Increasing competition and new opportunities in a changing business environment

Transcription

1 Increasing competition and new opportunities in a changing business environment

2 C o n t e n t s page To Our Clients 1 Teruhiko Ohtani Operating environment changes and corporate 2 issues in Japan s non-life insurance market Hiroshi Hirano Trends in the Japan s agricultural cooperative 8 insurance market and Zenkyoren s strategies Toshiyuki Uehara Insurer bankruptcy and the policy holder 13 protection system in Japan Makoto Sano Non-Life Japanese insurance market 17 Today & Tomorrow Howard J. Cheetham Catastrophe modeling for the Japanese market: 21 the Third Generation RMS Japan Earthquake Model Craig Van Anne Patricia Grossi Trends in Japan s non-life insurance industry 27 The Toa Reinsurance Company, Limited Trends in Japan s life insurance industry 32 The Toa Reinsurance Company, Limited Supplemental Data: 39 Results of Japanese non-life insurance companies for fiscal 2004, ended March 31, 2005 (part one) Results of Japanese non-life insurance companies 40 for fiscal 2004, ended March 31, 2005 (part two) About the cover Tokyo s dynamic cityscape combined with a traditional Japanese umbrella symbolize our expanding business activities and commitment to providing the best protection possible. The currency exchange rates used in this booklet are the ones effective at the date of production The Toa Reinsurance Company, Limited. All rights reserved. The contents may be reproduced only with the written permission of The Toa Reinsurance Company, Limited.

3 To Our Clients It gives me great pleasure to have the opportunity to welcome you to our 2005 brochure which is now in its ninth year. It is encouraging to know that over the years our brochures have been well received even beyond our own industry s boundaries as a source of useful, up-to-date information about Japan s insurance market, as well as contributing to further develop an interest in and an understanding of our domestic market. Today, Japan is in the throes of a number of major transformations both domestic and international in nature such as an aging society, the globalization of many business activities, and the advancement of information technology. Since the 1990s, many Japanese firms concerned themselves with severe belt-tightening and restructuring efforts. Following this, they are now shifting from a defensive to a more aggressive management posture, in order to adapt to the realities of the new business environment. As a result of these efforts, business revenues are witnessing an improvement. If we look at the banking sector, it shows that Japan s financial system has also begun to regain its footing. This has been due to the efforts made by banks and other financial institutions to improve their financial situation, centered largely on resolving problems related to nonperforming loans. Looking to the future, I believe that if Japan s financial system can be further stabilized, confidence in and expectations for the Japanese economy overall will rebound as well, and this, combined with today s strengthening in capital investment, will establish a solid foundation for economic recovery. In fiscal 2004, Japan s non-life insurance industry faced growth difficulties as competition intensified, particularly in automobile insurance which accounts for around half of non-life insurers total revenues. In addition, claims payments for the year are expected to reach their highest levels ever due to the extreme wind and water damage caused by the ten typhoons that struck Japan last year. These and the effects from other natural disasters made 2004 an extremely tough one for the industry as a whole. Although measures such as utilizing contingency reserves enabled insurers to maintain bottom line profitability for the year, their income actually decreased when compared to the previous fiscal year. At the same time, an increasing number of insurers have made concerted efforts to expand into the third-sector area which includes lines such as medical insurance. Remarkable growth has also been seen from some insurers expanding into other insurance markets in Asia an area which itself is experiencing rapid growth in the insurance sector. These developments have led to speculation that both domestic and overseas competition will most likely further intensify in the future. In the light of such circumstances, we will continue to adapt swiftly to the changes in our operating environment and continue with the day-to-day business of meeting our clients needs as best, and as fast as we can. In conclusion, I hope that our brochure will provide a greater insight into the Japanese insurance market and I would like to express my gratitude to all those people who so kindly contributed so much time and effort in the making of this brochure. Teruhiko Ohtani President and Chief Executive The Toa Reinsurance Company, Limited

4 Operating environment changes and corporate issues in Japan s non-life insurance market Hiroshi Hirano President and Chief Executive Officer Sompo Japan Insurance Inc. 1. Easing of regulatory restrictions and operating environment changes in Japan s non-life insurance industry For half a century, Japanese non-life insurance companies were required by various regulations to maintain similar business models for their operations as well as offering similar products at similar prices and through similar sales distribution channels. All of this changed, however, as a result of the amendment to the Insurance Business Law in April The resultant dynamic easing of restrictions led to unprecedented changes in both the marketplace as well as the players themselves. A clear differentiation emerged in product strategies as well as actual distribution channels. Moreover, new players such as direct marketing insurers were able to enter the market. More significantly, the new law set the scene for a complete market reorganization with mass consolidations and business alliances being created. These changes were also accelerated by the trend in consumers own needs diversifying as they became more sophisticated in their product selection. The result of all the above is that there are clear differences apparent today in the corporate strategies of non-life insurers operating in Japan. (1) Easing of regulatory restrictions in the non-life insurance industry In the wake of the enactment of the April 1996 amended Insurance Business Law, a series of fundamental industry-wide structural changes took place. Looking back at the history of this deregulation shows that it developed in two major ways: the liberalization of products and premium rates and the liberalization of business fields. The liberalization of products and premium rates eased the requirement to comply with fixed premium rates, leading to both intensified competition to secure profits in traditional products centered on auto insurance and also to the possibility of developing a diverse range of tailor made products suited to the needs of various types of consumers and agents. The liberalization of business fields lowered the barriers to entry in the non-life insurance field, leading both to the entry of new competitors such as direct marketing insurers as well as niche insurers handling only specific types of products. It also led to the possibility of entering new business fields in the life insurance industry as well as those in the third-sector market. The simultaneous advance of this intensifying competition and expanding business opportunities can be considered the key characteristic of this easing of regulatory restrictions in the non-life insurance industry. In response to this intensifying competition a move toward alliances in the insurance industry began in earnest in Today, the top five insurers in the industry have all established such alliances. These have focused on increasing premium revenue and developing more cost efficient operations in order to maximize the effects of alliances among the non-life insurers. The results have led to a reduction in each insurer s expense ratio. Expanding business opportunities have also led to the development of aggressive efforts such as non-life insurance companies establishing life-insurance subsidiar-

