Japan's insurance industry

During the glamorous period of the 1980s and the first half of the 90s, like the rest of its economy, Japan's insurance industry grew as a hedge. The sheer volume of premium income and asset formation, which can sometimes be compared even with the vast US and the limit of local investment opportunity, has led Japanese insurance companies to look outside for investment. The industry's position as a major international investor since the 1880s has brought it under the scanner. Analysts around the world.

World insurance giants have tried to put a foothold in the market, looking at the large market size. However, the restrictive nature of Japanese insurance laws led to fierce, sometimes flawed negotiations between Washington and Tokyo in the mid-1990s. The resulting bilateral and bilateral agreements overlapped with financial reforms in Japan's Big Bang Big Bang.

Based on the results of the US-Japan insurance talks in 1994, a series of liberalization and regulatory procedures have been implemented since then. However, the deregulation process has been very slow, and more often than not, very selective in protecting interest and market membership. Although the Japanese economy was similar to its US counterpart in size, the basis of effective financial markets – the rules and environmental regulations for a competitive economic environment – was fundamentally lacking. Its institutional structure was also different from that of other developed countries.

The Kirzo structure – the corporate group with cross-holdings in a large number of companies in different industries – was a unique phenomenon in Japan. As a result, shareholders' activism was lacking to force companies to adopt an optimal business strategy for the company. Although we first started out as a model in Japan's prosperous days, the vulnerability of this system became apparent when the economic bloom bubble burst in the 1990s. Working against Japan was also its inability to keep up with software development elsewhere in the world. Software has been the growth engine of the global economy for the past decade, and countries lagging behind in this field have faced the collapsing economies of the 1990s.

Japan, the world leader in "brick and mortar" industries, is surprisingly far behind in the "New World" economy after the Internet revolution. Japan now calls the 1990s a "lost decade" for its economy, which lost its name following 3 recessions over the past decade. Interest rates have fallen to historic bakes, to thwart the falling economy – in vain. For insurers, whose lifelines are the interest in their investment, it's devastating. Quite a few large insurance companies went bankrupt in the face of "negative expansion" and increasing the volume of non-performing assets. While Japanese insurers have apparently fled the scandals that hurt their siblings in the banking and securities industry, they are currently suffering unprecedented financial difficulties, including catastrophic bankruptcies.

Institutional weaknesses

The Japanese market is huge, and yet it consists of only a few companies. Contrary to the US equivalent, with about two thousand companies competing in a tough competition in life, Japan's market consists of only twenty-nine companies classified as foreigners and a handful of foreign entities. The same situation prevailed in the economy with twenty-six domestic and thirty-one foreign companies offering their products. There are far fewer options than their American counterparts in choosing their carrier. There is less variety on the product side. Both life insurers and non-life insurers in Japan are characterized by "regular vanilla" offerings. This is more pronounced in auto insurance, where until recently premiums were not allowed to reflect differential risk, For example, by gender, driving record etc. & # 39; Drivers were classified in their own Q age groups are only for the purpose of determining the premium, while US rates have long reflected all the same factors and others.

Demand also varies for different types of products. Japanese insurance products are more geared towards savings. Similarly, although many Japanese life insurance companies offer some limited types of life-changing policies (where the benefits reflect the value of the underlying financial assets held by the insurance company, thus exposing the insured to market risk), there are few to take such policies. At $ 100- $ 1.00, the Japanese variable life policies that were in effect as of March 31, 1996 were worth only $ 7.5 billion, representing 0.08 percent of all life insurance. In contrast, the US life-changing policy that was in effect since 1995 was worth $ 2.7 trillion, about 5 percent of the total, with many options, such as changing universal life.

Japanese insurance companies in both parts of the industry competed less than their American counterparts. In an environment where some companies offer a limited number of products to the market where new entry is closely regulated, implicit price coordination could be expected to curb competition. However, Japan's special factors further reduce rivalry.

