Tokyo, September 2025 – Japan’s Financial Services Agency (FSA) has published its official response to industry feedback on proposed revisions to the treatment of Market Value Adjustments (MVA) in insurance contracts. The consultation, originally tied to the Ministry of Finance Notification No. 48 (1996), focused on how insurers should calculate policy reserves when contract surrender values fluctuate with interest rate changes.
The Core Issue: Asset-Liability Management (ALM) and Accounting Distortions
Several insurers argued that MVA-linked insurance contracts create asymmetric impacts on surrender values depending on whether interest rates rise or fall. This, they said, distorts both asset-liability management (ALM) and annual accounting profits, even when ALM is otherwise properly managed.
Industry groups pushed for retroactive application of the revised rules—so that not only new contracts (from April 2026 onward) but also existing ones could benefit from the updated treatment, reducing mismatches.
The FSA, however, rejected retroactive application, citing concerns about earnings management and accounting manipulation risks, and confirmed that the rules will apply only to new contracts.
Clarifications on Key Technical Points
The FSA provided detailed guidance on how the revised rules should be implemented:
- Scope of Application: MVAs apply only to insurance contracts explicitly carrying MVA clauses. Mixed portfolios that contain both MVA and non-MVA products cannot be grouped together.
- Asset Coverage: “Corresponding assets” include not just securities but also cash holdings, which must be valued appropriately in ALM calculations.
- Valuation Tests: Insurers must ensure that the fair value of managed assets exceeds policyholder contract values at the end of each reporting period. If not, they must increase reserves accordingly.
- Cash Flow Sensitivity: Insurers should measure sensitivity to interest rate changes in five-year buckets. Even if cash flows are small in certain maturities, firms must set clear criteria to judge materiality.
- Flexibility in Methods: Alternative reserve calculation methods may be used if the standard approach becomes unworkable due to market conditions.
Industry Pushback
The consultation revealed several areas of tension between insurers and regulators:
- Granularity: Some insurers requested permission to apply MVA exemptions only to certain sub-groups of contracts, rather than at the broader product division level. The FSA declined, insisting on division-wide consistency.
- Interest Rate Assumptions: Companies sought clarification on how to model rate shocks and calculate liability cash flows. The FSA said insurers may use internal ALM models but must report assumptions consistently for supervisory review.
- Relaxing Prudential Buffers: Industry players argued that if ALM is matched, risk buffers in the standard reserve rate calculation could be relaxed. The FSA acknowledged the comment but maintained the current framework.
Implications for the Insurance Sector
The FSA’s stance reflects its prudence-first approach:
- By limiting changes to new contracts, it avoids sudden shifts in financial statements of existing insurers.
- By requiring division-level application, it reduces the risk of selective application that could distort profitability.
- By insisting on strict ALM discipline, it reinforces the link between interest rate management and solvency protection.
For insurers, this means higher compliance costs in adapting systems and internal controls for new contracts, but also greater clarity on how regulators expect MVA-linked products to be managed.
Market Structure Commentary
From a market structure perspective, this reform is significant for three reasons:
- Balance Sheet Integrity
The FSA is clearly concerned about avoiding accounting arbitrage. Retroactive application could have allowed insurers to smooth profits in ways that mislead investors or policyholders. - Investor Transparency
By clarifying that MVA products must be assessed separately, the FSA is strengthening disclosure and comparability across insurers, a key concern for institutional investors. - Interest Rate Risk Discipline
With Japan slowly emerging from decades of near-zero rates, regulators want insurers to demonstrate robust interest rate risk management, not rely on accounting relief when mismatches occur.
Final Word
The Japanese FSA’s final position underscores a familiar theme in global insurance regulation: innovation in product design must be matched by rigor in risk management and accounting discipline. While insurers argued for flexibility and retroactive relief, the FSA prioritized prudential safeguards, consistency, and investor confidence.
In practice, this means that from April 2026, new insurance contracts with market value adjustments will face clearer—but stricter—reserve calculation requirements, aligning Japanese rules more closely with international solvency and accounting standards.
Original FSA document (Japanese):
“Public Comment Results on Partial Revision (Draft) Concerning Reserves for Long-Term Insurance Contracts…,” FSA, Sept 5, 2025 (Japanese)