5 ies as well as the sale of medical insurance by the parent companies, with each company seeking to turn changes in the operating environment into profit opportunities. It appears that most such life insurance subsidiaries will make a positive contribution to the consolidated earnings of their parent companies. Moreover, the successful effort to sell medical insurance by the non-life companies reflects the degree to which each insurer has been focusing on this area. (2) Operating environment changes Next, I would like to remark on another change that has affected the non-life insurance market and that is Japan s maturing economy. The country s total population appears to be heading toward a peak in 2006 followed by a decreasing trend. This is thought likely to lead to the combination of an aging society and a reduction in market size for products such as auto insurance, which constitutes almost one half of overall insurance premium income, followed by property insurance, which is the next most important product. Naturally, one cannot immediately discount this point of view, but when looking at the future of the non-life insurance market, it is necessary to consider not only total population, but also changes in Japan s socio-demographic structure. For example, it is said that in general non-life insurance premium revenues correlate highly with nominal GDP, even if the effects are slightly delayed. However, even if total population is in a decreasing trend, an increase in the percentage of female and elderly workers would stave off any immediate decrease in the overall size of the workforce. In addition, the second generation baby-boomers who are currently in their thirties are very likely to a key driver of personal consumption in the future. Given such macroeconomic environmental conditions, there is a possibility that nominal GDP may well increase slightly over the short term. Moreover, with an aging society, it is anticipated that the role of private insurers in supplementing public-sector insurance systems, such as those providing pensions and medical insurance is expected to continue to grow. For example, consumers awareness of the importance of medical insurance, which is central component of the third-sector insurance field, is increasing rapidly. This is leading to estimates that the market will expand by a further 2 to 3 trillion yen in the future. Non-life insurers are putting their energies into the sale of such third-sector products which is a reflection of the trend for pursuing new business opportunities. Another change brought about by Japan s aging society is the increase in the personal financial assets of baby-boomers as they reach retirement. Given that most non-life insurers are involved in asset-management, there is a possibility for them to treat this development as an opportunity through the formation and sale of investment trusts. Furthermore, there is a move underway for companies to amend their pension schemes from a defined-benefit basis to one of definedcontribution in order to better quantify their future obligations. This matches with many employees increasing desire to ensure the portability of pension assets and diversification of investment methods. At Sompo Japan, we have established Sompo Japan DC Securities Inc. as a group company intended to provide investment and management services for such defined-contribution pension plans and are thus seeking to expand our fee-based businesses. In this way, it is evident that the trend toward a decreasing population and aging society expressed in our maturing economy will not necessarily lead to an immediate decrease in non-life insurance business, but will, rather, in many ways lead to the creation of new business opportunities.

6 Operating environment changes and corporate issues in Japan s non-life insurance market (3) Keys to survival in a competitive environment Up to this point, we have touched on the creation of new business opportunities brought about by the easing of regulatory restrictions, a maturing economy, and intensifying competition. Exploiting these business opportunities in order to overcome competition requires corporate strategies which will ensure a superior competitive position. Although the corporate strategies of each non-life insurer are becoming increasingly diverse in response to these changes in the business environment, the key factors for success remain profitability, growth, and stability. It is vital to increase corporate value while taking each of these factors into account as much as possible and maintaining an appropriate balance between them. 2. Sompo Japan s corporate strategies As one example of diversifying non-life insurance strategies, I would like to now explain how Sompo Japan deals with these factors of profitability, growth, and stability. (1) Fundamental concept The fundamental concept behind Sompo Japan s corporate strategies is the concept of strengthening its core competencies and maximizing their utilization. Core competencies here refer to sources of competitiveness, areas in which our company is in a superior competitive position. Sompo Japan defines its own core competencies as those intangible assets that it has built up to this point by means of major investments in manpower, tangible assets, capital, and time. Specifically, there are four aspects which form the core of our corporate strategy: distribution ability, claims handling services, product development capabilities and highly developed information technology systems. Since, for the most part, non-life insurers are not equipped with tangible production capabilities, they rely more on these intangible assets themselves. Put another way, it is these intangible assets themselves that serve as sources of value in non-life insurance business. Our company believes that maximizing corporate value is unlikely to occur without being able to strengthen and utilize these assets as much as possible. (2) Four intangible assets To expound on these four intangible assets, it must first be noted that distribution ability refers to the customer base and the delivery network for accessing this base. It does not matter how well products are developed, if they cannot be delivered to customers, then such development would be a waste of effort. Secondly, since the true value of insurance is demonstrated when a claim arises from an insured peril, the ability to respond to such incidents is vital. Providing high-quality service is key to further expanding the customer base. Thirdly, since the freedom to design products increases as regulatory restrictions ease, a high level of product development capabilities is required in order to respond to customers increasingly sophisticated and diversifying needs. Finally, the infrastructure that enables a company to provide all of these high quality services is made up of the company s informationtechnology systems. If these systems are not adequately constructed, the company s overall business will be significantly constrained. Sompo Japan is investing considerable business capital in the strengthening of these four intangible assets, in the recognition that by doing so, this in itself is a source of competitiveness.