Lack of price competition, especially between products, implies that an insurance company can grab a business in the firm and then keep it virtually indefinitely. American analysts sometimes noted that keiretsu connections (group of companies) are just such an excuse. A member of a group of companies in Mitsubishi, for example, can usually look for the best deal in the hundreds or thousands of goods and services it buys. But in the case of general insurance, such comparative pricing would be futile, since all companies will offer the same product at much the same price. As a result, Mitsubishi Group Company, more often than not, has been providing business to Tokyo Marine & Fire Insurance Co. & # 39; Inc., a company in Kitzu Mitsubishi for decades.

On life insurance premiums were more flexible. However, the government role is looming to grow in this part of the industry as well – and in a way that affects the pricing of insurance products. The state postal system operates, in addition to its huge savings system, the postal life insurance system commonly known as Campo. Transactions for Campo are done in the windows of thousands of post offices. As of March 1995, Campo had 84.1 million outstanding policies, or about one per household, and nearly 10 percent of the life insurance market, as measured by existing policies.

Funds invested in Campo usually go into a huge fund called the Mutual Fund, which in turn invests in several government financial institutions as well as a number of semi-public entities engaged in a variety of government-related activities, such as ports and highways. Although the Post and Communications Ministry (MPT) bears direct responsibility for Campo, the Treasury manages the trust fund. Thus, MOF theoretically can affect the returns that Campo is able to earn and, as a result, the premiums it is expected to charge.

Campo has several characteristics that affect its interaction with the private sector. As a government-run institution, it is undoubtedly less efficient, raises its costs, renders it uncompetitive and implies a declining market share over time. However, because Campo cannot fail, it has a high tolerance for risks that can ultimately be borne by taxpayers. This implies an expanding market share, to the extent that this postal life insurance system is capable of underestimating its products. While the growth scenario is likely to be what MPT favors, it seems that MOF is equally interested in protecting insurance companies under its protection from "excessive" competition.

The net effect of these contradictory incentives is that Campo seems to be restraining insurers' premiums. If their prices go up too much, then Campo will grab another share. In response, insurers may refund premiums. Conversely, if return on investment or greater efficiency reduces private sector premiums relative to basic insurance, Campo will lose market share unless it adjusts.

Japan's life insurance sector is also lagging behind its American counterpart in formulating collaborative approaches between companies against the threats of anti-choice and fraud activities by people. Although the number of companies is much lower in Japan, their lack of trust and distrust have led to isolated approaches to addressing these threats. In the United States, the existence of sector-sponsored entities such as the Medical Information Bureau (MIB) serves as the first line of fraud protection, and in turn saves the industry about $ 1 billion a year in terms of protective value and sentencing effect. Late, large Japanese vendors are initiating approaches similar to the formation of common data storage and data sharing.

Analysts often complain to insurance companies for their reluctance to adhere to cautious international norms about disclosing their financial data to the investment community and their insurers. This is especially true because of the mutual characteristic of companies versus their "public" counterparts in the US. For example, Nissan Mutual Life Insurance Co. & # 39;, which failed in 1997, generally reported net assets and profits in recent years, even though the company president acknowledged after its failure Because the firm has been insolvent for years.

Foreign participation in life insurance

Since February 1973, when the US Life Insurance Company (ALICO) first traveled to Japan to participate in the market, fifteen foreign life insurance companies (with more than 50% foreign capital) are now operating. However, companies such as American Family Life (AFLAC) were initially allowed to operate only in the third sector, namely the medical supplement area, such as serious illness and cancer programs, which were not attractive to Japanese insurance companies. The mainstream life insurance business was kept out of the reach of foreign carriers. However, the great turmoil in the industry in the late 1990s left many of the local companies in deep financial trouble. In their rage for protection, Japan allowed foreign companies to purchase the sands and leave them afloat.

Foreign operators continue to enter the Japanese market. As one of the world's top two life insurance markets, Japan is considered as strategically important as North America and the EU. The consolidation of the Japanese life market, facilitated by the collapse of local insurers and the abolition of ongoing regulation, provides global insurers with major opportunities to expand their business in Japan. The overall market share of foreign players is gradually increasing, with global insurance companies accounting for more than 5% in terms of premium income at the end of 1999 and over 6% of private businesses in effect. These figures are about twice as high as those five years earlier.

