Japan's insurance industry

During the heyday of the 1980s and the first half of the 1990s, like the rest of the Japanese economy, Japan's insurance industry was developing with tremendous strength. The huge amount of premium income and assets formed is sometimes comparable to even the most powerful United States, and domestic investment opportunities are limited, which has led Japanese insurance companies to look outward for investment. Since 1980, the industry has become a major international investor, which has made it popular with analysts worldwide.

The global insurance giant is trying to gain a foothold in the huge market size. However, the restrictive nature of Japanese insurance law led to fierce, and sometimes fierce, negotiations between Washington and Tokyo in the mid-1990s. The bilateral and multilateral agreements reached are in line with Japan's Big Bang financial reform and deregulation.

Based on the results of the 1994 US-Japan insurance negotiations, a series of liberalization and deregulation measures have been implemented since then. But the process of deregulation is very slow, and it is often very selective in protecting the interests and market share of domestic companies. Although Japan's economy is comparable in size to the United States, it clearly lacks the foundation of an effective financial market—sound regulations for a competitive economic environment. And its institutional structure is also different from other developed countries.

In Japan, a unique phenomenon is the kieretsu structure, which is a group of companies with a large number of shares in different industries. As a result, there is no need for shareholder motivation to force the company to adopt the best business strategy. Although initially touted as a model during Japan's boom, the system's vulnerability became too apparent when the economic boom bubble burst in the 1990s. Equally bad for Japan is that it cannot keep up with the pace of software development in the rest of the world. Software has been the engine of world economic growth in the past decade, and countries that are lagging in this area are facing the economic downturn of the 1990s.

Surprisingly, the "New World" economy after the Internet revolution lags far behind Japan, which is the world leader in the "brick and tile" industry. Japan now refers to the 1990s as the "lost decade" of the economy and has lost its luster after three recessions in the past decade. Interest rates fell to historical lows to stop the economy from falling, but to no avail. For an insurance company, its lifeline is the spread of benefits in its investments and has suffered severe damage. Faced with the "negative spread" and the increase in the number of non-performing assets, many large insurance companies went bankrupt. Although Japanese insurance companies have largely avoided the scandals that plagued fellow banking and securities companies, they are currently suffering unprecedented financial difficulties, including catastrophic bankruptcies.

Institutional weakness

The Japanese market is a huge market but consists of just a few companies. Unlike similar companies in the U.S., where approximately 2,000 companies compete fiercely in the life insurance sector, the Japanese market includes only 29 companies classified as domestic companies and a few foreign entities. The same is true for the non-life insurance industry, with 26 domestic companies and 31 foreign companies offering their products. Therefore, when choosing a carrier, consumers have fewer choices than their American counterparts. There are also fewer varieties of products. Japanese life and non-life insurance companies are characterized by "ordinary vanilla" products. This is even more apparent in car insurance, which until recently did not allow the risk of differences to be reflected by gender, driving records, etc. Drivers are divided into three age groups for the sole purpose of determining premiums, and US interest rates have long reflected all of these and other factors.

Needs also vary for different types of products. Japanese insurance products are more focused on savings. Similarly, although many Japanese life insurance companies offer several limited types of variable life insurance policies whose returns reflect the value of the underlying financial assets held by the insurance company, thereby exposing the insured to market risks, Some people choose such a policy. At 100 yen = 1.00 USD, the value of Japan's variable life insurance policies effective as of March 31, 1996 was only USD 7.5 billion, accounting for only 0.08% of all life insurance. In contrast, as of 1995, the effective variable life policy in the United States was worth $ 2.7 trillion, or about 5% of the total, and there were many options, such as variable universal life.

In both industries, Japanese insurance companies have less competition than their American counterparts. In an environment where a small number of companies are offering a limited number of products to newly entered markets that are heavily regulated, implicit price coordination will be expected to limit competition. However, Japanese-specific factors have further reduced competition.

