the incidence of cancer in Japan is high, with a possible lifetime prevalence rate of 65.0% for Japanese men, as detailed in Table 2.
Table 2: Risks of Cancer for Different Age Groups
(in %)
Note: The data of this table is taken from the proportion of cancer patients in 2018.
Source: Japan Foundation for the Promotion of Cancer Research, Cancer Report 2022
Second, the top three causes of death in Japan are cancer, heart disease, and cerebrovascular disease. See Table 3.
Table 3: The Top Three Causes of Death in Japan
Source: Japan’s Ministry of Health, Labour and Welfare, Statistics of the Regular Survey of Population Dynamics in 2020
The death rate of the top three diseases accounts for 50.1% of the total number of deaths. And the incidence of all three diseases is proportional to age, with the incidence increasing with age. For this reason, Japanese life insurance companies have introduced a series of insurance policies for the three major diseases to meet the needs of the aging society.
3) Cognitive Impairment
The risk of cognitive dysfunction (cognitive disorders) due to Alzheimer's disease (AD) and cerebrovascular disease increases in old age. Statistics from the Japanese Cabinet Office’s White Book on Aging Society, Heisei 29th Edition (2017) show that one in every 5.4 people over 65 years old has cognitive disorders.
Japanese life insurance companies have designed term and whole life cognitive disorders insurance in order to give financial support. The features of these products are as follows. First, the benefit is paid as soon as cognitive disorders is diagnosed, and in the case of mild cognitive disorders, the benefit is paid at 10%. Second, the benefit is 90% higher than the death benefit when cognitive disorders is diagnosed.
4) Long-Term Care
As the insured ages, he or she may require long-term care due to illness or other reasons.
According to the Ministry of Health, Labour and Welfare’s Report on the Status of Care Insurance Business (2022 Edition), the number of people in need of care in Japan was 6.33 million in April 2017, accounting for 17.49% of the population aged 65 and above.
The highlights of the Japanese life insurance company’s “care insurance” are as follows. First, the insured can receive care insurance benefits when he or she is considered to be in the “Care 2 to 5” category or when the status of care has lasted for more than 180 days. Second, the insured can convert the term insurance to a whole life insurance. Third, a death benefit is given in the event of the insured’s death. Fourth, there are additional coverage sections for the early disbursement of insurance funds and the exemption of unpaid premiums upon the diagnosis of 6 months of remaining life or of three major diseases.
5) Falling Birth-Rate
Japanese life insurance companies have “fertility benefit and infertility insurance” and “study capital insurance”, with the former as the focus of this article. The characteristics of this product are as follows.
First, fertility benefits are paid in order to encourage childbirth.
Figure 2: Diagram of Fertility Benefits
Source: Made by the author according to relevant contents for fertility benefits
Second, the infertility insurance benefit is paid. After a waiting period of 2 years, if the insured receives a treatment of in vitro fertilization or microscopic fertilization, 50,000 yen will be paid for each of the first to the sixth time of treatment, and 100,000 yen will be paid for each of the seventh to the twelfth time of treatment. The payment limit is 12 times. The product aims to provide financial support to the insured receiving infertility treatment in accordance with the government’s policy.
Third, the “three major illnesses insurance” is covered. Once diagnosed of these diseases, 3 million yen will be paid to the insured.
Fourth, at the end of the insurance contract, after deducting the aforementioned “fertility benefit” and “infertility insurance”, a maximum of 2 million yen will be paid, which manifests the principle of fairness.
The products, designed to cover a wide range of related circumstances, aim to respond to the phenomenon of fewer children in Japanese society and alleviate it.
2. Pension Annuity Plans Providing Channels for Commercial Pension Insurance
1) Overview of the Pension Annuity Plan in Japan
Due to the early emergence of population aging, the financial pressure on the public pension system increased, which led to a trend of financial strain. Therefore, a third pillar individual pension system was needed to supplement the public pension. In 2001, Japan introduced a self-funded "individual plan" (iDeCo) model pension annuity plan to relieve the pressure on the financial resources used for alleviating fewer childbirth and population aging.
2) Financial Management Channels for Pension/Annuity Insurance
The iDeCo Plan is operated in such a way that participants manage their own funds in their own accounts at their own expense. Among the many official financial management channels, life insurance companies provide pension and annuity insurance products with capital preservation and savings functions, as well as channels to earn income through the use of funds.
IV. Seeking Development Opportunities through Taking the challenges of an Aging Society with Falling Birth-Rate
1. Seize the Development Opportunity of the Aging Society with Falling Birth-Rate and Design Humanized Insurance Products
Asian insurance companies, by adopting the principle of humanized design, can break down the difficulties of the aging society with fewer children into several different types and design and develop products for respective types.
1) Design Products to Solve the Problem of Insufficient Funds for the Elderly
Although Asian countries are weaving various public assistance protection networks which fall into the type social security for aging societies with fewer children, the strength of “public assistance” is after all limited. With insufficient public assistance, various kinds of supplemental, accumulative, capital-applied, and profit-sharing pension insurance and annuity insurance of commercial insurance will become the target of people who have not yet reached old age, since these insurances can save them from the difficult situation of insufficient funds in the later stages of life.
