Aflac (NYSE: AFL) is doubling down on Japan, even as its population shrinks and ages

Japanese insurers have been expanding abroad with the challenging demographics of an aging population limiting growth prospects at home, but Aflac (NYSE: AFL)—a US-based insurance firm known for its famous quacking duck mascot—is deepening its commitment to the Asian country by going after younger clientele with new and adapted services. It’s a strategic move that could be harder to execute than it sounds, as the rising generation bears an outsized economic burden and won’t necessarily be able to foot all the bills coming due on its own. 

Insurance—at its core—relies on spreading risk across a large and diverse pool of policyholders. That math can get complicated in a country like Japan, where a declining population is also aging faster than anywhere else in the world. The demographic reversal poses challenges for healthcare and life insurers alike, as they would typically rely on younger and healthier policyholders to subsidize the costs of older ones. 

“Looking at our operations in Japan, we have continued to focus on third sector products as well as introducing these policies to new and younger customers,” CEO Daniel Amos said in a discussion about the company’s third quarter results, referring to services that supplement government healthcare like cancer insurance or dementia care. He added that the recent introduction of an updated life insurance product had driven a sales increase of 12.3%. “This approach is in line with our strategy of connecting with younger customers to provide them with integrated financial protection and services through different life stages.”

With over 50 years in Japan, Aflac’s established reputation and cultural adaptations—like quieter TV ads to fit local norms—may give it an edge over rivals in navigating these challenges. The company derives over 60% of its overall revenue from its Japanese operations and issues more policies in the country than any other insurer; its future success will be directly linked to its ability to adapt. 

Robots don’t need insurance

According to the International Monetary Fund, Japan will lose 34% of its current population by the end of the century with deaths outnumbering births by an average of 1,000 people a day. The domestic labor force, meanwhile, is expected to decline even faster than the overall population. While the IMF thinks that robots and AI may ease labor shortages in the country that has long been averse to widescale immigration, those digital agents won’t come down with cancer or dementia and don’t create demand for the insurance products Aflac sells.

“Strong and effective social safety nets will be crucial, since disruption of some traditional labor and social contracts seems inevitable,” the IMF said, highlighting the complexity of the changes underway. Even though Japan’s economy has been growing with solid consumer spending, a weakening yen, expanding exports and a stock market that’s up nearly 20% over the last year, the insurance market can’t simply trade itself into equilibrium.

Rising interest rates, meanwhile, further complicate matters. While improving financial market returns, they can also affect the pricing of annuities and life insurance policies that many clients use to build wealth, according to PwC. Aflac’s cancer insurance focus is less sensitive to rate shifts, however, and could position it to maintain an edge in adapting to the new environment when compared to peers. 

Kazuyoshi Ono, a senior consultant at Nomura Research Institute, thinks Japan’s insurance industry can learn from how its peers in the US have adapted to serve the aging population there, and Aflac may be especially well positioned to compete in that endeavor because of its familiarity with the market. “The US insurance industry uses data analytics, artificial intelligence and machine learning for risk assessment and claims management,” he wrote. “A greater degree of personalized targeting can lead to more precise underwriting decisions and better marketing strategies.”

The demographic changes underway in Japan will require many businesses to rethink how they operate, and the insurance industry will be at the forefront of the colliding forces of aging, population decline and automation. Aflac may be well prepared for the endeavor with its deep roots in two of the biggest insurance markets in the world, but the biggest hurdle ahead will involve convincing the younger generation to buy into a system already under strain. The company has had some early success, but the road ahead will be long.