7 (3) Selection and concentration of business fields When we look at corporate strategies based on such awareness, inevitably we are led to select and focus on businesses that can best maximize these core competencies. Following this selection and concentration of businesses, Sompo Japan has designated two specific high-priority business fields. Automobile insurance is one high-priority field, since this is one in which these core competencies can be used in direct and dynamic ways. Although competition is intensifying as a result of the easing of regulatory restrictions, given that auto insurance accounts for approximately one-half of net premium income and this is the type of insurance with the largest source of actual profits and the greatest number of customers, it is no exaggeration to say that this is the field in which the capabilities of the non-life insurance business are most fully demonstrated. In addition, since it is the largest insurance market segment, it is a vital platform for brand building as well as cross selling of other types of insurance, while at the same time it demonstrates that streamlining the delivery process leads to increasing cost efficiencies. The other high-priority fields are those that promise synergistic effects with our core competencies specifically, these include the fields of life insurance and defined-contribution pension plans. We believe these fields have the potential for greater and more stable returns in relation to the business capital invested, since they offer the best use of the above mentioned core competencies, especially in the area of distribution ability. Today, the major part of Sompo Japan s earnings comes from the fields of asset management and non-life insurance. However, it is projected in the future that earnings will increase in areas such as life assurance and defined-contribution pension plans. As mentioned earlier, since these business fields not only share Sompo Japan s core competencies, but also involve different types of business structures, we anticipate more stable, yet diverse group-wide revenue sources. To return to the key concepts discussed earlier, Sompo Japan intends to secure group-wide stability by building up multiple businesses with these strengths. At the same time we must ensure profitability and growth in each business field by selecting and concentrating on those businesses in which these core competencies can be demonstrated. 3. Non-life insurance business and corporate social responsibility We have already touched on our company s financial aspects. Now, I would like to consider our operations from the standpoint of corporate social responsibility (CSR). The concept of CSR refers to that of the triple bottom line. In other words, it considers the corporation s responsibilities to include not just the creation of economic value but also the creation of environmental as well as social value. For several years now, this concept has been attracting increasing interest in Japan. In addition, the concept of socially responsible investing (SRI) (which considers the extent of a company s CSR efforts to be a major criterion when selecting investments) has become widely accepted in the world of asset management, through efforts such as the development of numerous SRI funds. As demonstrated by the development of these SRI funds, corporate value is increasingly being judged on the concept of the triple bottom line. For this reason, the era has arrived in which CSR efforts, which have traditionally tended to be thought of as costs, must now be considered as investments that can lead to increased corporate value.

8 Operating environment changes and corporate issues in Japan s non-life insurance market Since the first half of the 1990s, Sompo Japan has made energetic efforts toward contributing to the resolution of environmental problems. Since then, it has expanded its areas of activity to broadly embrace CSR, through means such as ensuring thorough regulatory compliance and promoting respect for Human Esteem. Our company s CSR management has the following three key characteristics: (1) focusing its energies on CSR activities conducted via its core insurance and financial-services businesses; (2) focusing on communication with stakeholders; and (3) efforts to increase employee satisfaction (ES), such as establishing a Human Esteem Promotion Headquarters, whereby our employees are viewed as important stakeholders. The company s CSR activities conducted via its core businesses include the development of insurance products to cover various types of environmental risks, the development of eco as well as SRI funds that support companies involved in taking on CSR and environmental issues, and participation in the Carbon Disclosure Project, an international activity conducted by institutional investors worldwide seeking to prevent global warming. With regard to communication with stakeholders, the company recognizes that the proactive disclosure of information and a lively exchange of opinions with stakeholders both inside and outside the company are extremely important for the promotion of CSR. For this reason, we have implemented on-going bi-directional communication through a wide range of events and media, such as issuing CSR communication reports and holding stakeholder meetings, as well as participating in the CSR Consortium, which provides opportunities to exchange opinions with stakeholders via the Internet. Assigning employees a position as vital stakeholders is based on our company s management philosophy, which states, With services that always exceed customer expectations, Sompo Japan will create shareholder value and grow together with our employees. This philosophy includes the following two concepts: first, not just satisfying our customers by providing services that meet their expectations, but actually inspiring customers by providing services that exceed their expectations; second, growing together with our employees by enabling them to work with pride and vigor. A company that can provide its customers with inspirational products and services is one whose employees can work with vigor and a high level of motivation, proud of their company. Earning the appreciation and support of a wide range of customers and other stakeholders by providing products and services with inspirational levels of quality brings employees both satisfaction and growth. In other words, it is possible to use the interaction between customer satisfaction (CS) and ES to create a virtuous circle. We are certain that by generating and firmly establishing this virtuous circle for the entire group, this will increase corporate vitality and competitiveness and lead to increased corporate value by making it possible to achieve continued high level business performance. Yet another reason for considering the company s CSR efforts as likely to contribute to increasing corporate value is the worldwide spread of SRI. In recent years, as our CSR efforts have been highly evaluated, our company has seen an increase in opportunities to be incorporated into SRI funds and indices both in Japan and overseas, including the world s largest SRI index, the Dow Jones Sustainability Index, which has a net asset value of approximately 3 billion euros. Since inclusion in an SRI index increases the market presence of the company s stock, it can be said that the company s CSR efforts are leading to increased corporate value.

