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When domestic interest rates rise, the components of EEV, "adjusted net worth" and "value of in-force business" are affected as follows, respectively.
First, with respect to "adjusted net worth," it will decrease due to the decline in the market value of securities as a result of rising interest rates.
Most life insurance companies hold higher assets than the amount of EEV, and the impact of interest rate fluctuations on the present value of future profits from asset investment is relatively large. When interest rates rise, the present value of future profits from policies-in-force increases more than the decrease in adjusted net worth, and EEV tends to increase.
On the other hand, Lifenet only offers protection-type products, so the amount of assets under management is small in relation to EEV, and the impact of rising interest rates on the present value of future profits from asset investment is relatively small. Therefore, Lifenet’s EEV will decrease with the decrease of both adjusted net worth and value of in-force business when interest rates rise.
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Lifenet Insurance has voluntarily adopted IFRS (International Financial Reporting Standards), and its financial statements are evaluated on an economic value basis. Therefore, the impact on financial statements is basically similar to the impact on EEV, with a rise in interest rates resulting in a decrease inequity.
On the other hand, it is expected to have a positive impact on the new investment in bonds from the monthly premium income in the future with higher interest rates.
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In order to ensure the future payment of insurance claims to our policyholders, most of our assets are invested in yen-denominated fixed income assets, such as public bonds and corporate bonds with high credit ratings.
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Lifenet calculates its surrender and lapse ratio annualizing the average monthly number of policies-in-force for a specific duration divided by the average monthly number of surrendered and lapsed policies during the same duration. Our surrender and lapse ratio has been around 6% to 7% since business commencement.
Surrender and lapse of policies generally tend to occur from newer policies. Lifenet has a higher ratio of new policies in comparison to other life insurance companies as we have been in business for fewer years. Thus, it may be expected that we have a higher surrender and lapse ratio than other companies.
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