Overview of Life Insurance Industry in Japan

Transcription

1 FALIA Seminar Risk Management Course Overview of Life Insurance Industry in Japan November 12, 2014 The Life Insurance Association of Japan

2 Contents 2 I Basic Information of Japan P.3-11 P General Information 2. Economic Trends 3. Demographic Changes 4. Aging Population 5. Medical Expenses 6. Long-term Care Expenses 7. Employment and Asset Holdings of the Elderly II Development of Life Insurance in Japan 1. Early Development of Modern Life Insurance System 2. Innovation of Life Insurance Business 3. Contemporary Life Insurance Industry in Japan III Life Insurance Market in Japan 1. Role of Public and Private Sectors in Life Security 2. Current Situation of Life Insurance Market in Japan IV Regulatory Regime for Life Insurers in Japan 1. Supervision and Regulation 2. Bankruptcy Procedures 3. Taxation on Life Insurance 4. Recent Development on Insurance Regulation V Recent Industry s Action 1. Supervision and Regulation 2. Bankruptcy Procedures 3. Taxation on Life Insurance 4. Recent Development on Insurance Regulation VI The Life Insurance Association of Japan 1. Overview of 2. Role of P P P P P.63-75

3 I. Basic Information of Japan

4 I Basic Information of Japan 4 1. General Information Name Japan Area 377,914km2 (rank 60 th ) Population 127 million (rank 10 th ) Capital Language Main Religion Tokyo Japanese Shinto/Buddhism Government Trade Prime Minister: Shinzo Abe (Liberal Democratic Party) Import: crude oil, petroleum products, LNG (liquefied natural gas), clothes, coal, non-ferrous metal, semiconductor electric component Export: automobile, auto component, steel, semiconductor electric component, boats and ships, plastic, engines and turbines

5 I Basic Information of Japan 2. Economic Trends 5 Changes in Nominal GDP Stock Price (The Nikkei Stock Average) ,000 (yen trillion) Source: IMF - World Economic Outlook Databases, Cabinet Office (yen) 40, , ,783 yen (as of Oct. 7, 2014) 30,000 Source: Nihon Keizai Shimbun Nominal GDP (2013): trillion yen Growth Rate (2013): 1.0% GDP per capita (2013): million yen 25,000 20,000 15,000 10,000 5, Interest Rate (JGB 10-year yield) Yen-Dollar Exchange Rate (%) Source: Ministry of Finance (yen) dollar = yen (as of Oct. 7, 2014) % (as of Oct. 10, 2014) Source: Mitsubishi Research and Consulting

6 I Basic Information of Japan 3. Demographic Changes Population Demographics 6 Aged 19 or under Aged Aged Aged 75 or over Population aging rate (aged 65~ to the total population) (%) 14, ,000 10,000 8,000 6,000 4,000 2,000 (ten thousands) 9,008 8, , , , ,105 12,361 12,557 12,693 12,777 12,806 12,660 12,410 12,066 11, ,160 11, ,407 11,194 1,646 11, , , ,109 10,728 1,301 2, ,221 1,407 2, , ,245 1, ,223 1, , ,479 1,407 7,056 7,353 6,786 7,590 7,861 4,646 5,109 5,650 6,295 7, ,495 1, ,600 7,752 7,497 7,089 6,783 6,559 6,278 5,910 5,393 4, ,708 2,385 1,383 4, ,193 8,674 2,401 2,336 1,225 1,128 4,368 4, ,846 3,883 3,781 3,648 3,432 3,517 3,578 3,501 3,249 2,857 2,596 2,409 2,287 2,176 2,015 1,849 1,698 1,562 1,467 1,386 1,297 1,199 1, Source : The Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research Note: The total population from 1950 to 2010 includes the population of uncertain age. 0

7 I Basic Information of Japan 4. Aging Population Total Fertility Rate and Proportion of Elderly Population Papua New Guinea Total fertility rate (births per woman) ( Year 2010) Philippines Malaysia India Mongolia Uzbekistan Indonesia Vietnam Myanmar China Singapore Aging Population and Declining Birthrate t New Zealand France USA UK Australia Thailand South Korea Germany Taipei Japan Proportion of population aged 65 and over (% of total population) (Year 2011) Source: Asian Development Bank(ADB); National Institute of Population and Social Security Research

8 I Basic Information of Japan 8 5. Medical Expenses (Age) Hospitalization Rate by Age Group Average Days of Hospitalization by Age Group (%) (Days) (Age) (ten thousand yen) Lifetime Medical Expenses (Estimates in Fiscal 2009) (Age) 104 Lifetime Medical Expenses Y23.00 million Under 70 50% or over 50% Source: Ministry of Health, Labor and Welfare 9

9 I Basic Information of Japan 9 6. Long-Term Care Expenses Period of Unhealthy Condition = Average Life Expectancy at Birth Healthy Life Expectancy Male Female (Years) Year Average period of a life WITHOUT physical limitations Average period of a life WITH physical limitations Average life expectancy Average period of a life WITHOUT physical limitations Average period of a life WITH physical limitations Average life expectancy Certification Rate of Needed Long-Term Care in 2011 By Age Group Source: Ministry of Health, Labor and Welfare (ten thousand) Population Number of People Certified Certification Rate (%) (Age) Source: Ministry of Health, Labor and Welfare; Ministry of Internal Affairs and Communications