Price competition and the lack of product differentiation mean that an insurance company can acquire a company's business and stay in business indefinitely. American analysts sometimes point out that keiretsu [corporate group] relationships are such an excuse. For example, members of the Mitsubishi Corporation may often wander around to purchase hundreds or thousands of its goods and services. But for non-life insurance, this comparison pricing is futile, as all companies will offer many of the same products at the same price. As a result, a company of the Mitsubishi Group often handed over its business to Tokyo Marine Fire Insurance Co., Ltd., which has been a member of Mitsubishi Keiretsu for decades.

On the surface, life insurance premiums are more flexible. However, the role of government in a part of this industry is also increasing-and in some way influence the pricing of insurance products. In addition to its huge savings system, the country's postal system also operates a postal life insurance system commonly known as Camp. Kampo's transactions take place at thousands of post offices. As of March 1995, according to the calculation of current policies, Camp has 84.1 million unpaid policies, about one per household, accounting for nearly 10% of the life insurance market.

Most of the funds invested in Campo went into a huge fund called a "trust fund", which in turn invested in several government financial institutions and many half-dozen government-related activities such as ports and highways Public Sector. Although the Ministry of Posts and Telecommunications is directly responsible for Camp, the Ministry of Finance is responsible for managing the trust fund. So, in theory, the Treasury can have an impact on the returns Campbell can earn and the premiums it might charge.

Kampo has many characteristics that influence its interaction with the private sector. As a government-run institution, it is undoubtedly inefficient, increasing costs, making it uncompetitive, and implying a declining market share over time. However, because Kampo cannot fail, it has a high risk tolerance and can ultimately be borne by the taxpayer. This means increasing market share, enabling this postal life insurance system to underestimate the price of its products. Although growth prospects are probably what MPT hopes, MOF seems equally interested in protecting its affiliated insurance companies from "excessive" competition.

The end result of these conflicting incentives is that Kampo appears to limit the premiums that insurance companies charge. If their prices rise too much, Kampo will gain more shares. In response, the insurance company can return the premium. Conversely, if investment returns or greater efficiencies reduce private sector premiums relative to basic insurance, Kampo will lose market share unless adjustments are made.

Japan's life insurance division also lags behind its American counterparts in formulating ways in which companies can cooperate to deal with the threat of personal anti-selection and fraud. Although the number of companies in Japan is much smaller, the mistrust and disunity among them has led to an isolated approach to these threats. In the United States, the presence of a sector-sponsored entity such as the Medical Information Bureau [MIB] is the first line of defense against fraud, which in turn can save the industry about $ 1 billion annually in terms of protecting value and outpost effects. Soon after, major carriers in Japan began to adopt methods similar to forming common data warehouses and sharing data.

Analysts often complain that insurance companies are reluctant to adhere to prudent international norms in order to disclose their financial data to the investment community and its policyholders. This is especially true because companies have common characteristics compared to "public" companies in the United States. For example, Nissan Mutual Life Insurance Co. went bankrupt in 1997. Although the company ’s president admitted to bankruptcy for many years after the bankruptcy, the company has generally reported net assets and profits in recent years.

Foreign life insurance

Since the American Life Insurance Company [ALICO] first entered the Japanese market in February 1973, there are currently 15 foreign life insurance companies [over 50% of foreign investment] in business. However, companies like American Family Life [AFLAC] were initially allowed to operate only in the third sector, Medicaid Areas such as the Critical Illness Supplement Program and Cancer Program, which was not attractive to Japanese insurance companies. The mainstream life insurance business is controlled by foreign carriers. However, in the late 1990s, there was a huge turmoil in the industry, and many domestic companies fell into severe financial difficulties. Japan has gone to great lengths to protect itself, allowing foreign companies to acquire troubled companies and keep them in business.

Foreign operators continue to enter the Japanese market. As one of the two largest life insurance markets in the world, Japan is considered strategically important with North America and the European Union. The collapse of domestic life insurance companies and the continued deregulation have promoted the consolidation of the Japanese life insurance market, which has provided global insurance companies with major opportunities to expand their business in Japan. The total market share of foreign participants is gradually increasing. As of the end of fiscal year 1999, global insurance companies' premium income accounted for more than 5%, while effective personal business accounted for more than 6%. These numbers are about double what they were five years ago.