9 The trend toward demands on management that focus on CSR is likely to accelerate even further in the future, via moves such as ISO standardization and assessment by CSR rating agencies. Our company plans to carry on our assertive CSR efforts in the future as well, with management being ever mindful of the triple bottom line. 4. Conclusion There is no doubt that the environment in which not just the non-life insurance industry, but the whole financial sector operates will undergo further changes in the future. This will most likely result in the development of corporate strategies that have a greater wealth of variety among the companies operating in this sector. However, one fact that will remain unchanged is the need for a company to conduct its business with a balance between profitability, growth, and stability all three achieved at the highest possible levels no matter what kinds of corporate strategies it adopts. What is more, in order to ensure continued growth as a company, it is vital to make every effort to create not just economic value but environmental and social value as well. We are certain that Japan s non-life insurers are in a position to lead the world in this area.

10 Trends in the Japan s agricultural cooperative insurance market and Zenkyoren s strategies Toshiyuki Uehara President The National Mutual Insurance Federation of Agricultural Cooperatives (Zenkyoren) 1. Current situation It seems difficult to describe the size of Japan s cooperative insurance market in a few words, however, the Japan Cooperative Insurance Association Incorporated (JCIA) stated in its statistics that the share of Japan s insurance and cooperative insurance market (on a coverage basis) accounted for by cooperative insurers was 22% in the life insurance field and 17% in the non-life insurance field in According to a survey by the International Cooperative and Mutual Insurance Federation (ICMIF), the premiums received by Japanese cooperative insurers affiliated with ICMIF accounted for 11% of Japan s insurance and cooperative insurance market in This share of 11% of premiums is largely the same as that across the nations of Asia (average: 10%) and is higher than the worldwide average of 5%, indicating that cooperative insurers in Japan are making strong efforts. Among Japan s cooperative insurers, the National Mutual Insurance Federation of Agricultural Cooperatives (Zenkyoren), an agricultural cooperative insurer, has shares of 42% on a coverage basis and 80% on a premium received basis in 2003 (JICIA Yearbook, December 2004 Issue). Zenkyoren s businesses are centered on its 9 million members and their families, and are conducted by Japan Agricultural Cooperatives (JA) (with 877 organizations as of June 2005) and by Zenkyoren (with a national headquarters and 47 prefectural headquarters). As of the end of March 2005, it provided 368 trillion yen (approximately US$ 3.4 trillion) in amount insured in the fields of long-term life insurance and building endowment insurance and held 5.5 trillion yen (approximately US$ 51 billion) in total premiums received. With total assets of 42.7 trillion yen (approximately US$ 395 billion), Zenkyoren is one of world s leading cooperative insurers. Our agricultural cooperative insurance scheme was established based on the Agricultural Cooperative Society Law enacted in 1947, and has been conducted through JA. Basing its business activities on the concept of mutual aid, our scheme has expanded nationwide, launching operations in Hokkaido in 1948 and establishing Zenkyoren in Until 2000 the scheme had been organized as a three-tiered structure (consisting of JA, 47 prefectural federations, and Zenkyoren), and then Zenkyoren consolidated the prefectural federations into a two-tiered operation (consisting of JA and Zenkyoren). In 2003 The Kyoei Fire & Marine Insurance Co., Ltd. was made a Zenkyoren subsidiary as part of its strategy to expand the coverage and services provided. In order to guarantee the soundness of its business operations in a severe economic environment, Zenkyoren has reliably ensured adequate levels of underwriting reserves for future payments, and built up various other reserves for the risk of major disasters and for investment risks. In addition, in order to ensure stable returns in each fiscal year over the long term, Zenkyoren s investment policies are

11 centered on interest-bearing assets denominated in yen, such as yen-denominated bonds and loans, as most of its invested funds are for fixed assumed interest rate insurance. 2. Characteristics of Zenkyoren s business and the market environment We owe what we are today to the understanding and trust of our members and policyholders over more than 50 years, as well as to our predecessors, who provided superior insurance at reasonable premiums. Our agricultural cooperative insurance scheme has the following unique business characteristics: (1) Its membership consists of full members involved in agriculture (individual farmers and members of agricultural firms) and associate members who reside in areas served by JA. (2) It is organized as a cooperative, based on the principle of mutual aid, rather than as a corporation. (3) While the business of insurance companies is based on the Insurance Business Law and supervised by the Financial Services Agency, our business is based on the Agricultural Cooperative Society Law and supervised by the Ministry of Agriculture, Forestry and Fisheries. (4) Our cooperative insurance business is one of the general lines of business provided by JA, and can provide both life and non-life insurance products and services.

12 Trends in the Japan s agricultural cooperative insurance market and Zenkyoren s strategies Due to these characteristics, our business is greatly influenced by the economic circumstances of Japanese agriculture and the regions in which JA offices are located. For this reason, it must respond to present-day requirements such as organizational restructuring and amendments to the Agricultural Cooperative Society Law. Above all, securing and expanding the number of policyholders, as well as realizing a low-cost structure, which are the cornerstones of business operations, are vital topics for Zenkyoren. The environment faced by the agricultural industry and JA changes from year to year due to factors including the following: delays in Japan s economic recovery, stagnant agricultural production, strengthening of international regulations based on WTO agricultural negotiations, an aging and decreasing population of agricultural workers, and the transformation of agricultural communities due to parttime farming or diversification of the residents of such communities themselves. In regard to such environmental changes, we recognize that we face the following issues: (1) The relationship between JA and its members is being diluted as the population of agricultural workers ages and decreases in number, leading to a trans formation (weakening) of JA s organizational foundation. (2) This point also means an aging and a decrease in the actual number of our policyholders. (3) We need to shift from coverage against death to respond to diverse needs such as those for coverage for living or short-term and nonrefundable insurance. (4) We face threats in market competition, both in the form of competition from other insurers and the postal life insurance and in the form of the expansion of sales channels resulting from the launch of insurance-product sales at banks. (5) Our management needs to control and respond to the risk of a gap between assumed interest rates and investment yields (i.e., a negative spread), as well as being prepared against major disasters. (6) We need to reduce costs through business rationalization and increased efficiency. 3. Mid-to-long term strategies of Zenkyoren In this business environment, Zenkyoren must maintain and expand the scale of its business in terms of both quality and quantity, in addition to helping members and policyholders establish comprehensive life coverage, which is one of its fundamental missions. These efforts are necessary to fulfill its responsibilities to members and policyholders. Our two mid-to-long term strategies are as follows: (1) Constructing a firm business foundation by strengthening ties and a sense of fellowship Our mission is to provide our members and policyholders with the best coverage and satisfaction at all times through business activities based on the principle of mutual aid, and to contribute to enhancing the quality of life for members and policyholders and to the creation of affluent local societies. For this reason, we are promoting efforts to enhance the coverage Zenkyoren provides to policyholders and to restructure its business organization, in order to establish a strong business foundation. 10

13 In addition, we plan to promote: understanding of and participation in JA activities by the next generation, associate members, and others; increasing the number of new partners (new policyholders); the establishment of comprehensive life coverage for the existing policyholders; and the strengthening of existing ties with its members. While working to increase policyholder satisfaction, we seek to maintain a level of approximately 18 million policyholders. (2) Establishing comprehensive life coverage to meet the needs of members and policyholders In order to establish comprehensive coverage for the lifetime of our members and policyholders and to contribute to their asset formation, we plan to focus on the individual-cover field by providing comprehensive coverage of life, homes, and automobiles. In addition to continuing to respond to the needs of our members and policyholders by providing coverage against death and disaster, we will strengthen efforts in the fields of coverage for living for medical treatment and of nursing care and short-term insurance such as automobile insurance. With regard to the existing policyholders, we plan to promote membership in the Zenkyoren Happy & Dream Club, which provides benefits such as discounts on premiums for policyholders with high-value coverage, and to promote follow-up activities for members as well as promoting various additional insurance products for such members. For new partners, we plan to expand the membership by providing low-premium coverage directly related to such members lives, including medical and automobile insurance. Based on the above, we have formulated and are implementing a three-year plan covering the period from 2004 to The following are summaries of current themes addressed by Zenkyoren: A. Improvement of Zenkyoren-related legal structure In order to protect its policyholders and ensure sound business operations through highly transparent regulations, legislation relating to Zenkyoren has been enacted. Under the amendments to the Agricultural Cooperative Society Law enacted in April 2005, regulations and activities concerning thoroughly protecting policyholders and responding to member needs (such as those regarding sales promotion, cooling-off periods, agents and subsidiaries), and concerning ensuring the soundness of business operations (such as those regarding disclosure of management information, the application of prompt corrective measures regarding solvency margin ratios, as well as requirements for building up various reserves), which previously had been carried out via administrative guidance, are now stipulated by law. This is partly in response to reforms to Japan s financial system and amendments to the Insurance Business Law enacted in recent years. We expect that modernization of the legal system will back efforts to improve compliance and achieve business expansion. 11

