No. 11 — March 17, 2000


Weekly Review

--- by Jon Choy

After two decades of work to align Japan's financial-market rules and regulatory practices with those of the United States and Europe, the end of the process is in sight. Tokyo has drafted legislation that will allow a wider range of firms to sell insurance policies and give insurers new freedoms to restructure and compete. Also on the drawing board is a government-backed system for dealing with failed insurers that mirrors the approach adopted for the banking industry. Even though the proposed changes will not be implemented for more than a year, companies already are rushing to prepare for the new competitive environment.

Three factors have fueled concerns about the insurance industry and prompted the review of how to deal legislatively with these issues:

One sign of Tokyo's growing concern about the health of the insurance industry is the increased attention paid to it by financial regulators. The Financial Reconstruction Commission, the Financial Supervisory Agency and the Ministry of Finance all are focusing additional resources on monitoring insurers.

Taking action for the first time against an insurer, the FSA ordered Taisho Life Insurance Co. in early March to submit a turnaround plan after an inspection revealed that the company's solvency ratio could drop below the 200 percent minimum for financial soundness specified in the agency's Prompt Corrective Action guidelines. An insurer's solvency margin, which includes unrealized profits from investments, indicates its ability to meet obligations in the event of a disaster or an unforeseen loss. Taisho Life executives are considering several options, including restructuring and finding a stronger ally. They hope to present a response to the FSA's directive soon.

In another unprecedented FSA move, agency inspectors paid an unannounced visit to Nippon Life Insurance Co. looking for evidence that the firm had pressured customers to switch to policies with smaller payouts before their original contracts had expired. The Japanese press also reported that the FSA was interested in checking the general financial health of the country's largest writer of life insurance policies.

The Obuchi administration moved March 7 to address many of the concerns about the insurance industry by approving a package of amendments to the Insurance Law. The reforms, which could go into effect as early as April 1, 2001, will institute a variety of changes. These include:

The proposed reforms plus recent amendments to the Commercial Code and the Securities and Exchange Law have set off an industrywide scramble to consolidate (see JEI Report No. 41B, October 29, 1999). Nippon Fire & Marine Insurance Co., Ltd., the fifth-largest nonlife insurer, and smaller competitor Koa Fire & Marine Insurance Co., Ltd. will merge by April 2002. The numbers three and four in the property and casualty business, Mitsui Marine & Fire Insurance Co., Ltd. and Sumitomo Marine & Fire Insurance Co., Ltd., are negotiating a deal that would create Japan's largest such underwriter, the title now held by Tokio Marine & Fire Insurance Co., Ltd. Midsize Dai-Tokyo Fire & Marine Insurance Co., Ltd. and Chiyoda Fire & Marine Insurance Co., Ltd. are the latest to get on the bandwagon, announcing plans March 2 to merge by April 2001.

The impending changes also have caught the attention of many organizations both public and private that hope to grab a piece of the insurance pie directly or indirectly by offering alternative financial options. Some examples:

The ferment in the insurance industry already has led to some notable developments and announcements. Among them are:

Even as foreign firms rush into the evolving Japanese insurance and pension markets, Washington and Tokyo remain at odds over a related issue. Working-level officials from the Office of the U.S. Trade Representative, the Ministry of Foreign Affairs, MOF and the FSA were scheduled to rehash Japan's timetable for deregulating the third sector at a March 16 meeting. The two governments had agreed in December 1996 that Japan would open up the third sector, in which foreign firms have built a strong presence, to subsidiaries of domestic life and nonlife insurers in January 2001 — provided that the Finance Ministry had followed through on specific commitments to deregulate the so-called primary sector by June 1998.

The Clinton administration insists that Japan fell short on several of its obligations, such as speeding up the approval of new insurance products, and thus has not earned the right to allow the cross-market subsidiaries of big insurers to offer such products as cancer, hospitalization and personal accident policies. Tokyo, however, plans to open up the third sector as scheduled (see JEI Report No. 16B, April 23, 1999). "It is clear that all conditions for opening up the third sector have been satisfied, and the sector will be liberalized fully in January 2001," an FSA official said ahead of the talks.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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