In 2000, AXA Group strengthened its business base in Japan by acquiring Japan's Dantai Life Insurance Co., Ltd., a domestic secondary insurance company with weak financial strength. To this end, AXA established the first holding company in the Japanese life sector. Subsequently, Aetna Life Insurance Co. acquired Heiwa Life Insurance Co., Winterthur Group acquired Nicos Life Insurance, Prudential British company [Prudential UK] acquires Orico Life Insurance. Also active in the Japanese market are American insurance company Hartford Life Insurance Co., known for its variable insurance business, and France's Cardiff Vie Assurance.

In addition, Manulife Century, a subsidiary of the manufacturing merchant life insurance company, inherited the business and assets of Daihyaku Mutual Life Insurance Company, which failed in May 1999. In April 2001, AIG Life Insurance Company assumed the business of Chiyoda Life and Prudential. Life Insurance Co., Ltd. took over Jingrong Life. Both Japanese companies applied for court protection last October.

Supported by a good global track record and strong financial capabilities, foreign entrants enjoy a reputation as part of an international insurance group. They also got rid of the negative interest margin that has plagued Japanese insurance companies for a decade. Despite market turbulence, foreign companies are better able to optimize business opportunities. Although several large Japanese insurance companies still dominate the market, the dynamics are changing as existing business units move from domestic insurers, including failed ones, to new immigrants eligible for policyholders. The pursuit of quality. The list of companies with foreign participation is as follows:

INA Himalayan Life
Prudent life
Manulife Century Life

Scandinavian life
GE Edison Life
Aoba life

Antai peace life
Ridan Life
Zurich life

American Family Life
AXA Nichidan Life

Prudent life
ING life
Cardiff Guarantee Alliance

NICOS life

Foreign insurers are expected to lead their domestic competitors to some extent in terms of innovative products and distribution, allowing them to gain a broader experience in the global insurance market. The immediate challenge for foreign insurers is how to establish a franchise large enough in Japan so that they can take advantage of these competitive advantages.

What's wrong with the life insurance industry?

In addition to its low operating efficiency, Japan's life insurance industry is also a victim of government policies, part of which aims to free banks from financial difficulties. By keeping short-term interest rates low, the Bank of Japan encouraged a relatively large spread between short-term and long-term interest rates in the mid-1990s. This benefits banks, which tend to pay short-term interest rates with deposits and long-term interest rates with loans.

However, the same policy is not good for life insurance companies. Their customers have higher interest rates on insurance policies that are usually long-term investments. Falling interest rates usually mean gains for insurance companies. Assets fall. By the end of 1997, insurance company officials reported that guaranteed yields averaged 4%, while yields on priority assets and Japanese long-term government bonds hovered below 2%.

Even if the numbers increase, insurance companies cannot make up for the negative difference. In fiscal 1996, they tried to get rid of the dilemma by cutting the benefits of pension-type investments, only to see a lot of money under their management flow to competitors.

To increase the damage, life insurance companies bear part of the cost of cleaning up the bank. Distressed assets are chaotic. Since 1990, the Ministry of Finance has allowed the issuance of subordinated bonds ordered by banks. They can count any funds raised through such instruments as part of their capital, making it easier than others to meet existing capital / asset ratio requirements. It can be said that this treatment makes sense, because the holders of this debt [such as equity holders] are almost last in the bankruptcy event.

Subordinated debt has high interest rates precisely because of the higher risk of default. In the early 1990s, insurance companies were almost unable to determine bank defaults, were seduced by the high returns available, and provided large loans to banks and other financial institutions on a subordinate basis. Smaller companies, especially those eager to catch up with larger peers, especially large players. Tokyo Mutual Life Insurance Company ranks 16th in the Japanese life insurance industry based on assets. As of March 31, 1997, about 8% of its assets are subordinated debt, while industry leader Nippon Life has only 3%. .