14 Trends in the Japan s agricultural cooperative insurance market and Zenkyoren s strategies B. Restructuring of our business operations As the frontline in serving members and policyholders, each JA is endeavoring to strengthen the structure of and develop the necessary human resources for its cooperative insurance sector. One example of these efforts is the strengthening of specialized staff (so-called Life Advisors) for providing coverage and consulting services in order to create a structure for the customers-oriented sales promotion. We expect that 65% of long-term insurance policies will be handled by 23,000 Life Advisors by As for Zenkyoren, in addition to enhancing its guidance function for JA and increasing its level of specialization, we plan to consolidate and focus our business functions for providing services of consistent quality nationwide in an efficient manner. The new structure, which is to take effect in 2006 when two policyunderwriting centers will start operations, is expected to improve results even further. C. Zenkyoren Happy & Dream Club The Zenkyoren Happy & Dream Club, which was launched in 2002, provides various added benefits such as the centralized control of each policyholder s policy information, as well as discounts on premiums and preferential treatment at JA facilities. There are no fees for joining this club, and no annual fees. Not only providing higher levels of service for the existing policyholders, but this membership club also serves to expand new partners by providing the same benefits. Eight million people are currently registered as club members, and we will continue to make every effort to increase this number to ten million by the end of the 2006 fiscal year. 4. Conclusion Today, the environment in which JA and Zenkyoren operate, including the agricultural industry and agricultural communities, is on the verge of transformation. The vital roles, however, played by the agricultural industry and agricultural communities will remain unchanged. Based on the fundamental principle that has remained unchanged since its founding: that of mutual aid, Zenkyoren will actively develop a wide range of the business and activities for the purpose of providing the highest levels of coverage and satisfaction to its members and policyholders. As such, we intend to contribute to increasing the quality of life for our members and policyholders, and to creating local societies in which residents can live in affluence with peace of mind. 12

15 Insurer bankruptcy and the policyholder protection system in Japan Makoto Sano Professor of Law Fukuoka University 1. Insurer bankruptcies in Japan In comparison with the nations of Europe or North America, Japan has an extremely small number of insurance companies. For this reason, Japanese insurance companies tend to be large in size and thus unlikely candidates for bankruptcy. In particular, for a long period following World War II, no insurers went bankrupt. This was a result of insurance supervision policies implemented by the insurance regulator, the Ministry of Finance, that were intended to prevent insurer bankruptcies. However, in 1996 the Insurance Business Law of Japan was substantially amended to advance liberalization of the Japanese insurance market. A series of insurer bankruptcies followed. Table 1 Postwar insurer bankruptcies in Japan Date of bankruptcy Insurer Type of insurance Current company name April 1997 Nissan Life Life Prudential Life June 1999 Toho Life Life AIG Edison Life May 2000 Daiichi Fire and Marine Non-life May 2000 Daihyaku Life Life Manulife Japan August 2000 Taisho Life Life Yamato Life October 2000 Chiyoda Life Life AIG Star Life October 2000 Kyoei Life Life Gibraltar Life March 2001 Tokyo Life Life T&D Financial Life November 2001 Taisei Fire and Marine Non-life Sompo Japan These bankruptcies resulted from various causes. In many of these cases, the bankruptcy resulted from so-called negative spreads. This refers to gaps between the actual investment returns earned by insurance companies and the planned returns for policyholders. Japan s bubble economy collapsed in the early 1990s, and as a result, market interest rates fell rapidly. As insurers held large numbers of policies underwritten during times of high interest rates, they were forced to bear the cost of the resulting gap by reducing market interest rates. Insurers that could not withstand this burden fell into bankruptcy. However, not all insurer bankruptcies resulted from negative spreads. For example, the bankruptcy of Taisei Fire and Marine Insurance in November 2001 resulted from large payments of insurance claims in connection with the September 11 terrorist attacks in the United States. 2. The policyholder protection system in Japan (1) Types of policyholder protection institutions Partly due to the fact that Japan saw no insurer bankruptcies over a long period of time, the previous Insurance Business Law made no provision for a system to protect policyholders in the event of insurer bankruptcy. The 1996 amendment to the Insurance Business Law created a new policyholder protection system known as a policyholder protection fund. In 1998, this organization was strengthened functionally and renamed as the Insurance Policyholders Protection Corporation of Japan. Today, the organization consists of two Protection Corporations, the Life 13

16 Insurer bankruptcy and the policyholder protection system in Japan Insurance Policyholders Protection Corporation of Japan and the Non-Life Insurance Policyholders Protection Corporation of Japan. (2) Obligation to join an Insurance Policyholders Protection Corporation All domestic and foreign insurers licensed to operate in Japan must be members of an Insurance Policyholders Protection Corporation of Japan. However, reinsurers are not required to be members. (3) Member contributions The Insurance Policyholders Protection Corporations protect the policyholders of a bankrupt insurer, with the fund contributed by the member insurer. The amount of contribution by each member is calculated based on the following two indicators. 1) The amount of insurance premiums received by the member 2) The amount of underwriting reserves accumulated by the member It is possible that it would be fairer to use indicators that take into account the likelihood of bankruptcy, or financial soundness, of each member in calculating the amount of contribution by the member. Calculation of the amount each member much contribute, based on financial soundness indicators, is referred to as a variable-rate system. Currently, South Korea uses this system. Although use of such a system is permissible under Japan s Insurance Business Law, at present neither of the two Insurance Policyholders Protection Corporations does so. (4) Policyholder protection methods Policyholder protection by the Insurance Policyholders Protection Corporations of Japan is implemented by providing financial assistance to the insurers taking over the policies of bankrupt insurers. When an insurer has gone bankrupt, it is merged with another sound insurer or its policies are transferred to a sound insurer. Such a sound insurer is called a redemption insurer. At the time it receives the transfer of the policies of the bankrupt insurer, the insurer taking over these policies also receives transfer of the bankrupt insurer s assets. However, as the assets transferred from the bankrupt insurer will be insufficient to cover the amount of policy liabilities transferred, the relevant Insurance Policyholders Protection Corporation provides funds to assist in the performance to policyholders of insurance-policy liabilities. (5) Policies eligible for compensation The Insurance Policyholders Protection Corporations do not protect all policyholders. For the most part, the policies eligible for protection are those held by individuals. In addition, compensation is provided only for up to 90% of insurancepolicy liabilities. (However, this does not apply to some insurance policies with strong public-welfare aspects, such as Compulsory Automobile Liability Insurance and earthquake insurance.) Reinsurance policies are not eligible for compensation. 14