In 2000, AXA Group strengthened its business base in Japan through the acquisition of Nipon Dantai Life Insurance Ltd., a second-rate local insurer with a weak financial profile. To this end, AX established the first holding company in the Japanese life industry. Athena Life Insurance Co. & # 39; Following that, she acquired Heiwa Life Insurance Co. & # 39; while the Winterdor Group bought Nicos Life Insurance and UK Prosecutor Acquired Oriko Life Insurance. Also recently active in the Japanese market are Hartford Life Insurance Co., a US insurer known for its changing insurance business, And Cardiff Wei securing France.

In addition, Manulife Century, the subsidiary of the Life Insurance Manufacturers Company, inherited the activities and assets of Daehiaco Mutual Life Insurance Co. & # 39;, which failed in May 1999. In April 2001, AIG Life Insurance Co. & # 39; Took Chiyoda Life and Prudential Life Insurance Company Ltd. took over Kyuyi Life. The two Japanese companies filed a lawsuit last October.

Foreign contenders bring a reputation with them as part of international insurance groups, which are supported by positive global records and strong financial ability. They are also innocent of the negative spreads that have plagued Japanese insurers for a decade. Foreign players are better positioned to optimize business opportunities despite market turmoil. Although a number of large Japanese insurers still dominate the market in terms of stock, the dynamics change as existing business blocks move from local insurers, including failed companies, to newcomers according to insured & # 39; Flight to quality. The list of foreign participation companies is as follows:

INA Himawari Life
A watchful life
Manulife's Century Life

Scandia life
Chaim Edison
Oba life

Atna Hiwa is alive
Nikidan's life
The life of Zurich

Japan, too
American Family Life
AXA Life Chaser

A watchful life
ING Life
Vie promise CARDIFF

Nicos life

Foreign insurers are expected to be able to beat their local rivalry to some degree in innovative products and distribution, where they can leverage wider experience in global insurance markets. The one immediate challenge for foreign insurers will be how to set up a large enough franchise in Japan to leverage these competitive advantages.

What helps the life insurance industry?

Apart from its operational inefficiencies, Japan's life insurance industry is also a victim of government policy that is partly designed to save banks from financial hardship. By maintaining short-term interest rates, the Bank of Japan in the mid-1990s encouraged a relatively wide spread between short-term and long-term interest rates. It benefits banks, who tend to pay short-term rates on their deposits and charge long-term rates on their loans.

However, the same policy hurt life insurance companies. Their clients have been locked into relatively high rates of long-term insurance policies, usually long-term. The fall in interest rates usually means that the return to insurers & # 39; Assets fell. At the end of 1997, the insurers reported that the guaranteed rate of return was an average of 4 percent, while yields on preferred assets, long-term Japanese government bonds, were below 2 percent.

Insurance companies cannot compensate for a negative spread even with an increase in volume. In FY 1996, they tried to get out of their dilemma by cutting returns on pension-type investments, only to predict a massive outflow of money under their management for competitors.

To add insult to injury, life insurance companies need some of the banks' cleaning costs & # 39; A non-performing asset mess since 1990 allowed the Treasury to issue deferred debts transferred by bank order. They can enumerate all funds raised through such instruments as part of their equity, thus making it easier than meeting existing equity / asset ratio requirements. Arguably, this treatment makes sense, since such debtors, like shareholders, are almost in line for bankruptcy.

Deferred debts carry high interest rates precisely because the risk of default is higher. In the early 1990s, banks' default computers were virtually impossible and were tempted by the high yields available, lending large sums of money to banks and other financial institutions. Smaller companies, perhaps eager to catch up with their larger counterparts, were particularly large participants. Tokyo Mutual Life Insurance Co., which ranks 16th in Japan's asset-based life insurance industry, had about 8 percent of its assets as debt deferred as of March 31, 1997, while industry leader Nippon Haim only had 3 percent.