The rest is of course history. Banks and securities companies that insurance companies also borrowed from began to close in the mid-1990s. The fall of Sanyo Securities Co., Ltd. last fall was partly due to the failure of life insurance companies to extend their subordinated loans to the brokerage company. Life insurance companies have complained that even if the bank's failure suggests that they should have been repaid, they sometimes cannot. For example, it was reported that when Meiji Life Insurance Co. closed down in November, the outstanding debt owed to Hokkaido Takubo Bank Co., Ltd. was 35 billion yen [$ 291.7 million]. Even though Hokkaido Bank did have some good loans transferred to North Pacific Bank Co., Ltd., Meiji Life did not receive compensation from these assets. It will obviously have to write off the entire loan balance.

Subordinated debt is only part of the bad debt story. In the early 1990s, with the collapse of the bubble economy, insurers played a role in almost every large, half-baked loan scheme. For example, they are lenders, they want to rent [housing finance company], and have to share the costly mess-up work. In addition, like banks, insurance companies rely on unrealized profits from shareholdings to help them in case of trouble. During the bubble period, small insurance companies bought this stock at relatively high prices. As a result, under the depressed stock price at the end of 1997, except for two medium-sized [tiers 9-16] life insurance companies, none of them achieved Net loss.

What future

Analysts have identified the following short-term challenges for the industry:

New market entrants
Profit pressure
Poor asset quality; and,

The recent high-profile closure of several life insurance companies has put pressure on life companies to urgently address these challenges in a identifiable manner.

The investment market is even worse than expected. Interest rates have not risen from historical lows. The Nikkei index has fallen since January 2001, and has fallen to a nine-year low after a recent terrorist attack on US soil. Unrealized gains have provided a certain buffer for most insurance companies in the past, but it depends on the insurance company. Relying on unrealized returns, the volatility of retained earnings is now affecting the level of capitalization, which in turn affects financial flexibility.

Table 1
Major risks facing Japanese life insurance companies

Business risk
Financial risk

Weak Japanese economy
Strong income pressure

Lack of confidence of policyholders to pursue quality
Low interest rates, exposed to fluctuations in domestic and overseas investment markets

Deregulation and increased competition
Poor asset quality

Insufficient safety net for policyholders
Insufficient capital

Accelerating the integration of the life sector with other financial sectors
Limited financial flexibility

Most analysts will probably agree that Japanese life insurers face problems with solvency and liquidity. The heavy contractual obligations assumed by policyholders, the declining return on assets, and the mitigation effect of unrealized returns on stock portfolios have little or no mitigation. All these factors have led to the uncertainty of some companies' sustainable viability. Many others, while apparently solvent, face the risk that they will have to pay off unstable policyholders earlier than originally planned. Solvency or liquidity issues raise questions about how insurance companies will manage their assets. Another factor that must be considered is Japan's aging population. As Mr Yasuo Satoh, IBM Japan Financial Industry Insurance Industry Program Manager pointed out: "The industry needs to change business models. They must focus on the benefits of life rather than the benefits of death, and they must emphasize Medicaid. And the long-term care sector because of the total population Is aging. "

Japanese life insurance companies are actively seeking larger segments, while seeking to establish unique strategies in traditional life and non-life businesses. In late 2000, the industry witnessed the emergence of a number of business partnerships and cross-border alliances involving large family life insurance companies. In view of the intensification of market integration, fierce competition and the full opening of the third sector business, the two companies are reviewing their involvement through the subsidiary's non-life insurance business unit, which was first allowed in 1996.

In the long run, Japanese insurance companies may establish business alliances on a shareholding basis. In the short term, the extensive integration of the Japanese financial market will also comprehensively reform the life insurance industry. Although domestic life insurance companies announced various business strategies in the second half of 2000 to cope with this drastic change, the actual benefits of each insurance company for various planned alliances remain uncertain. Further market integration will at least add value to policyholders, thereby providing more products and services. To be successful, life insurers must be more sensitive to a variety of customer needs while establishing new business models to secure their revenue base. Given the high savings rate of the Japanese population, the long-term prospects seem good. But in the short term, Japan is expected to see more insurance companies succumb and then tighten their profits through comprehensive reforms, prudent investment and disclosure regulations.