JAPANESE INSURERS UNSURE OF
--- by Jon Choy
Perceptions play a key role in the insurance business. At the micro level, an insurance company attracts and retains customers on the basis of its financial health and stability. These attributes are needed at the macro level as well because providers of life and property and casualty coverage must compete against other types of financial institutions &emdash; notably, banks and securities brokers. With the exception of the chaotic years immediately following the end of World War II, Japan's insurance industry had maintained a rock-solid financial reputation. This standing was due in part to very close supervision by the Ministry of Finance, which set remarkably conservative standards for such key benchmarks as the solvency ratio, or the excess of total assets over potential liabilities. While insurers could not be characterized as the star performers of Japan's financial world, they were considered among the least likely to fail.
This assumption of invulnerability was shattered in April 1997 when Nissan Mutual Life Insurance Co. announced that it would close its doors because of losses from a "negative spread" &emdash; an unbridgeable gap between what the firm was earning on its investments and what it had promised in returns to buyers of certain types of policies (see JEI Report No. 17B, May 2, 1997). The first postwar failure of a major Japanese life insurer revealed to the public and to overseas observers that the industry and the government were ill-prepared to deal with this kind of event.
No safety net was in place for Nissan Mutual Life's policyholders. Nor was there a mechanism to recapitalize, sell or dissolve the ailing company. With MOF's support, the Life Insurance Association of Japan tried to develop a rescue plan, but it failed and was forced to relinquish Nissan Mutual Life's remaining assets (and obligations) to a caretaker company established, owned and run by the association.
Nonetheless, the industry convinced both itself and customers that Nissan Mutual Life's bankruptcy was a freak occurrence and that insurance executives and MOF regulators alike had learned valuable lessons. Such assurances were shown to be hollow, however, when Toho Mutual Life Insurance Co. failed two years later for similar reasons (see JEI Report No. 22B, June 11, 1999).
When Daiichi Mutual Fire & Marine Insurance Co., Ltd. went under in early May (see JEI Report No. 19B, May 12, 2000), it became clear that the problems that had forced the two life insurers into bankruptcy had not been solved. Neither were they unique or restricted to one type of insurance writer. In fact, Daiichi Mutual Fire & Marine's failure was seen by many experts as the third strike against the industry's vaunted reputation for financial soundness and, more importantly, as the beginning of its realignment.
This view seemed prophetic as Japan's top 15 life and 13 largest property and casualty insurers began to release their business results for the year ended March 31, 2000. Officials of Daihyaku Mutual Life Insurance Co. announced that the Financial Supervisory Agency had directed their company to cease most new policy-writing. They reported that the firm's solvency ratio had fallen below zero, leaving the FSA no alternative but to order Daihyaku Mutual Life to shut its doors.
Executives said that three developments had ripped apart the company's financial fabric:
Big insurers' FY 1999 results show that Japan's prolonged slowdown coupled with the ongoing deregulation of the industry created leaders and laggards. In general, nonlife insurers are in better shape than their life insurance counterparts because they do not sell savings-type policies and, therefore, are not beset by the negative-spread problem. However, the financial statements of all firms are beginning to reveal the impact of the lifting of government controls on premiums (see JEI Report No. 29A, July 30, 1999). Rate-cutting, particularly for automobile insurance, is becoming accepted practice not only for corporate customers but for individuals as well.
The FY 1999 reports for major insurers also indicate that cost-cutting and streamlining have become the norm. The numbers for both employment and branches have fallen sharply since FY 1995. Firms have worked hard to lower expenses in order to boost price competitiveness and to raise operating profits. Executives say, though, that it will be difficult to wring more efficiencies from operations as they currently are structured. Thus, the headlong rush within the industry to form alliances or to merge.
The stampede started last October when Mitsui Marine & Fire Insurance Co., Ltd., Nippon Fire & Marine Insurance Co., Ltd. and Koa Fire & Marine Insurance Co., Ltd. &emdash; three of Japan's bigger property and casualty insurers &emdash; announced a comprehensive partnership as a prelude to a three-way integration and reorganization. Dai-Tokyo Fire & Marine Insurance Co., Ltd. and Chiyoda Fire & Marine Insurance Co., Ltd. shot back in May with a plan to merge in April 2001. The situation is fluid, though, a fact underscored by Mitsui Marine & Fire's recent decision to withdraw from its three-way deal and throw in its lot instead with Sumitomo Marine & Fire Insurance Co., Ltd.
The pending realignment of Japan's insurance industry, at least the nonlife part, is based not only on hard business decisions but also on the general desire of executives to prevent the erosion of their firms' reputations for financial stability. The FY 1999 results for large insurers, especially the numbers of new policies written, show a flight to quality among customers shopping for insurance products. Observers predict that, for this reason alone, the gap between leading and lagging firms will widen.
The business environment only will get tougher for insurers, whether writers of life or nonlife policies. In July, another round of deregulation is scheduled to be implemented. First, insurance companies will have even greater freedom to set prices for their products. This added leeway surely will renew the downward pressure on profits. Second, restrictions on entry into the nonlife sector will be eased, a move that is expected to draw foreign and domestic direct-marketing insurance providers into the fray.
These developments bring into relief some key subjects that will determine the future of the Japanese insurance industry: