Japan’s Insurance industry was booming in the 80’s & 90’s. Japanese insurance firms started to look for foreign investment opportunities because of the volume and quality of their asset and premium income. Analysts around the world have been monitoring the industry’s position since 1980, when it was a major international investment.
The market’s enormous size meant that global insurance companies attempted to establish a presence. However, the Japanese insurance laws, which were very restrictive, led to intense, often acrimonious negotiations between Washington and Tokyo during the mid-1990s. The bilateral and multilateral deals that resulted were in line with Japan’s Big Bang reforms and deregulation.
Since 1994, a variety of liberalizations have been undertaken and deregulation measures implemented. This was in response to the US-Japan talks on insurance. However, the process of deregulation was slow and sometimes very selective in protecting domestic market shares and companies’ interests.
Although the Japanese economy was larger than the one in the USA in terms in size, it was missing the essential elements that make financial markets efficient – sound rules to ensure a healthy economic environment. It also had a different institutional structure than the rest of the advanced countries.
The kieretsu system, a structure that combines cross-holdings in many companies across industries, was a new phenomenon in Japan. Therefore, shareholders did not have the power to force companies to choose the most profitable business strategy. This model system was once a beacon of hope in Japan’s early days of prosperity. However, it quickly became too fragile when the bubble of the Japanese economic boom burst.
Japan’s inability of keeping up with other software developers around the globe was also a disadvantage. Software was the engine of economic growth for the last ten years, and countries that did not have the necessary software development skills faced the decline of their economies in the nineties. For japan-guide contact some one on the internet for his experiences and memories of their last visit.
Japan, world leader in “brick & mortar” industries has been surprisingly left behind in “New World” economics after the Internet revolution. Japan is now calling the nineties a lost decade for its economy. After three recessions in a decade, its economy has lost its shine. To stop the economic decline, interest rates fell to record lows. This caused havoc for insurance companies, whose lifeline was the interest spread from their investment.
Large insurance companies suffered from “negative spreading” and a rising number of non-performing loans, which led to many going bankrupt. While Japanese insurers managed to escape the scandals plaguing their fellow banks and securities industry members, they now face unprecedented financial difficulties including bankruptcies.
The Japanese market, though huge, is small and only a few companies can make it. Japan’s markets are smaller than those in the USA where around two thousand companies vie for life. Japan’s market has only 29 companies that can be classified as domestic, and a handful foreign entities.
The non-life sector was similarly affected with 26 domestic and 31 overseas companies offering products. Customers have less choice in selecting their carrier than American counterparts. There are also fewer product choices. Japan’s insurance companies are known for having “plain vanilla offerings”.
This is even more evident in automobile coverage, where premiums weren’t allowed to reflect different risk factors such as driving records, gender, and age. To determine premiums, drivers were divided into three age groups. But US rates are long known to reflect all of these factors.
Demand for different products can also vary. Japanese insurance products tend towards savings. Although many Japanese insurance companies offer limited options for variable life policies, there is a lot of choice. American variable life insurance policies, valued at $2.7 trillion in 1995, were roughly 5 percent. However, many options, including variable universal life, are available.
Japanese insurance companies operating in both the US and Japan have had less competition than their American counterparts. Implicit price coordination can be expected to curb competition in an industry where only a few firms offer a limited selection of products to a tightly controlled market. Japan has unique characteristics that further reduce competition.
The lack of price competition and product differentiation can mean that an insurance company could grab a firm’s businesses and keep them almost indefinitely. American analysts have often noted that keiretsu or corporate group ties are an excuse. For example, a member from the Mitsubishi Group could shop around for the best price for hundreds or thousands worth of goods, and services that it purchases.
Comparative pricing is futile for non-life insurance because all companies would offer the same product at the exact same price. A Mitsubishi Group member company has been giving business to Tokio Marine & Fire Insurance Co. Ltd. over the past decades.
On paper, life insurance premiums were more flexible. However, there is still a lot of government involvement in this sector. It has an impact on pricing. The country’s postal system works, including its massive savings system and the postal insurance system known as Kampo.
Kampo transactions are handled at the windows of thousands if post offices. Kampo had 84.1 Million policies outstanding at the time of March 1995. That is about one per household. Kampo accounted for nearly 10 Percent of the overall life insurance market.
Kampo investments go mainly into the Trust Fund. The Trust Fund invests in many financial institutions, semipublic units, and a variety other activities that are associated with government like ports and highways. The Trust Fund is run by the Ministry of Finance. Although Kampo falls under the Ministry of Posts and Telecommunications (MPT), it is still responsible for the overall operation. MOF can theoretically influence Kampo’s earnings and, thereby, the premiums it might charge.
Kampo has several characteristics that influence its interaction and interactions with the public sector. Because Kampo is a government-run entity, its efficiency is lower, making it more expensive and making it less competitive. This in turn leads to a falling market share. Kampo cannot be failed, so there is a high risk of it failing. However, taxpayers could still pay for its costs.
This suggests an expanding market share, to the extent this postal insurance system can underprice products. MPT may favor growth, but MOF appears just as keen to protect its members from “excessive” competitors.
Kampo’s conflicting incentives seem to have the net result of lowering premiums for insurers. Kampo will get additional share if prices go too high. In response, insurance companies may lower premiums. Kampo might lose market share in the event that private-sector prices are reduced by greater efficiency or returns on investments relative to the underlying policy.
Japan’s insurance sector for life is behind that of the United States in developing inter-company cooperation strategies to combat individual anti-selection activities. Despite Japan having a lower number of companies, the distrust and disunity among them have led to isolated approaches when dealing with these risks.
US sector-sponsored entities like Medical Information Bureau are an effective first line of defense against fraud. They also help save the industry around $1 billion annually in terms both of sentinel and protective value. Japanese carriers are pursuing similar strategies to common data warehousing, and data sharing.
Analysts frequently criticize insurance companies because they refuse to conform to prudent international norms regarding disclosures to their financial data to the investment world and their policyholders. This is especially true due to the mutuality of the companies in comparison with their US counterparts. Nissan Mutual Life Insurance Co. for instance, which was bankrupted in 1997, has reported net assets as well as profits in recent times, even though its president admitted that it had been insolvent since years.
Since February 1973, when American Life Insurance Company(ALICO) went to Japan to join the market, fifteen foreign insurance companies with more than 50% foreign capital are currently in business. American Family Life, however, was not allowed to initially operate in the third industry, the Medical Supplement Area. It included critical illness plans like cancer and critical illnesses plans.
Foreign carriers were unable to reach the mainstream life insurance business. Many domestic businesses were in deep financial trouble after the market turmoil of the late nineties. Japan allowed foreign companies, in an effort to protect them, to acquire the distressed ones and keep them alive.
Japanese foreign operators are being increasingly welcomed. Japan is seen as having a high strategic importance as North America, Europe and the European Union. Global insurers have excellent opportunities to expand their Japanese businesses due to the consolidation in the Japanese market.
The market share for foreign players is slowly growing. Global insurers account to over 5% in terms premium incomes at end fiscal 1999 and for over 66% of the total business in force. These figures are about two-times greater than the five year prior.
AXA Group expanded its Japan operations in 2000 by purchasing Nippon Dantai Life Insurance Co. Ltd. (a second-tier, low-financial insurer). AXA established the Japanese Life Sector’s first holding firm. Aetna Life Insurance Co.
Heiwa Life Insurance Co. also bought Winterthur Group and Nicos Life Insurance. Prudential UK also bought Orico Life Insurance. Hartford Life Insurance Co. from the U.S. is now active in Japan. It is well-known for its variable and insurance business.
Manulife Century, a subsidiary company of Manufacturers Life Insurance Company, took over the operations and assets at Daihyaku Mutual Life Insurance Co. (which had failed in May 2000). AIG Life Insurance Co. acquired Chiyoda Life. Prudential Life Insurance Co. Ltd. bought Kyoei Life. Both Japanese companies applied to court protection last October.
The foreign entrants have strong financial capacities and good track records. They are also free from negative spreads that plague Japanese insurers over the past decade.
Foreign companies have greater ability to exploit business opportunities even in times of turmoil. Although many Japanese insurers are still the dominant players in the market, the dynamics of the market are changing. The existing business blocks, which include failed companies, shift from the domestic to the newcomers to meet the policyholders’ flight to quality. The following companies have foreign participation
Foreign insurers should be able compete with domestic competitors in terms innovation and distribution. It will be difficult for foreign insurers to establish a large enough Japan franchise that allows them to leverage these competitive advantage.
What is wrong with the life insurance industry?
Japan’s inefficient operation is only one reason why the life insurance sector in Japan is under attack by government policies. These policies were designed in part to rescue banks in financial distress. The Bank of Japan encouraged the creation of a large spread between short-term and longer-term rates in the mid-1990s by keeping short interest rates low. Banks benefitted from this as they tend to pay short rates on deposits and long-term rate on loans.
