The framework market access pacts, the hallmark of the Clinton administration's results-oriented Japan trade strategy, face their most critical implementation test to date. At issue is the Ministry of Finance's timetable for deregulating the insurance industry, a major thrust of the most significant reform of the nation's insurance system in more than a half-century. May 1995 amendments to the Insurance Business Law, scheduled to go into effect April 1, will allow now tightly regulated life and nonlife insurance providers to move into each other's businesses via wholly owned subsidiaries. Japan's insurance giants also will gain more freedom to go into or to expand in the so-called third sector.
This niche in the world's second-biggest insurance market spans products that blend elements of life insurance and nonlife insurance personal accident, sickness, injury and nursing care insurance and, as a result, fall into the gray area between the official definitions of the two primary insurance sectors. Such policies are important premium generators for American insurers operating in Japan, in large part because the current regulatory environment does not allow the competition to capitalize on its strengths of product innovation and price in either the life insurance business or the property and casualty insurance field. For example, American International Group Inc. affiliate AIU Insurance Co., ranked number one among foreign nonlife insurance companies in Japan in terms of premium income, earned just under half of its ¥214.9 billion ($2.1 billion at ¥100=$1.00) in premium income in FY 1994 from personal accident policies.
Apparently to help big Japanese insurers struggling with the increasingly unfavorable domestic business world of the 1990s (see JEI Report No. 9A, March 8, 1996), policymakers in MOF's Insurance Bureau intended to deregulate the third sector before allowing greater competition in the life and the nonlife markets. Stopping that movement in its tracks was near the top of the White House's agenda for the framework negotiations on insurance. That objective was recognized. The relevant section of the October 1994 insurance agreement (see JEI Report No. 38B, October 7, 1994) reads:
With regard to mutual entry of life and nonlife insurance companies into the "third sector," the MOF intends not to allow such liberalization to be implemented as long as a substantial portion of the life and nonlife areas is not deregulated. É Furthermore, with respect to new or expanded introduction of products in the third sector, it is appropriate to avoid any radical change in the business environment, recognizing that such change should depend on medium to small [Japanese firms] and foreign insurance providers first having sufficient opportunities (i.e., a reasonable period) to compete on equal terms in major product categories in the life and nonlife sectors through the flexibility to differentiate, on the basis of the risk insured, the rates, forms, and distribution of products.
The pact contains no definition of "a reasonable period." U.S. trade negotiators thought, however, that they had an understanding with their MOF counterparts that foreign insurers would have three years to gain more customers in the primary life and nonlife sectors before major Japanese insurers were given greater access to the third sector.
Last spring the Clinton administration began to receive reports from American insurance firms doing business in Japan that not only was the process of drafting the regulations to implement the amendments to the Insurance Business Law being conducted in the old, nontransparent way but that the framework agreement's straightforward deregulation language notwithstanding the Finance Ministry's Insurance Bureau was planning little meaningful liberalization in the two primary sectors while considering substantive changes in the regulatory environment for the third sector. On several occasions through the fall top White House officials raised these reports with Japanese government decisionmakers. Each time, U.S. Trade Representative Mickey Kantor says, the American officials were assured that Tokyo would live up to its agreement commitments on the deregulation timetable and other issues. Late last year, however, MOF's number-two official spelled out an interpretation of key agreement provisions that Mr. Kantor termed "clearly at odds" with Japan's commitments. The top U.S. trade negotiator as well as Secretary of the Treasury Robert Rubin and Vice President Al Gore subsequently stressed both in writing and in one-on-one meetings with senior Japanese officials that Washington expected Tokyo to implement the insurance pact as written. Two rounds of midlevel talks in December and another in January yielded no to minimal progress. The same verdict was issued March 2 by USTR Senior Counsel Ira Shapiro after another negotiating session in Washington and his own discussions in Tokyo with Finance Ministry officials.
Given the deep divisions between Washington and Tokyo over the timing of the deregulation of Japan's primary insurance sectors and the third sector, trade and industry watchers doubt that this and other implementation issues can be settled prior to April 1 or even before President Clinton's mid-April meeting in Japan with Prime Minister Ryutaro Hashimoto. What the White House might do if Japan sticks to its plan to open the third sector to greater competition from big Japanese insurers without giving foreign companies substantially expanded opportunities to do business in major life and nonlife areas is unclear. Mr. Kantor did tell Sen. Christopher Bond (R, Mo.) in a February 8, 1996 letter reprinted by Inside U.S. Trade, a weekly Washington newsletter, that the Clinton administration was "É exploring all [its] options to bring Japan into compliance with [the insurance] agreement."