10 I Basic Information of Japan 7. Employment and Asset Holdings of the Elderly (1) Labor Force Participation Rate of the Elderly Proportion of elderly employees to population by age group 10 (%) (Male) (Female) (Male) (Female) Source: Ministry of Internal Affairs and Communications

11 I Basic Information of Japan 11 (2) Assets of the Elderly (million yen) 25 Average savings of householders by age group The Elderly (Age) Source: Ministry of Internal Affairs and Communications

12 II. Development in Japanese Life Insurance Industry

13 II Development in Japanese Life Insurance Industry Early Development of Modern Life Insurance System (1) Beginning of modern life insurance industry The first life insurance company, Meiji Life, was set up in Many people started life insurance business following with the expansion of market, but most of them did not run its business in a statistical basis. (2) Facilitating the infrastructure of life insurance system Establishment of trade and professional associations (The Forum of Japanese Life Insurers in 1898 and the Institute of Actuaries of Japan in 1899) The Insurance Business Act was promulgated in 1900 The first mutual life insurer, Dai-ichi Life, was set up in The government started to operate the postal life insurance business in 1916 in order to provide insurance coverage to low income people. Main products were whole life insurance and endowment insurance. The war and natural catastrophes t increased public awareness of the importance of life insurance.

14 II Development in Japanese Life Insurance Industry Innovation of Life Insurance Business (1) Postwar Economic Reconstruction The need for group insurance was growing with the progress of industrialization. Setting g of The Month of Life Insurance (November) in order to conduct promotion campaign for life insurance. Recruiting women as tied sales agents (2) High-Growth Period of the Japanese Economy Change of family structure re and increase of needs of death coverage Increase in number of people who feel need for insurance coverage because of the economic growth Issue of mass hiring and mass turn-over of tied agents Main products: endowment insurance with term rider, whole life insurance with term rider, insurance products with saving element What is the Month of Life Insurance Upon the proposal by J.P. Royston, the Insurance Commissioner of GHQ, the board meeting of passed the resolution to designate November as the Month of Life Insurance for the promotion of life insurance in September Since 1947, the promotion campaign for life insurance has been conducted every November as the industrial annual event, playing a key role to enhance penetration of life insurance.

15 II Development in Japanese Life Insurance Industry Recent Situation of Life Insurance Industry in Japan (1) Shrinking the market size Little growth in income from 1990s invoked cancellation of insurance contracts and downsizing the coverage The amount of policies started to decrease after reaching its peak in the mind-1990s. Trend to choose to remain single or postpone marriage and progress of aging society with a declining birthrate declining the need for death coverage (Trillion yen) 2500 The amount of insurance policies in force and national income The amount of insurance policies in force (insurance coverage amount) 575 (%) National income Ratio of the amount of policies in force to national income Source: The Life Insurance Association of Japan

16 II Development in Japanese Life Insurance Industry 16 (2) Low interest rate environment and bankruptcy of life insurers The decrease in stock prices, the increase of bad loans, and continued extremely low interest rates caused significant impacts on asset management. Negative spread where the actual investment returns fall below the expected interest rates, pressed the business management of life insurers. 7 life insurers failed during 1997 to Regulation regime for insurers were developed, and systems to maintain the financial soundness of insurers were revised. 400 Negative spread (billion yen) , (Note) Total of 4 companies (Nippon, Dai-ichi, Meiji Yasuda, Sumitomo) Source: Disclosure of each company

17 II Development in Japanese Life Insurance Industry 17 Bankruptcy case of life insurers Company Date of failure Total Assets (billion yen) Relief Company (Sponsor) Current Nissan April Aoba (Artemis) Prudential Life Toho June GE Edison (GE Capital) Gibraltar Life Daihyaku May Manulife (Manulife) Taisho August Azami (Yamato Life / Softbank) Prudential Gibraltar Financial Chiyoda October AIG Star (AIG) Gibraltar Kyoei October Gibraltar (Prudential) Tokyo March T&D Financial (Daido/Taiyo Life) Yamato October Prudential Financial Japan Prudential Financial Gibraltar (3) Changes in market participants The first foreign life insurance company, Alico Japan started its business for Japanese citizens in General insurers were allowed into life insurance market through their subsidiary in Number of market participants : 42 (as of October, 2014) Domestic: 19 Non-Life subsidiaries: 5 Foreign* : 18 Branch offices: 3 *Foreign stake of 50% or more and Branch offices

18 II Development in Japanese Life Insurance Industry 18 Changes in Market Participants i t Domestic Foreign Non-Life : Bancassurance deregulation (in annuity sales) 2007: Complete lifting of the ban on Bancassurance (in all areas) : Financial Crisis in Japan : Allowing non life insurers to enter life insurance market through subsidiary Source: Financial Service Agency, The Life Insurance Association of Japan

