13 April, San Jose, Costa Rica

1. 1 Annuities and longevity risk Lessons learnt from Japan and the work of the Asia Pacific Financial Forum (APFF) For ASSAL Annual Conference 2015 13 April, San Jose, Costa Rica Makoto (Mack) Okubo 大久保　亮 General Manager, International Affairs Nippon Life Insurance Company

2. 2 Contents Rapid aging and demographic change in Japan and longevity risk 1 Fighting against low interest rate and negative spread problems 2 The work of Asia Pacific Financial Forum and the key issues identified 3 Conclusions – Yin and Yang 4

3. 3 Rapid aging • Japan was in the lower-rankings until the 1980s, in the middle in the 1990s, and is already the highest in the early 21st century (%) (Source: Statistic Bureau, Data is based on United Nations, "World Population Prospects," The 2010 Revision Note: Data for Japan is based on "Population Census of Japan“)

4. 4 Longer lifespan • Japanese life expectancy is among the highest in the world. • Many Japanese women live alone for around 10 years after their husbands pass away.

5. 5 Lower fertility rate - Trends in number of births • Total fertility rate has dropped from 4.54 in 1947, to 1.91 in 1975, and to 1.26 in 2005 • Baby Boomers reaching retirement age! (Source: Ministry of Health, Labor and Welfare, Vital Statistics）

6. 6 Savings higher as age increases • Savings per household by age in 2010 • Savings are 2.7 million yen for a householder under age 30 • 8.5 times larger at 23.14 million yen for a householder age 60 or older • Liabilities to be higher as age increases up to the ages 40 to 49, at which age they peak and begin to decrease (million yen) (Source: Annual report on the family income and expenditure survey. Income and expenditure, Statistics Bureau, Ministry of Internal Affairs and communications 2010 )

7. 7 Annuities/pension system in Japan and longevity risk • The public pension provides a whole life annuity and the corporate pension provides a supplement in the form of a lump sum retirement payment or fixed-term annuity • Longevity risk is mainly borne by government, employers, and individuals. • Life insurers are subject to longevity risk, in case where the option for whole life annuity is chosen by policyholders for self-private pension. • Offsetting longevity risk and mortality risk, Japanese life insurers’ exposure to longevity risk is limited, although gradually increasing (Source: Ministry of Health, Labor and Welfare)

8. 8 Contents Rapid aging and demographic change in Japan and longevity risk 1 Fighting against low interest rate and negative spread problems 2 The work of Asia Pacific Financial Forum and the key issues identified 3 Conclusions – Yin and Yang 4

9. 9 Japan experienced a low interest rate environment • Low interest rates becoming a worldwide trend

10. \45,000 9.0％ ¥ 38,915(Dec.29. ’ 89) 8.220%(Sep. ’ 90) \40,000 10year JGB 8.0％ \35,000 7.0％ \30,000 6.0％ ’ ’ \25,000 5.0％ \20,000 4.0％ ’ \15,000 3.0％ ’ Nikkei225 index \10,000 2.0％ ’ \5,000 1.0％ ¥ 7,054(Mar.10. ’ 09 ) \0 0.0％ '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 0.540%(May. ’ 03) 10 Stock market has been also disappointing • Low interest rate coincided with poorly-performing stock prices

11. 11 Negative spread problems in 1990s • After the collapse of the bubble economy, Japan experienced a long-lasting, severe investment environment with low interest rates and poor performing stock prices. This, combined with a market dominated by long-term insurance products with high guaranteed returns, led to negative spread problems in the mid 1990s, although most Japanese life insurers endured the severe business environment.

12. 12 Contents Rapid aging and demographic change in Japan and longevity risk 1 Fighting against low interest rate and negative spread problems 2 The work of Asia Pacific Financial Forum and the key issues identified 3 Conclusions – Yin and Yang 4

13. 13 APFF (Asia Pacific Financial Forum) APFF: Public-private collaboration in developing financial systems • Importance of regional public-private collaboration: • Legal and regulatory frameworks • Financial market infrastructure • Financial market integration • APFF: informal, inclusive and advisory public-private platform for collaboration in the development of common strategies for developing sound, efficient and integrated Asia-Pacific financial markets • Governments and regulatory bodies • Private sector • International organizations (IFIs, SSBs, others)

14. 14 APFF Interim Report 12 Action Plans • A pathfinder initiative to develop credit information sharing systems • A pathfinder initiative to improve the legal and institutional architecture for security interest creation, perfection and enforcement and related workshops • Dialogues on regulatory issues in trade and supply chain finance • Workshops on emerging facilitators of trade and supply chain finance • A pathfinder initiative to develop classic repo markets • Workshops to develop strategies to improve legal and documentation infrastructure for the development of OTC derivative market • Self-assessment templates on information for capital market investors • ARFP (Asian Region Funds Passport) support initiative • Workshop series to develop an enabling Asia-Pacific securities investment ecosystem • Dialogue series on regulation and accounting issues impacting the long-term businessof the insurance industry in Asia Pacific economies and longevity solutions • Collaboration with APEC Finance Ministers’ Process in promoting long-term investment, including infrastructure • Conference and workshop series on linkages on structural issues

