Jeremy Golden's national overview finds an insurance industry responding well to liberalisation, with growth in net premiums and influences from non-domestic companies, but payment defaults have proved a problem
Until government de-regulation of the sector began as part of the financial 'big bang' of the mid 1990s, Japan's non-life insurance market was a classic example of an over-regulated industry. The authorities for most insurance products dictated product terms and conditions, including premiums and agency commissions. All non-life companies provided the same products at the same price and conditions.
With no competition on products or prices, sales relied on brand loyalty and buyer-seller relationships. But from 1996, premiums were liberalised, brokerages allowed to operate for the first time and, as expected, there followed a sudden revision of product management and sales structures, with foreign insurers making renewed attempts to carve out a share of the market.
According to a recent Economist Intelligence Unit white paper sponsored by Marsh - Japan's corporate insurance market: Coming of age? - the key change was a major consolidation of the industry "with high profile firms such as Daiichi Mutual Fire and Marine and Taisei Fire and Marine going bankrupt, and others undergoing a series of mergers and acquisitions".
The paper continues: "This has led to increasing oligopoly - there were six major non-life firms as of 2006 and more restructuring is expected - and has placed mid-scale insurers in increasingly tenuous positions. The final deregulatory step will come in late 2007, when banks will be allowed to sell insurance products over the counter."
Figures from the General Insurance Association of Japan for the 2005 financial year calculate the top six players controlled an estimated 91.2% of net premiums paid in and 89.9% of combined assets. The ruling elite also swallowed up 95% of ordinary profits.
Net premiums up
Megumi Usui, an analyst in Fitch's financial institutions group based in Tokyo, says the rise in gross domestic product, which was supported by firm consumption growth, highlights the continued recovery of the Japanese economy, which in turn is generating higher annual growth for non-life net premiums more or less across the board.
"The total net premiums written for the major Japanese non-life insurers increased by 0.8% year-on-year in the 2005 financial year," says Ms Usui. "Demand for cargo insurance was fuelled by a huge increase in volume of trade with China. Medical and nursing care products as well as general liability insurance were also strong."
In aggregate, the NPW increased in all the major business lines - except for 'compulsory automobile liability insurance' - with the largest contribution from the fire line.
In the voluntary motor insurance sector, which is the major business line for Japanese non-life insurers, the leading companies' total NPW returned to positive growth. "Car insurers are much more responsive to driver risk segmentation, which is a relatively recent phenomenon in Japan," says Ms Usui.
"While it allows companies to provide discounts for accident-free drivers, insurers are proving to be increasingly innovative in broadening the range of voluntary coverage to meet customer needs. For example, to include damage to property inside the vehicle, as well as value-added services to customers such as traffic information and various hot lines for traffic accidents and emergencies - and by doing so, price the products upwards."
Increase in fire premiums expected
Non-life insurance companies are also planning major revisions to premiums on fire insurance policies this April, with hikes expected in regions hit by a recent string of typhoons, The Nikkei learned last month.
The move reflects coming changes in basic rates used in premium calculations and will result in the first major overhaul of fire insurance premiums in nine years.
The Non-Life Insurance Rating Organization of Japan, which sets underlying rates that insurers use as a basis for their own policy premiums, has obtained approval from the Japanese Financial Services Agency for its new numbers. Consequently, premiums for concrete condominiums in 34 of Japan's 47 prefectures are expected to increase.
Basic rates for fire insurance, which provides coverage for losses arising from such events as hurricanes as well as fire, vary by building type and prefecture. And because of recent large claims in the Kyushu and Shikoku regions for typhoon-related damage, basic rates for most dwellings there are expected to rise by around 20%. Last September's Typhoon Shanshan, which wreaked havoc primarily in the Kyushu region, caused the sixth-largest losses on record. Increases in the Kanto, Tokai and Kinki regions are expected of up to 10%.
Market share battle
Overall, foreign non-life insurance firms' net premiums occupy a marginal proportion of the market - less than 5% and occupying more or less the same level as five years ago. And to make matters more galling, the Japanese players have now infiltrated those niche product lines from which they were at one time excluded, although the outcome has been mixed to say the least.
Direct sales of car insurance, which only account for around one in 20 policies sold, has previously proved a major earner for foreign companies. American Home Assurance (Japan), for example, boasts high name-recognition as a pioneer in direct insurance sales.
However, in the year ended March 2006, the company suffered its first ever decline in car insurance revenue. "Customers are being stolen by major insurance companies, which have begun offering products with inexpensive premiums that finely divide risk," says chairman and chief executive officer Masataka Ueda.
In the same vein, Makoto Ozeki, CEO of the Japan branch of Zurich Insurance, states: "Our appeal has declined due to an increase in commercials by competitors, including new entrants to the field, like securities companies and banks."