19 II Development in Japanese Life Insurance Industry 19 (4) Changes in Product Portfolio (the number of new policies) People started to have interests in whole life insurance and individual annuities from 1980s. Insurance products with saving element became unpopular under the extremely low interest rate environment. Medical insurance and products for post-retirement security (such as individual annuities and whole life insurance with single premium payment) became popular. 100% 90% 80% 70% 60% Endowment Term Whole Life Medical Annuties Others % 40% 30% 20% 10% 0% Source: The Life Insurance Association of Japan

20 II Development in Japanese Life Insurance Industry 20 (5) Changes in Asset Management Changes in Total Assets (Billion yen) 320, , , , , ,243 5,855 12,893 26, ,871 Source: The Life Insurance Association of Japan

21 II Development in Japanese Life Insurance Industry 21 Changes in Asset Management Portfolio Cash/Deposits & Call Loans Government Bonds Corporate Bonds Stocks Foreign Securities Policy Loans Financial Loans Tangible Fixed Assets Others 100% % % % % % % 30% 20% % 0% Source: The Life Insurance Association of Japan

22 III. Life Insurance Market in Japan

23 III Life Insurance Market in Japan Role of the Public and Private Sectors in Life Security <Social Security> Public Pension Old Age Benefit Survivor Benefit Complement Private Insurance Products Fixed Annuity Insurance Variable Annuity Insurance Whole Life Insurance Term Insurance Endowment Insurance Public Health Insurance Medical Insurance Cancer Insurance Public Long-term care Insurance Long-term care Insurance

24 III Life Insurance Market in Japan 24 (1) Post-Retirement Security As of the end of March, 2013 (* as of the end of March, 2014) Individual Annuity 1 : Approx million policyholders (estimated) Premium : Y4.31 trillion, Payment: 3.11 trillion, Policy reserves: trillion Corporate Pension (2012) Participants²: million Premium 3 : 3.10 trillion Payment 3 : 3.26 trillion Holding assets 3 : trillion Public Pension (2012) Participants: 67.36million Premium: 30.1 trillion Payment: 49.7 trillion Accumulated fund:y162.4 trillion National Pension Fund 0.49 million participants Defined Contribution Plan (Individual type) 0.18 million participants* Defined Contribution Plan (Corporate type) 464million 4.64 participants* Defined Benefit Plan 7.88 million participants* i t Employees Pension Insurance million participants Employee s Pension Fund 4.08 million participants* i t Substitutional benefits Occupational Field Mutual aid associations 4.40 million participants National pension (basicpension) million participates House wife, etc/ Self-employed Private-sector workers Public service employees Class III insured 9.60 million people Class I insured million people Class II insured million people 1. Estimated by the survey of JILI 2. Total of defined contribution plan (corporate type), defined benefit plan and employee s pension fund 3. Total of employees pension fund and defined benefit plan Source: Health, Labor and Welfare Ministry, National Institute of Population and Social Security Research, Pension Fund Association, disclosures of mutual aid organizations, JILI,

25 III Life Insurance Market in Japan 25 (2) Medical Security (b) Co-payment for meal expense on hospital admission Average amount per day: 780 Public Medical Insurance Members: 123 million(2012) Benefit: 31.4 trillion(2011) Premium: 19.6 trillion(2011) (a) Co-payment (10~30 %) (c) Amenity Bed Charges (Private room or small-group of patients room) Average amount per day: 5,829 (d) Specialty care not eligible for public medical insurance (Advanced medical care, medical exam, preventive injection, dental materials, etc.) (e) Other Expenses (Traveling expenses, necessities for hospitalization, gifts, etc.) Out-of-pocket cost in public medical insurance (a)+(b) Need for private coverage (2013) Policyholders¹: 60 million (estimated) Other out-of-pocket cost Premium² : 6.07 trillion (c)+(d)+(e) 1. Estimated by the survey of JILI 2. Including medical, accident and long term care insurance Source: Japan Institute of Life Insurance,, National Institute of Population and Social Security Research

26 III Life Insurance Market in Japan 26 (3) Long-Term Care Security b. Additional services Services exceeding the amount covered by public long term care insurance, such as Amenity bed charges. Out-of-pocket cost Need for private coverage Policyholder: 7.4 million¹(estimated) Public Long term Care Insurance Member: million (2012) Benefit: 8.1 trillion(2012) Premium: 1.7 trillion(2012) Home long term care services:services i provided d by visiting nurses or caregivers, such as long term care, bath and rehabilitation Services at long term care facilities c. Services uncovered by Public long term insurance Catering service Transfer service a. Co-payment (10 %) 1. Estimated by the survey of JILI Source: Japan Institute of Life Insurance, Health, Labor and Welfare Ministry, National Institute of Population and Social Security Research

27 III Life Insurance Market in Japan Current Situation of Life Insurance Market in Japan (1) Penetration Rate of Life Insurance Changes in Life Insurance Ownership Rate per Households (%) Source: Japan Institute of Life Insurance: Consumer Survey Note: The data includes the total of private life insurance (including Japan Post Insurance), postal insurance and JA cooperative

28 III Life Insurance Market in Japan 28 (2) Purpose of Life Insurance Ownership Medical or surgery expense 56.3% 59.6% 60.5% Survivor 51.7% 12.5% Funeral expense 13.7% Accident 19.4% 8.8% Educational and marriage expenses of children Post-retirement life Saving 44% 4.4% Long-term care expense 3.1% 10.9% 8.6% 8.9% 8.6% 7.1% 6.7% % 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% <Multiple choice question> Source: Japan Institute of Life Insurance