17 Table 2 Policies subject to compensation by Insurance Policyholders Protection Corporations, and compensation percentages Type of insurance Compulsory Automobile Liability Insurance, Earthquake Insurance 100% Auto Insurance, Fire Insurance, Personal Accident Insurance, Medical Expense Insurance, Healthcare Expense Insurance 90% Non-life insurance other than the above (Marine Insurance, Transit Insurance, Credit Insurance, Aviation Insurance, Workers Compensation Insurance, Guarantee Insurance, Liability Insurance, etc.) Compensation percentage Not covered Life Insurance 90% 3. Trends concerning revision of the policyholder protection system (1) Problems with the current system A. Exhaustion of funds As noted above, since the creation of the policyholder protection system in 1996, nine insurers have gone bankrupt. As a result, the Insurance Policyholders Protection Corporations have provided large amounts of financial assistance, leading to severe financial circumstances for the Protection Corporations. This is particularly true for the Life Insurance Policyholders Protection Corporation, which has suffered seven bankruptcies. Although in order to remedy these financial circumstances it will be necessary to increase the amount of contribution by members, the method of doing so is at issue. Increasing the amount borne by members means increasing the amount paid by sound insurers who have not gone bankrupt. As such, any increase would ultimately be borne by the policyholders of such sound insurers. As a result, policyholders who wisely chose sound insurers would be forced to bear costs attributable to policyholders who made the poor choice of selecting an insurer that went bankrupt. This presents issues in terms of fairness. Furthermore, increasing the amount borne by members would put pressure on the balance sheets of sound insurers, in turn becoming itself another risk that could lead to insurer bankruptcy. In order to overcome issues such as these, possible solutions, such as the adoption of assistance using public funds and reductions in compensation percentages, must be considered. B. Characteristics of non-life insurance The current system provides for the continuation of a bankrupt insurer s policies by transferring them to a redemption insurer, which then takes over the policies. This method is applied to long-term life insurance policies held by policyholders who would have difficulty taking out new policies due to age. However, most non-life insurance policies have single-year terms, and policyholders encounter few difficulties in taking out new non-life policies. For these reasons, in the event 15

18 Insurer bankruptcy and the policyholder protection system in Japan of the bankruptcy of a non-life insurance company, policyholders will tend to shift quickly to other, sound insurers, further worsening the asset situation for the bankrupt insurer and making it difficult to find a redemption insurer. At the same time, as the payment amounts of insurance claims for non-life insurance policies can be very large, in such cases the current system, which covers only 90% of such payments, may not provide sufficient protection for policyholders or parties sustaining damages. For example, if damages of 100 million yen were to arise in an automobile accident involving personal injury, coverage of only 90% of this amount would force the policyholder to bear a cost of 10 million yen him or herself. If the policyholder could not pay this amount, the injured party would have to bear this huge cost him or herself. From this perspective, it might be desirable to change the current system, under which financial assistance is provided to the redemption insurer taking over nonlife insurance policies, to one, under which the affected policyholder would be compensated for the full amount of any insurance money for a certain period following the bankruptcy of the insurer, during which time the other policyholders of the bankrupt insurer can switch to sound insurers. (2) Trends in revisions to the system In order to overcome the above issues, the policyholder protection system is currently being revised. In April 2005, an amendment to the Insurance Business Law passed the Diet, and this amendment is planned to take effect beginning April Although the framework for the amendment consists of the two points specified below, their details will be determined through directives to be issued by regulators in the future. A. Review of compensation in accordance with the characteristics of insurance policies 1) Adopting a compensation method, that would encourage policyholders of nonlife insurance to switch to other insurers, while providing full compensation for three months after the bankruptcy of an insurer 2) Determining compensation percentages for financial assistance and the like based on consideration of policy types, planned interest rates, and other policy terms, and providing compensation under this system for 85% 90% of each life insurance policy with a high planned interest rate 3) Managing insurance policies, in which amount paid to policyholders is linked to investment performance (such as so-called variable insurance ) separately from other policies, and providing 100% compensation for such policies B. Review of financial measures of the Life Insurance Policyholders Protection Corporation 1) In principle, funds of the Life Insurance Policyholders Protection Corporation are financed by contributions from individual insurer based on pre-agreed limits. 16 2) If the balance of debts for the Life Insurance Policyholders Protection Corporation exceeds 460 billion yen and the funds for processing of an insurer bankruptcy cannot be covered entirely by funds from insurers, the government shall provide assistance. However, such government assistance is a temporary measure that shall be implemented only over the coming three-year period.