The rest, of course, is history. Banks and securities companies, to which they also lent insurers, began to fail in the mid-1990s. The collapse of Sanyo Securities Co., Ltd. Last fall, it plunged in part because of life insurance companies' refusal to realize the brokerage's subordinated loans. Life insurers complained that they were sometimes not repaid even when the conditions of bank failure suggested that they should be. For example, Meiji Life Insurance Co. & # 39; reported that $ 35 billion ($ 291.7 million) was in deferred debt to Hokkaido Takosoku Bank Ltd. when the bank collapsed in November. Although Hokkaido Bank had some good loans transferred to Northern Pacific Bank Ltd. From, Meiji Life has not compensated for these assets. This will probably have to wipe out the entire loan balance.

Deferred debt is only part of the bad debt story. Insurance companies had a role in almost every large-scale, half-baked loan program that collapsed with the bubble economy in the early 1990s. For example, they were accompanied by Zen (housing finance companies) and had to share the precious cleanliness of that mess. Furthermore, much like the banks, the insurers relied on unrealized profits from the holdings of their shares to extract them if they got into trouble. Smaller bubble insurers bought such stocks at relatively high prices, and the result of the downward-sloping stock prices at the end of 1997, all but two middle tiers (size 9 to 16), were unrealized. Net losses.

What to expect next

Analysts have identified the following short-term challenges in the field.

New market participants;
Click on earnings;
Poor asset quality; and,
Capitalization.

The recent high profile failures of some life insurance companies have put pressure on life companies to face these challenges in urgent and familiar ways.

The investment market was even worse than expected. Interest rates have not risen from historically low levels. The Nike Index has fallen since January 2001, dropping to a 9-year low after the recent terrorist attack on American soil. Unrealized earnings used to provide some cushion to most insurers, but, depending on insurers & # 39; Relying on unrealized earnings, the remaining volatility of earnings now affects discounting levels and thus financial flexibility.

Table 1
Great risks faced by Japanese life insurance companies

Business risks
Financial risks

A weak Japanese economy
Strong earnings pressures

Insured distrust, flight to quality
Low interest rates, exposure to fluctuations in the domestic investment market, overseas

Deregulation, increasing competition
Poor asset quality

Poor Insured & # 39; Safety net
Discounted capitalization

Accelerating consolidation in the life sector, with other financial sectors
Limited financial flexibility

Most analysts are likely to agree that Japan's life insurers face both insolvency and liquidity issues. Heavy contractual obligations to policyholders, reduced return on assets, and little or no profit as a result of unrealized gains in stock portfolios are combined to make the continued viability of some companies far from secure. Many others, although of course taxable, face the risk that they will have to pay to uncomfortable policyholders sooner than they planned. Repayment or liquidity concerns raise the question of how insurers will manage their assets. Another factor to consider is Japan's aging population. As Mr. Yasu Sato, Program Manager in Insurance, Finance, IBM Japan, points out, "The industry needs to change the business model. They need to focus on life benefits rather than death benefits and they need to emphasize on medical supplement. And nursing sectors as the general population ages."

Japanese life insurers are actively seeing greater segmentation, while seeking to establish unique strategies in both traditional life and non-life business. By the end of 2000, the sector was up to the formation of several business partnerships and cross-border alliances involving large home life insurers. The companies are examining their intervention through subsidiaries on the general side of the business, which was first permitted in 1996, impersonating market growth, fierce competition and full liberalization of third-sector businesses.

In the long run, Japanese insurance companies are likely to establish demotalized business relationships. Widespread consolidation in Japan's financial markets in the near term will also bring about life insurance improvements. Although local life insurers announced different business strategies in the second half of 2000 to respond to this maritime change, the actual benefit of different planned alliances for each insurer remains unclear. Further consolidation in the market should add value to policyholders, at least and make a wider range of products and services. To be successful, life insurers will need to be more sensitive to the diverse customer needs while establishing new business models to ensure their earning base. Long-term prospects look good given the high Japanese savings rate. But in the short term, Japan intends to see some more insurers surrender before the sector tightens the bottom line with sweeping reforms and investment norms and disclosure.