29 III Life Insurance Market in Japan 29 (3) Business Results New policies Policies in Force (Number; million) (Number; million) Individual Life Insurance Individual Annuities Individual Life Insurance Individual Annuities Source: The Life Insurance Association of Japan

30 III Life Insurance Market in Japan 30 Individual id Insurance Share by Type New policies (2013) Policies in Force (2013) (%) Variable Annuity, 1.01 Others, 3.48 Variable Annuity, 1.81 Others, 3.94 (%) Juvenile, 3.57 Fixed Annuity, 8.25 Fixed Annuity, Whole Life, Juvenile, 3.67 Whole Life, Cancer, 8.80 Term Life, Cancer, Medical, Term Life, Endowment, Medical, Endowment, 8.03 Source: The Life Insurance Association of Japan

31 III Life Insurance Market in Japan 31 Premium Income (yen billion) 40,000 35,000 30,000 25,000 20,000 Individual Life Insurance Individual Annuities Group Life Insurance Group Annuities Others 36,289 37,140 34,116 34,454 3,836 3,874 4,973 4,276 3,926 3,684 1,109 3,813 1,114 3,727 1,116 4,374 1,133 4,679 4,802 6,641 34,738 2,740 3,852 1,113 4,312 15,000 10,000 17,641 20,448 22,734 24,099 22,721 5, Source: The Life Insurance Association of Japan

32 III Life Insurance Market in Japan 32 Premium Income of Japanese Life Insurers in 2013 Japan Post 5, (Market Share:17.0%) Nippon 4, (13.9%) Dai ichi 4, (11.6%) Meiji Yasuda 3, (10.4%) Sumitomo 2, (7.3%) Prudential 2, (6.7%) Aflac T&D 1, , (4.8%) (4.6%) Metlife 1, (4.0%) MS&AD 1, (3.6%) Sony (3.2%) 1, Fukoku Tokio Marine Mitsui (2.0%) (1.8%) (1.6%) AXA (1.5%) 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 (yen billion) (Note) Dai-ichi: Dai-ichi+Dai-ichi Frontier+Sompo Japan DIY; Prudential: Gibraltar+Prudential+PGF; Sumitomo: Sumitomo+Medicare; T&D: Taiyo+Daido+T&D; Sony: Sony+Aegon Sony; MS&AD: Aioi+Primary; Fukoku: Fukoku+Fukokushinrai; Tokio Marine: Tokio Marine Life Insurance+Tokio Marine Financial Life Insurance * ; AXA: AXA Life+AXA Direct Source: The Life Insurance Association of Japan

33 III Life Insurance Market in Japan 33 Life Insurance Premium Volume by country in 2013 New Premium Written by company in 2012 Ranking Country Share in World Market 1 United States 20.43% 2 Japan 16.21% 3 United Kingdom 8.55% 4 France 6.14% 5 China 5.83% 6 Italy 4.52% 7 Germany 4.38% 8 South Korea 3.50% 9 Taiwan 2.88% Ran king Company name Ran king Company name 1 Axa S.A. 11 Nippon Life Insurance Co. 2 UnitedHealth Group Inc. 12 Kaiser Foundation Group of Health Plans 3 Allianz SE 13 WellPoint Inc. 4 Assicurazioni Generali S.p.A. 14 Prudential plc 5 National Mutual Insurance Federation of Agricultural 15 Zurich Insurance Group Ltd. Cooperatives 6 Japan Post Insurance Co.Ltd. 16 Meiji Yasuda Life Insurance Co. 7 Munich Reinsurance Co. 17 Dai-ichi Life Insurance Co. Ltd. 8 Prudential Financial Inc 18 Life Insurance Corporation of India 9 China Life Insurance (Group) Co. 19 MetLife Inc 10 Canada 2.01% 10 State Farm Group 20 American International Group Inc Source: Swiss Re; AM Best

34 III Life Insurance Market in Japan 34 Insurance Payment (yen billion) 40,000 Claims Paid Annuities Paid Benefits Surrender Benefits Paid Other 35,000 33,681 2,319 30, ,948 25,000 4,026 20,000 2,558 15,000 32,049 2,155 5,799 3,976 2,876 33,778 31,209 31,686 2,918 2, ,225 5,680 8,000 5,867 3,805 3,937 4,054 3,135 3,360 4,500 10,000 18,830 17,244 16,143 15,296 14,308 5, Source: The Life Insurance Association of Japan

35 III Life Insurance Market in Japan 35 Profit Basic Profit Ordinary Profit 4000 (yen billion) ,075 3,260 3,545 3, , ,629 2,551 2, ,860 1, Basic profit represents the profitability of the life insurance business. *Basic Profit = Ordinary Profit - Capital Gain/Loss - Nonrecurring income/loss Source: The Life Insurance Association of Japan