19 Non-Life Japanese insurance market Today & Tomorrow Howard J. Cheetham Managing Director Aon Re Japan, Aon Limited Yesterday Deregulation in 1996 led inevitably to consolidation. The 60 companies have become 44, of which 28 are domestic. More dramatically, the 80/20 rule applies the top 5 companies now control market share greater than 80%. Deregulation has also had impact upon the distribution channels. Non-life products are now available through life companies and vice-versa. Banks are now permitted to sell insurance. Brokers have now been introduced as an additional distribution channel. In a business culture that has been underpinned by continuity, the pace of change since deregulation has been spectacular. It has proved that it is simply not possible to be slightly pregnant! Within this continuing white water of change, the industry will face many new challenges. There is a strand of logic that suggests that we could anticipate more consolidation. The economies of scale achieved by the biggest companies result in expense ratios which give competitive advantage over the rest of the market. The middle/small market may be forced to choose between a more niche market position or consolidation. The attraction of product diversity increases the issue is which combination of Financial Institution/Life Insurer/Non-Life Insurer is best suited to the market environment. The decision process is ultimately financial, according to the historical background and the strategic parameters of the entities included. In this ultra competitive environment we already see exciting progress in the way that the industry has embraced product development. The consumer is more clearly King than ever before. Nowhere is that more recognised than the impending regulation of the Kyosai sector a part of the industry which is totally consumer driven. Competition has increased to the benefit of the consumer particularly in the Auto and Personal Lines sectors. Both pricing and scope of cover have been subject to some innovative development and given that Auto accounts for more than 50% of Industry income, margins have been significantly squeezed. This trend has been repeated in the commercial sector, where we have seen an increase in the number of tender bids which have successfully provoked competition between the domestic insurers. With no cyclical data to analyse, the market is forced to consider its future in terms of developing new revenue streams and maintaining market position, a measurement that is considered critical in Japan. At this time, the market share gained, post deregulation, by foreign insurers and brokers has not been so impressive. However, as we see evidence of the dismantling of some historic Keiretsu relationships, the skill sets of the broker will increase in their appeal. Global Programmes, Captive Solutions, etc. all suggest that the best equipped broker has an important role to play in the maturing of the market. 17

20 Non-Life Japanese insurance market Today & Tomorrow Today By conventional measures, premiums as a proportion of GDP as well as per capita, Japan is already a mature market. Growth is therefore a major challenge for all. Since deregulation, the homogenous face of the Japanese market has changed dramatically. Each insurer now has it s clear characteristics and identity, so the growth imperative is met differently by each Company. The biggest Companies are seeking growth by diversification but in very different ways. Some may look outside Japan for their future needs. However, even here the strategic focus is different. One might only consider Asia. One might consider building it s own international network from it s own resource. One may consider fast-track growth through international acquisition. One may feel that it is better to remain focussed on domestic clients and diversify through product type and/or access channels. Each strategy has been carefully considered and executed. Both in terms of geographic reach and market intellect, coupled with product innovation and knowledge, we believe the role of the broker is of increasing value in supporting these journeys into unfamiliar areas. Our areas of client interface are broadening daily. We may all agree that growth is essential over time but without damage to shareholders returns. Margins are being squeezed already. Each area of cost must be analysed and understood as being the most efficient. Objective and scientific measurement has become increasingly important. The cost of reinsurance is one important factor. Working with our clients to evaluate the efficiency of their programmes is one of our key roles. We anticipate that our clients will expect their broker to develop this analysis in two directions. Already we have increased the transparency of the model to allow a more rigorous analysis of the catastrophe reinsurance proposition. This analysis may become the more important if insurers submit to pressure from industrial clients to provide additional earthquake capacity. We also believe it is of interest to define the expense of reinsurance relative to the cost of capital through dynamic financial analysis. This methodology has been welcomed by our clients in other important markets. We are already seeing evidence of companies developing their own optimum retention strategies. These conclusions are usually justified against a scientific model. In most cases these companies are increasing their retention of risk and, therefore, exposing their balance sheet to the higher probability of damage. We are all aware that there exists a basis risk between modelled result and actual performance. If this basis risk is now being assumed on the balance sheet it becomes more important to refine the model to minimise such basis risk. This is a great area of opportunity for those brokers/advisors with the relevant intellectual capital. Finally, one of the major challenges facing the Japanese non-life market is the globalisation of regulation in terms of both operating procedures and financial regulations. Japan must now consider the impact of international accounting standards. Whilst the utilisation of finite reinsurance has not been prevalent in Japan, recent developments elsewhere will add to the regulatory scrutiny of the present and future arrangements. Historically, Japanese companies have benefited from close relationships with governmental organisations and the resulting Tax and Accounting practices were considered by some to be flexible. As the past problems are unravelled at an 18