However, this policy was also detrimental to life insurance businesses. Their customers had locked-in high rates on long-term investment policies. As interest rates dropped, insurers saw a drop in their returns. The average guaranteed return rate for insurance company officers was 4 percent by late 1997. But, the returns on Japanese government bonds, a preferred asset, hovered under 2 percent.
Even with increasing volume, insurance companies are unable to make up for a negative margin. They tried to overcome their problems by cutting the yields of pension-type investments in FY 1996. However, their management saw a huge outflow to competitors.
To add insult, life insurance companies are paying a significant portion of the cost to clean up banks’ non-performing asset mess. Since 1990, subordinated debt was allowed to be issued by the Finance Ministry for banks.
They can use any funds they receive through such instruments to count as capital. This makes it easier to meet capital/asset requirement requirements. This treatment makes sense insofar as such debt holders, just like equity holders, are last in line for bankruptcy.
Subordinated borrowing is more risky than regular debt. This is why they charge high rates of interest. In the early 90s, banks were difficult to figure out and insurers were lured by high returns.
Even though smaller companies may have been eager to catch up to larger firms, they were particularly large participants. Tokyo Mutual Life Insurance Co. was 16th among Japan’s life insurers based on assets. Nippon Life had 3 percent.
The rest is history. In the mid-1990s banks and securities businesses, to which also insurers had lent money, began to fail. Sanyo Securities Co., Ltd. fell last year partly due to refusals by life insurance providers to roll over the brokerage firm’s subordinated debts.
Life insurance agents complained that they were not paid off when they were due, even though they had to because of bank failures. Meiji Life Insurance Co., reportedly had Y=35Billion ($291.7M) in subordinated bank debt to Hokkaido Takushoku Bank, Ltd., after the bank collapsed on November. Meiji Life wasn’t compensated for the Hokkaido Bank’s good loans, which were transferred into North Pacific Bank, Ltd. It is expected that it will write off the entire loan amount.
Subordinated borrowing is just one aspect of the bad-debt tale. Insurance companies played a part in almost every large-scale, halfbaked lending scheme that failed to materialize in the early 90s. For example, they were lenders of jusen (housing finance businesses) and had the responsibility for the costly cleanup. Insurance companies, like banks relied on unrealized profits from equity investments to bail them off if they ran into problems.
Smaller insurance companies bought these stocks at very high prices during the bubble. As a consequence, all but two life insurance companies of the middle tier (size rank 9-16) had not realized their net losses at year’s end 1997.
A number of life insurance companies have recently failed to make headlines, putting pressure on companies to immediately address these issues in tangible ways.
The investment markets have been much worse than predicted. Inflation rates have not risen significantly from their historically low levels. The Nikkei index fell since January 2001. It has also fallen to a 9 year low due to recent terrorist attacks in America.
Insurance companies used to have some cushion from unrealized losses. However, if the insurers rely on unrealized earnings, capitalization levels are affected and financial flexibility is reduced.
Most analysts agree that Japan’s insurers of life face difficulties in terms of liquidity and solvency. It is difficult to predict the future viability of certain companies due to high contractual obligations to policyholders. They also face shrinking returns on their assets and little cushion from losses on stock portfolios. Other companies, although they may be solvent, are at risk of having uneasy policyholders pay them off earlier than they intended.
Either liquidity or solvency worries raise questions about how insurers plan to manage their assets. Japan’s aging populations are another consideration. As Mr. Yasuo Satoh, Program Director of the insurance sector, finance sector, IBM Japan states, “The industry needs a change in its business model.” They should focus on the life benefits, not death benefits. In addition, they need to place emphasis on the long-term and medical care sectors.
Japanese life insurances are actively trying to improve segmentation. Ende 2000 saw the rise of cross-border and business partnerships involving large domestic insurers.
Anticipating market consolidation and heated competition, these companies are reviewing whether they have subsidiaries that deal in the non life side of their business. This was originally allowed in 1996.
Japanese insurers will likely form business alliances with foreign companies based on demutualization in the long term. Also, the Japanese financial markets will experience a wide spread of consolidation over the next few years.
In response to this sea-change, domestic life insurers launched a number of business strategies in 2000. However the real benefit of different planned alliances for each insurer is still unknown. A further consolidation of the market should provide additional value for policyholders.
Life insurers will need to be more sensitive towards the different needs of customers while also creating new business models to protect their earning base. With the high saving rates of Japanese citizens, the long term outlook seems good.
Japan may lose a few insurers in the near term before it tightens its belt with comprehensive reforms, prudent investment, and disclosure norms.