36 III Life Insurance Market in Japan 36 Total lassets and Portfolio Yields Total Assets: 350 Trillion Yen (As of the end of March 2014) Tangible Fixed Assets, 1.80 Cash & Deposits, 1.26 Others, 9.57 (%) Portfolio Yields by Type of Assets Bonds Domestic Stocks Foreign Securities Financial Loans Real Estate Policy Loans, 0.89 Other Foreign Securities, 2.38 Foreign Stocks, 1.50 Financial i Loans, JGB, Foreign Corporate Bonds, Foreign Government Bonds, 5.37 Stocks, 5.14 Corporate Bonds, Local Government Bonds, 4.00 Source: The Life Insurance Association of Japan

37 III Life Insurance Market in Japan (3) Distribution Channel Share of Distribution Channel Tied Sales Agents House visit Workplace Direct Sale Internet TV, Newspaper, p Magazine Office of Insurer Bank/Securities Firm Bank Securities Firm Sales Agency At the Counter Sales Representative Via Workplace or Labor Unions Others Source: Japan Institute of Life Insurance

38 III Life Insurance Market in Japan 38 Number of Life Insurance Sales-Person tied sales agents sales representatives at agencies 1,200 (Thousand) 1, , ,011 1, Source: The Life Insurance Association of Japan

39 III Life Insurance Market in Japan (4) Other Insurance Providers Cooperatives (Kyosai) 39 While Insurance does not limit the scope of policyholder, Kyosai is a scheme, formed by residents in the same region or persons engaged g in the same occupation, which provides a certain amount of benefits from the pooled financial contributions of the membership for disaster, death or accident with the aim of mutual assistance. Major kyosai: National Mutual Insurance Federation of Agricultural Cooperatives, National Federation of Workers and Consumers Insurance Cooperatives, Federation of Japanese Consumer Cooperatives and etc. Small llamount & Short-term t Insurance After the revision of the Insurance Business Act in 2006, unregulated Kyosai was required to be either an insurance company or a small-amount and short-term insurance company to continue its business within two years from the effective date of revised IBA. The number of small amount and short-term t insurance companies is 77 as of April The number of policies i in force is 5.18 million, and the amount of premium income is 51.7 billion yen. Postal Life Insurance Postal life insurance is a state-owned business established in 1916 with aim to provide low premium insurance with simple enrollment procedure. Various new postal insurance products were developed, following the development of new products and services of private life insurance companies. In 2005, Postal Service Privatization Act was enacted with the aim of promoting public convenience through various types of high-level postal services by enhancing the autonomy, creativity and efficiency of its business management. In 2007, Japan Post Holdings was established, which consists of five companies including Japan Post Insurance Company. Japan Post Insurance Company was established in October 2007 based on the Postal Services Privatization Act. Taking into account government funding to JP Insurance, a certain level l of limitations it ti is imposed on its business operation such as maximum limit on payable benefits and requirement to conduct new business.

40 IV. Regulatory Regime for Life Insurers in Japan

41 IV Regulatory Regime for Life Insurers in Japan Supervision and Regulation (Insurance Business Act) (1) Licensing No insurance business shall be operated without having obtained a license due to its characteristics of underwriting contracts from a large amount of people. The license consists of two types; the life insurance business license and the general insurance business license. (2) Restriction on Other Business and Scope of Business An Insurance Company may not conduct business other than these conducted pursuant to the Insurance Business Act and other relate acts. An insurance company may conduct the following businesses under the Insurance Business Act (IBA): 1. Proper Businesses Underwriting insurance policies and asset investment 2. Incidental Businesses Representing the businesses or carrying out services on behalf of other insurance companies and others operating financial businesses Guarantee of obligation Underwriting of National Government Bonds or handling of public offerings of the National Government Bonds Acquisition or transfer of monetary claims Underwriting g of specified company bonds issued by special purpose p companies and any other securities or handling of public offering of the specified company bonds Acquisition or transfer of short-term company bonds Handling of a private placement of securities Financial futures transactions at exchange Financial derivative transactions Over-the-counter t transactions ti of securities-related t derivatives 3. Statutory Other Businesses Subscription or commissioning the administration of bonds, dealings in public bonds, life insurance trust, securities investment trust, sales and purchase of foreign investment trusts and its intermediary, investment advisory business

42 IV Regulatory Regime for Life Insurers in Japan 42 (3) Subsidiary There are certain limits on business conducted by a subsidiary company as follows: 1. Definition of subsidiary company A company of which voting rights exceeding fifty hundredths of the voting rights of all the shareholders are held by another company A company of which voting rights exceeding fifty hundredths of the voting rights held by all shareholders of another company, are owned by the company and one or more of the subsidiary companies of such company. 2. Scope of subsidiary company A (foreign) life insurance company, a (foreign) general insurance company, a (foreign) small amount and short term insurance provider, a (foreign) bank, a (foreign) security company, a (foreign) trust t company, companies which h exclusively l engage in dependent business or finance-related business, a venture company which is held through venture capital, holding companies whose subsidiary companies consist exclusively of those-already-mentioned companies Also, there are limits on business conducted by a subsidiary/affiliate (not a subsidiary company but has business relation with it). (4) Requirement on documentation and authorization for documents To obtain a license, following documents shall be attached to the written application for a license (articles of incorporation, statement of business procedures, general policy condition, and statement of calculation procedures for premiums and policy reserves). To change matters prescribed in those documents, an insurance company shall obtain the authorization from the Commissioner of the FSA. With respect to matters specified as being not very likely to impair the protection of policyholders, an insurance company shall give advance notification. (5) Asset Investment An insurance company shall conduct asset investment by following financial instruments; Securities, real estates, monetary claims, short-term corporate bonds, gold bullion, loan of funds (money/securities), contribution to labor union contracts, deposit and savings, money/monetary claims/securities/real estate in trust, derivative transactions for asset investments, derivative transactions other than that, financial derivative transactions, forward foreign exchange transactions, and any other equivalent transactions

