INSURANCE AT CENTER STAGE OF BIG BANG DEREGULATION FINALE
--- 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:

• Japan's rapidly aging demographic profile is creating pressure for reform in the pension business, which life insurers and long-term credit banks dominate. Underperforming pension plan investments have hurt insurers' bottom lines and soured customers on the pension products they offer. The cabinet of Prime Minister Keizo Obuchi recently approved legislation that will permit defined-contribution pension plans in 2001 (see JEI Report No. 10B, March 10, 2000), a move that should benefit both insurance providers and pension plan participants.
• The graying of Japan also is putting more strain on the nation's health insurance system. Both the national health insurance program and company-based plans are encountering financial troubles as the proportion of subscribers who are 70 and older continues to grow. Tokyo estimates that as many as 80 percent of all company-based health insurance associations will bleed red ink in FY 2000 and that the ¥60 billion ($545.5 million at ¥110=$1.00) worth of assistance planned by the government will provide only minimal life support for these ailing groups.
• Big Japanese life and property and casualty insurance firms are suffering from an overhang of nonperforming loans, a situation very similar to the one that precipitated the crisis in the country's banking industry. But because the industry has had to operate within a much more conservative and comprehensive regulatory framework, insurers are in a somewhat better position to deal with their financial problems. Nevertheless, the fund meant to protect policyholders in the event of the failure of an insurance provider is nearly bankrupt itself.

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:

• Expanded freedom for mutual insurance companies to reorganize as ordinary stock corporations. Mutual insurers are owned by their policyholders, making it difficult for management to raise capital or to sell the business.
• More flexibility for insurers to cut promised returns — even on existing policies — with the permission of regulators.
• Increased leeway for regulators to intervene when an insurer experiences problems, a change that could prevent crisis situations.
• Additional powers for regulators in the event that an insurer fails. As they now can do with banks, authorities would be able to reorganize and run the bankrupt company, sell its policies to a "bridge insurer" created specially for each failure, auction off the failed firm in whole or in part, or liquidate it.
• Better protection for policyholders through a new government-run safety net, the Insurance Policyholders Protection Corp. of Japan. Tokyo would contribute ¥400 billion ($3.6 billion) and insurance companies another ¥100 billion ($909.1 million) to a pool that would be merged with the existing, privately funded protection plan, which has about ¥460 billion ($4.2 billion) in assets.
• Fiercer competition beginning April 1, 2001, when banks will be free to sell a limited menu of insurance products through their branch offices. The short list includes life insurance policies linked to mortgages and fire insurance for home owners.

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 Ministry of Posts and Telecommunications announced plans March 8 to sell motorcycle accident insurance at post offices nationwide beginning in April 2001. MPT already markets life policies through the country's post offices, but this would be the first time that it offered nonlife coverage. MOF and insurance executives strongly oppose the idea and can be expected to fight the authorizing legislation.
• FMR Corp.'s Fidelity Investments, the top American mutual fund manager, plans a full-scale drive into the market for defined-contribution pension plans. It intends to offer a wide range of services — everything from pension-plan design to advising employees on investment vehicles. At the same time, Fidelity plans to buy into a proposed venture between Industrial Bank of Japan, Ltd. and Nomura Securities Co., Ltd. that will handle the administration of customer accounts. The mutual fund giant also has expressed interest in investing in Nippon Record Keeping Network Co., Ltd., a similar firm to be backed by the Mitsubishi and Sumitomo Groups as well as by Nippon Life.
• Japanese insurance agency Global Insurance Corp. plans to set up in April an extensive, Internet-based network of agents to push sales of life and nonlife policies. Participating brokers would forward customers' insurance needs to Global Insurance, which would use software to choose the most appropriate policy from the offerings of 43 companies. Agents would pay Global Insurance a percentage of the fees received from buyers. Global Insurance was established in March 1996 by a former Sony Life Insurance Co. executive. He hopes to list the firm this autumn on the Market of High Growth and Emerging Stocks, known as MOTHERS, a new Tokyo Stock Exchange trading floor for start-ups (see JEI Report No. 42B, November 5, 1999).
• By June, Marubeni Corp. expects to found a securities subsidiary to sell investment trusts (Japanese-style mutual funds), insurance policies and other financial products to wealthy individuals. With about ¥1 billion ($9.1 million) in capital, the envisioned firm anticipates tie-ups with more than 100 accounting offices around the country. It will use this network to widen its customer base. A Web site with information on products and financial management services also is planned. In addition to selling more than a dozen investment trusts, life and nonlife insurance policies and other financial products, the company will offer funds that invest in privately placed shares.

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

• The deregulated auto insurance market could be close to claiming its first victim. According to press reports, Taiyo Fire & Marine Insurance Co., Ltd., an affiliate of Taiyo Mutual Life Insurance Co., is considering pulling out of this business in FY 2000 at the earliest. Taiyo Fire & Marine earns about 25 percent of its revenues from auto insurance, about half the typical ratio for major casualty insurers. Executives have not announced how they expect to replace the lost income.
• Yasuda Mutual Life Insurance Co. has plans to link with telecommunications giant Nippon Telegraph and Telephone Corp. and Sharp Corp. to launch an Internet health-information service in April that will be accessible through special telephones fitted with displays. Sharp will supply the modified phones to NTT. Yasuda Mutual Life will provide on-line content focused on family health and life-style issues and will market the service to its 500,000 or so policyholders.
• Also in April, Dai-Ichi Mutual Life Insurance Co. will set up a unit dedicated to creating a sales network that, beginning in FY 2000, will market so-called third-sector products, which include cancer treatment, hospitalization and other policies that blend elements of life and nonlife coverage.

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.