Several points need to be paid attention to in the designing process. First, since the insured is generally still young and strong when getting an insurance, products need to cover both life and death, which means that they should ensure the financial compensation after death, the reception of pension funds after old age, as well as the sufficiency of the treatment costs in case of a major illness. Second, since the aforementioned insurance policies generally have a long insurance term, they need to have a safety measure to preserve the value and the capital. And it will be better to add inflation prevention measures in the design. Third, it is better to add policies of tax benefits to enhance the policyholder’s confidence in taking the insurance.
2) Design Products to Provide Generous Coverage for Diseases with High Death Rate
The elderly are several times more likely to suffer from various diseases than the young, especially the three major diseases of cancer, heart attack and stroke. The three major diseases insurance and the cancer insurance launched by Japanese life insurance companies reveal their clear intention, since the incidence of the three major diseases is high with the death rates ranking the top three. This makes it necessary for consumers to have a corresponding insurance to protect themselves.
Therefore, in general, insurance companies are advised to design and develop the three major diseases insurance and corresponding medical insurances that target at other diseases. The focus of the benefit payment, however, should still be on the three major diseases.
3) Design or Improve Cognitive Disorders Insurances and Care Insurances, with the Focus on Developing of Humanized Products
Asian insurance companies basically have insurance products for cognitive disorders and long-term care. The following two points, however, deserve attention.
First, when designing and developing cognitive disorders insurance and care insurance, it can be added that once the insured is diagnosed with six months of remaining life or three major diseases, he or she can receive all or part of the death benefit in advance. In addition, the unpaid premiums can be exempted.
Second, for insured persons suffering from cognitive disorders or requiring care for various reasons, by taking into consideration the level of the illness and the official level of care required, the severity of their condition, and the extent of the restrictions to their movements, the quantitative index of their real need for care and the rate of financial support that the insurance company can actually provide them based on the law of large numbers can be determined. Thus, based on each individual’s quantitative index, a reasonable and humane benefit plan that is appropriate for the insured person could be made.
4) Design Products to Reduce the Economic Burden of Treating Infertility and to Reward Fertility
In Asia, especially in East Asian countries, the trend of population aging coupled with the decline in the number of newborns is emerging, with the latter being the root cause of the aging process.
Insurance companies in each country need to design products that directly reward the birth of newborns and that support infertility treatment according to different national conditions so as to play the self-help card to mitigate the impact of fewer childbirth.
2. Can We Develop Advance Payment Comprehensive Insurance as an Alternative?
At present, there are age restrictions for various types of insurance, therefore the elderly are generally not eligible for insurance. If people do not join various insurance policies when they are young, once they suffer from a serious illness, they may not be able to pay for the treatment due to the lack of money. Is it possible to develop products to meet this need?
The insurance market already has a “home insurance” product, but can we expand our thinking to develop a “advance payment comprehensive insurance” that includes “pension, medical treatment, and care”? With the insured’s own home used as a mortgage, the monthly pension could be paid to him or her and medical and nursing care can also be provided when needed until the real estate value is fully used up. However, the feasibility of this early consumption insurance model remains to be explored both on the theoretical and practical level.
V. Conclusion
Asian countries have become or are about to become aging societies with fewer children. Due to the rapid aging, various difficulties and risks of business decline manifest themselves. Insurance companies should face these challenges and seek development opportunities by innovating their business to provide products and services that meet the needs of the aging societies with fewer children, so as to reach the goal of coexistence and mutual prosperity with population aging.
【This article is AFTT Working Paper No. 2023-13/144. The translators are Shao Yufei, Liu Liyang】
Expert Biography
Yinhua Sha, Chairman of Ginka Kinshou Consulting Co., Ltd, industry mentor of Master’s Degree in Insurance of East China Normal University, arbitrator of Shenzhen International Arbitration Court, legal compliance core expert of China Insurance Association, risk assessment expert of China Insurance Guarantee Fund Corporation, expert of East Lake Science and Technology Insurance Innovation Think Tank. His previous posts include: director researcher of Japan Life Insurance Basic Research Institute, deputy general manager of Tokyo Marine & Nichido Fire Insurance (China) Co., general manager and director of China Taiping Insurance Services (Japan) Co. He previously worked as a specialist in the following posts: member of the China Research Council of the International Financial Information Center of the Ministry of Finance of Japan, an expert for Japan in the project “Standardization and Innovation of Rural Pension Insurance System in the People's Republic of China”, a judge of the “Top Ten Young Insurance Legal Experts” of the China Insurance Association. He had been a part-time/visiting professor at 8 universities, including Northeast University of Finance and Economics and East China University of Political Science and Law. He has published more than 810 papers in Chinese, Japanese, English, and Korean as well as 8 books in Japanese (including 3 monographs) and 10 books in Chinese (including 3 monographs).