43 IV Regulatory Regime for Life Insurers in Japan 43 (6) Policy Reserves An insurer shall set aside a certain amount of money as policy reserves to prepare for future performance of obligations under its insurance contracts for each accounting period. Standard Policy Reserve: The Commissioner of the FSA may set necessary requirements for the method of funding the policy reserves pertaining i to the long-term insurance contracts t as well as for the levels l of the coefficients i that t should constitute the basis for calculating the amount of policy reserves, such as expected mortality. 1. Method of funding the policy reserves: Net level premium method 2. Expected mortality rate: Developed by the Institute of Actuaries of Japan, and verified by the Commissioner of the FSA. Contracts concluded during April 1, 1996 and March 31, 2007: Calculated based on Standard Mortality Table 1996 (For death insurance contracts, for annuity contracts after the beginning of payment) Contracts concluded during April 1, 2007: Calculated based on Standard Mortality Table 2007 (For death insurance contracts, for annuity contracts after the beginning of payment) and calculated based on Standard Mortality Table 2007 for third sector products 3. Assumed interest rate: Contracts concluded on or before March 31, 1999 = 2.75% per year Contracts concluded between April 1, 1999 and March 31, 2001 = 2.00% per year Contracts t concluded d between April 1, 2001 and March 31, 2013 = 1.50% per year Contracts concluded on or after April 1, 2013 = 1.00% per year (Note) For the calculation of the standard assumed interest rate, whichever lower will be used in the calculation: (1) the average rate of the 10-year JGBs yield to subscribers, which were issued for the past three years from the previous month of the reference date, or (2) the average rate of the 10-year JGBs yield to subscribers, which were issued for the past ten years from the previous month of the reference date.

44 IV Regulatory Regime for Life Insurers in Japan 44 (7) Supervisory Power To require an insurer to submit reports or materials concerning the status of its business or property to protect policyholders by ensuring the sound and appropriate management of the insurer, the Commissioner of the FSA may conduct following; 1. Submission of reports or materials: Require the insurer to submit reports or materials concerning the status of its business or property. 2. Inspection: have its officials enter a facility of the insurer, ask questions on the status of its business or property, or inspect relevant objects such as books and documents. 3. Order to change matters prescribed in Statement of Business Procedures 4. Submission of an improvement program, suspension of business, etc. :request the insurer to submit an improvement program by identifying matters for which measures shall be taken as well as due dates, or, within the limit necessary, order the full or partial suspension of the business of the insurer with due dates. Prompt Corrective Action System The Commissioner of the FSA may require an insurer whose solvency margin ratio is under 200% to take following corrective actions by each category: Category Solvency Margin Ratio Corrective Measure Category 1 Category 2 100% to less than 200% 0% to less than 100% Submission and implementation of a business improvement plan Submission and implementation of a plan for adequate solvency of the insurer, etc. Category 3 Partial or full suspension of the Less than 0% business with due dates

45 IV Regulatory Regime for Life Insurers in Japan 45 (8) Solvency Margin Ratio The reserves of insurers are sufficient to cover normal expected risks. However, unexpected events such as catastrophic disasters or plunging stock prices can happen. In order to determine whether an insurer has a sufficient "margin of solvency" to cover such unexpected risks, the solvency margin ratio was introduced as an index of administrative supervision. Since the fiscal year ending in March 1998, life insurers in Japan have been disclosing their solvency margin ratio. It is calculated as follows: Total Amount of Solvency Margin a Solvency Margin Ratio (%)= * 100 1/2 Sum Total of Risks b a The Total Amount of Solvency Margin (numerator) is the total of the following: = Total Capital + Price Fluctuation Reserve + Contingency Reserve + General Bad Debt Reserve + 90% of Variance of the Estimate of Other Securities* + 85% of Unrealized Gain or Loss on Real Estate* + Debt Capital Instruments + Deductible Items, and others. * If these values are negative, 100% of the value is applied instead of 90% or 85%. b The Sum Total of Risks (denominator) is calculated as follows: = ( R1 R8) ( R2 R3 R7) 2 2 R 4 R 1 : Underwriting Risk Risk of massive insurance payouts following a disaster or catastrophe R 8 : Underwriting Risk of third-sector insurance Risk of massive third-sector insurance payouts such as health insurance and cancer insurance R 2 : Assumed Interest Rate Risk Risk that investment return falls below the assumed interest rate R 3 : Asset Management Risk Risk of a drastic devaluation of assets because of a crash in stock prices or sharp fluctuation in the currency market, and risk of a sharp increase in irrecoverable loans due to failures of borrowing companies R 4 : Business Management Risk Business risk in excess of normal expectations R 7 : Minimum Guarantee Risk Risk related to the minimum guarantee for benefits of variable insurance and variable annuity products Reference: Risk factor for each asset category on the solvency regulation (price fluctuation risk) Risk assets Risk factor Domestic stocks 20% Foreign stocks 10% Domestic Bonds (excluding policy reservematching bonds) Domestic Bonds (policy reserve matching bonds) 1% Foreign bonds and foreign loans 1% 2% Risk assets Risk factor Real estates (land) 10% Gold metal 25% Trading account securities 1% With currency risks 10%