15. A holistic framework to support the long-term roles of insurance and pension industry in the Asia-Pacific 15 APFF Insurance and Retirement Income Work Stream Social security Financial Stability Financial inclusion Sustainable development Macro economy Insurance protection Insurance and pension industry Insurance industry Regulation and accounting Capital market and long-term investment Retirement Income and Longevity Solutions Microinsurance and disaster risk financing

16. 16 Compositionoftheworkstream • Participants include experts from the insurance, pensions and financial industries, academic specialists and policymakers and regulators • Participants (as of March 31, 2015): Nippon Life (Sherpa), Jardine Matheson (Vice Sherpa), ADB, AIA Group, ASEAN Insurance Council/WanaArthaLife, ASEAN Secretariat, Asociación de Aseguradores de Chile, Association of Insurance Supervisory Authorities of Developing Countries/Association of Insurers and Reinsurers of Developing Countries, Australian APEC Study Centre at RMIT University, Australian Super, Australian Treasury, Barnert Global(regulatory and micro-insurance), Canadian Pension Plan Investment Board Asia, Cathay Life, Citigroup(retirement income), , Great Eastern Life, HK-APEC Trade Policy Study Group, Hong Kong University of Science and Technology, IAG, ING Bank Singapore, International Insurance Society(special advisor), J.P. Morgan Asset Management Global Real Assets, Life Insurance Association of Malaysia, Manulife, MetLife(capital market), Nomura Securities(APFF coordinator), OECD, OJK Indonesia, Oliver Wyman, PIMCO, Pramerica Financial Asia(longevity solution), Prudential Corporation Asia, RFPI Asia, RGA, Samsung Life (accounting, and liaison with AOSSG), Sun Life Financial, Tokio Marine(disaster risk financing), ASIFMA (observer and liaison with other relevant workstreams)

17. 17 Retirementincomeandｌongevity solutions • The work on retirement income and longevity solution will focus on demand- and supply-side issues in the development of lifetime retirement income solutions Figure: Interrelated Issues in Promoting Retirement Security and Longevity Solutions

18. Regulatoryissues • Economic-based regime should have a long-term vision • If a short-term-minded economic regime were implemented • Significant volatility for long term products • Driven to transfer risks over to customers • Refrain from investing in non-fixed income assets （Photo – Santiago, Chile) （Source – APEC Seattle) • Unintended consequences might occur if banking regulations were copied for insurers • Insurers play an important role as long term investors • Life insurers play an increasing role in the social security system • Diversity needed to support a sound development of the environment （Photo – Sydney, Australia)

19. Regulatory issues(cont.) • “One-size-fits-all” models would not work • Consumers’ risk preference • Expected roles of the insurers • State of development of financial markets Protection-type products Investment-type products Mortality risk Longevity risk

20. 20 Accounting issues • Volatility in the balance sheet • Short-term fluctuation should be avoided • Assets-liabilities interaction should be reflected for a wide range of products sold in the region • Discount rate should reflect the business model • Volatility in the income statement • The (optional) use of OCI for insurance liabilities and corresponding assets （Photo – Buenos Aires, Argentina) • The proposed IFRS contains other significant issues for traditional long-duration products • Complexity • Consistency • Transition requirements • Presentation

21. 21 Market and operational Issues • Market issues • Underdeveloped long-term capital market • Small number of bankable projects available • Lack of infrastructure financial instruments • Lack of market instruments (i.e. derivative, hedging tools) to manage portfolio risk • Constraints on long-term insurance business (both demand side and supply side) • Operational issues • Weakness in credit rating • Lack of experience • Uncertainty in legal framework (i.e. creditors rights, resolution) • Collaboration with Capital market/FMI/PPP work is the key （Photo – Auckland, New Zealand)

22. 22 Contents Rapid aging and demographic change in Japan and longevity risk 1 Fighting against low interest rate and negative spread problems 2 The work of Asia Pacific Financial Forum and the key issues identified 3 Conclusions – Yin and Yang 4

23. Some words from Taoism Be aware that the world is cyclical Don’t go to the extreme, otherwise you will fall Bring the balance of yin and yang to the universe In order to manage the world, you should control yourself In order to implement international standards, you should first know your own country 23 Conclusion: yin and yang （Photo – Tao Garden, Chang Mai, Thailand)

24. For more details on the APFF, visit mackglobe.com or email Makoto Okubo, Nippon Life (m-okubo@nliinter.com) Asia Pacific Financial Forum (APFF) Insurance and Retirement Income Work Stream 24