46 IV Regulatory Regime for Life Insurers in Japan 46 (9) Appointed Actuary An insurer shall appoint an actuary at the board of directors. 1. Requirement for appointment of actuary: Fellows of the IAJ with a certain amount of experience with regard to actuarial science 2. Related matters: An insurer shall get involved with following matters based on the relevant laws calculation method of insurance premiums, calculation method of policy reserves, calculation method of policy dividends or dividends of surplus to members, calculation method for refund and other accumulated fund for policyholders, calculation of uncollected premium, calculation l of reserve for outstanding t claim, planning for insurance solicitation, it ti development of rules regarding salaries of life insurance solicitors, and other necessary matters to carry on the operation of actuaries 3. Duties: The actuary shall check the following matters and submit to the board of directors a written opinion describing its findings for each accounting period. Whether the policy reserve has been funded according to sound actuarial practice. (Note) Future cash flow analysis verifies the sufficiency of accumulated policy reserves, and if it is expected that the loss will be incurred, actuaries shall describe the need of additional policy reserve accumulation in a written opinion. Whether policy dividends or dividends of surplus to members have been distributed in a fair and equitable manner. Whether it is difficult for an insurer to continue its business according to a result derived from rationally calculated future cash flow based on the actuarial mathematics or not. The Commissioner of the FSA may order an insurer to dismiss its actuary when it has violated any provision of IBA and etc.

47 IV Regulatory Regime for Life Insurers in Japan 47 (10) Solicitation There are regulation specified in IBA in order to regulate solicitation activities by an insurer as follow; 1. Restrictions on insurance solicitation, Registration of life insurance solicitors Persons allowed to conduct insurance solicitation business are limited to life insurance solicitors registered with the Commissioner of the FSA. Life insurance solicitor: an officer or employee of a life insurer, person entrusted by a life insurer, an officer or employee of such person entrusted (Note) Ban on bancassurance was lifted in Prohibition on life insurance solicitors to work for more than one life insurer A life insurer shall not entrust a life insurance solicitor of another life insurer with any insurance solicitation business on its own behalf. (Note) As an exception, an insurance agent which has at least 2 a responsible officer for education/training and a responsible officer for business management is excluded from this restriction. 3. Prohibited acts Prohibited acts pertaining to insurance solicitation are specified. False statement and not disclosing any important matters, encouraging to breach disclosure obligation, inappropriately inducing to apply for a new insurance contract, provision of any special advantage, misleading comparison, making a conclusive statement on such as dividend uncertain. 4. Supervision by the FSA The Commissioner of the FSA may order a life insurance solicitor to submit any report or data, and conduct on-site inspection. The Commissioner of the FSA may order for improvement of business operation when it finds any fact that might harm the interest of policyholders. The IBA has provisions requiring life insurers to take measures to ensure sound and appropriate business operation (e.g. explanation of important matters to customers). The detailed contents to be explained are prescribed in Ordinance for Enforcement of the IBA and Comprehensive Guidelines for Supervision of Insurance Companies (which describes basic concept for the supervision by FSA, valuation items, points to be mentioned)

48 IV Regulatory Regime for Life Insurers in Japan 2. Bankruptcy Procedures 48 Resolution Scheme Bankruptcy of life insurers Administrative procedure based on the Insurance Business Act (FSA) - Management order - Appointment of insurance administrator Judicial procedure based on Rehabilitation Law (courts) (since 2000) - Commencement of rehabilitation procedure - Appointment of rehabilitation trustee Types of relief Transfer of insurance contracts to a relief company Merger with a relief company Acquisition q of stocks by a relief company Transfer of policies to PPCJ or subsidiaries Measures for resolution General debts reduction Policy reserves reduction Expected interest rate reduction Early surrender charge Policyholder Protection Corporation of Japan Functions Guarantee Coverage Financial Aid Representation of policyholders in rehabilitation procedures -Preparation of a list of policyholders ld -Exercise of voting rights 90% of policy reserve (in principle) i

49 IV Regulatory Regime for Life Insurers in Japan 49 Policyholder Protection Scheme When a relief company exists Insolvent insurance company PPCJ Transfer of insurance contracts, merger or stock acquisition Financial aid Relief insurance company When a relief company does not exist 1. Transfer of contracts to a bridge insurance company 2. Contracts undertaken directly by the PPCJ Insolvent insurance company PPCJ Insolvent insurance company PPCJ Transfer of contracts Investment in stocks (more than 50%) Transfer of contracts Bridge insurance company

50 IV Regulatory Regime for Life Insurers in Japan 50 Funding scheme The size of protection funds based on the assumption of few bankruptcies in a decade Contribution Contribution of life insurers (per year): Y33 billion The amount is allocated to each member based on policy reserves and premium incomes Financial resources: Y400 billion Designed as pre-funded regime; however, post-funded in practice because of several bankruptcies in the early stage Loan and government assistance When the amount of financial aid exceeds its financial resources Borrow money from financial institutions (debt cap: Y460 billion) government guarantee is available The government subsidy is available if the amount of financial aid exceeds the debt cap extended until the end of March 2017

51 IV Regulatory Regime for Life Insurers in Japan Taxation on Life Insurance (1) Life Insurance Premium Deduction Tax deduction scheme for life insurance premiums is a preferential tax treatment which deducts a certain amount of premium paid from the policyholder s income, which leads to reduction of income tax and resident tax. Tax Deduction Scheme for Life Insurance Premiums Total Deductible Limits i Income tax: 120, Life Insurance Long-term care/medical Insurance Individual Annuity Deductible limits Deductible limits Deductible limits Income tax: 40, Income tax: 40, Income tax: 40, (2) Tax Exemption for Death Benefits Tax exemption emption is applied to death benefits with the limits of 5 million yen multiplied by the number by legal successor since the death benefit is considered the inheritance to provide coverage for deceased s family. (3) s Request on Tax Reform In order to improve the environment to promote the independence and self-help efforts of people with the aim of ensuring the establishment of sustainable social security system, the requested that the tax deduction scheme for life insurance premiums be expanded, following the on-going review of the social security system. s Proposal Deductible limits of insurance premiums from taxable income should be raised to 50 thousand yen for national income tax and to 35 thousand yen for local income tax for each category of life insurance products (i.e. life insurance, long-term/medical insurance and individual annuity). Life Insurance Long-term Care/ Medical Insurance [Deductible limits] Income tax: 150,000 Individual Annuity Income tax: 50,000 Income tax: 50,000 National tax: 50,000

52 IV Regulatory Regime for Life Insurers in Japan 4. Recent Development on Regulation (1) Revision in Solicitation Regulations (Amendment to IBA in June 2014) 52 Changes in business environment of life insurance industry Increasingly complicated insurance products/further diversified distribution channels New types of agencies which offer insurance products of multiple insurance companies Need for reestablishment of solicitation regulations corresponding to the changes in business environment Establishment of Basic Rules for Insurance Solicitation With the aim of providing thorough services at every stage of whole insurance solicitation procedures (e.g. from ascertaining customer s wishes to concluding insurance contracts), new solicitation regulations to require active attitude for customer services will be introduced, in addition to the existing regulations which only prohibits companies from conducting inappropriate practices. Introduction of Obligation to ascertain customer s wishes To require insurers to ascertain customer s wishes and propose appropriate products in accordance with their wishes/intention Introduction of Obligation to provide necessary information To require insurers to provide necessary information to determine whether or not to conclude suggested insurance contract (e.g. detailed information on insurance products) Establishment of Regulations on Insurance Solicitors In light of increase of independent insurance agencies, new regulations to require insurance solicitors to improve solicitation systems reflecting their actual practices will be introduced, in addition to the existing solicitor regulations which place supervisory responsibility on insurance companies. Introduction of Obligation to insurance solicitors to improve their solicitation system To require insurance solicitors to improve their solicitation system in light of characteristics/scale of responsibilities of insurance solicitors (e.g. whether they offer insurance products of multiple l insurance companies.

53 IV Regulatory Regime for Life Insurers in Japan 53 (2) Orderly Resolution Regime for Financial Institutions (Enforcement in March 2014) In order to prevent financial crisis which may spread across financial market and pose significant impact on the real economy (e.g. failure of Legman Brothers), a new orderly resolution regime for financial institutions was introduced in accordance with endorsement of the G20. Scope Whole financial industry (depository financial institutions, insurance companies, financial instruments business operators, financial holding companies, and etc.) Procedure & Condition for Initiating the Regime The Prime Minister declares and confirms the need to implement the orderly resolution regime for financial institutions, following deliberations by the Financial Crisis Response Council. (Note) Financial Crisis Response Council: Consisting of Prime Minister (Chairman), Chief Cabinet Secretary, Finance Minister, Minister in charge of financial affairs, Bank of Japan Governor, Financial Services Agency Commissioner Resolution Measures When it is considered necessary to prevent significant disruptions to the market Oversight by the Deposit Insurance Corporation of Japan Provision of liquidity and financial assistance * Capital injection may be undertaken as necessary provided the financial institutions are not insolvent. The measures reduce market transactions, while ensuring the performance and continuation of obligations which are critical for stabilization of the financial system, thereby achieving orderly resolution of financial institutions and preventing severe disruption to the market. (Note) When the measure above implemented, contractual bail-in options (writing down of unsecured debts or converting unsecured debts into equity) are exercised. Funding The government provides guarantees for the DICJ s funding. If losses are incurred, in principle the expenses need to be borne ex post by the financial industry s participants. The government may provide financial support in exceptional cases.