Many in the industry say the direct sales business model has lost its freshness and mass media advertisements are no longer as effective. So there is a movement to revise marketing strategies.
Another area where foreign insurers appear to be losing out is on so-called 'third sector products'. These are classified as distinct from life and non-life products although incorporating elements of both - such as cancer and supplementary hospitalisation insurance, in addition to personal accident.
Worrying from the Japanese insurers' perspective, however, is the recent incidence of payment default. In a 2005 survey of payment default incidents among all non-life insurance companies, conducted by the Japanese FSA, 26 firms including the six biggest were revealed to have had 180,000 violations worth a total of Yen10.2bn.
In the 2005 official FSA inquiry, the sector concerned was car insurance. But in the 2006 inquiry, non-payment in the third sector emerged as an enormous problem. More default problems materialised last year with Sompo Japan and Mitsui Sumitomo Insurance ordered to suspend business for two weeks.
The origin of the problem was identified as the confusion created by the ever frequent revision of product line ups and premiums; as liberalisation proceeded and price wars raged, policy terms and rate scales were revised continuously, and insurers kept adding 'extras' to avoid having to lower premiums - to the point that contracts became unwieldy. While insurers have publicly been accused of underhand profit-seeking, insiders blame this problem on a lack of experience.
In mid 2006, Japan's FSA ordered Mitsui Sumitomo Insurance to suspend selling new non-life insurance policies at all branch offices for two weeks in July, saying that the company had failed to pay some 18,000 insurance claims and engaged in illegal practices in medical insurance sales.
The Japanese financial watchdog also ordered Sompo Japan to partially suspend operations in June for not paying some claims stemming from vehicle accidents.
Weighed down by the debilitating effect of the sanctions, Mitsui Sumitomo has revised downward its group net profit outlook for the latest business year to Yen57.5bn from Yen75bn.
Ms Usui concurs that the sanctions are mainly an unforeseen and unfortunate side effect of deregulation, rather than underhand practice, and says that the leading non-life insurers are highly stable and well-capitalised entities well within the statutory solvency margin ratio. Moreover, the FSA is not just targeting non-life insurers but other financial institutions, such as banks.
In addition, a Japanese version of the US's Sarbanes-Oxley legislation comes into force in 2009 to impose strict regulations on internal controls and financial reporting.
Through all of this market restructuring and product diversification, one area of the non-life market has been left largely untouched - corporate insurance products.
According to Rob Wendin, Marsh's leader of Japan Client Services for Europe, the Middle East and Africa: "Corporations with lots of international experience tend to demand the same sort of insurance products as their European and US counterparts, and each insurance company provides products to meet these firms' demands. But there are probably only 100 such firms in Japan, and the gap between them and the rest of corporate Japan is considerable."
He adds: "Perhaps the most important reason for the lack of dramatic change in the corporate insurance market is the traditional arrangement under which most major companies purchase their insurance products - through in-house agents."
However, several trends give reason to expect that demand for more sophisticated corporate insurance products will soon begin to rise, forcing change in the market. First among these is the increasingly risky world in which Japanese companies operate. Market growth for many Japanese companies, particularly manufacturers, is now coming from the more volatile markets of Asia.
What of foreign insurers and brokers? Theoretically, they should at least find their prospects improving with the unwinding of cross-shareholding; the Japanese have shown a greater willingness to purchase from 'outsiders'. Moreover, Japanese executives returning from abroad are bringing risk management literacy back with them.
Mr Wendin identifies the following risks as rich in potential for foreign insurance service providers to the corporate market: globalisation risk; management system risk; natural disasters; compliance; risk of litigation; corporate investment; and information risk.
"These are all areas where foreign insurance firms can make a strong impact in the long term. They have the depth of experience and expertise, catering for bespoke risk and on an industry basis, such as with the IT industry," he says. "They are also more familiar than their Japanese counterparts with market-driven products as a result of competition."
For his part, Clive James, group managing director of Aon Global Insurance Managers, recognises the gradual increase in influence of non-Japanese insurance companies and brokers in the Japanese market who are proposing new insurance solutions to Japanese companies. One such example is alternative risk financing, which has influenced the use of captives and also protected cell companies.
"I can also see the influence of younger Japanese who are working abroad, especially in the US, and learning the different approach to insurance solutions," says Mr James. "This has been further influenced with the impact of Sarbanes-Oxley and Basel II on Japanese multinationals."
Aon Global Insurance Managers has a dedicated business development unit for its global captive development - and this will include the appropriate skill sets for initiating feasibility studies for Japanese captives.
So, in which industry sectors has Aon experienced, or does it expect, higher demand over the coming years?
"The energy sector specifically, but multinationals across a range of sectors - or in fact any company where the insurance market influences the pricing, coverage and availability of risks," responds Mr James. "These are areas where the local markets will have less of an influence on global situations and captives and other dynamic solutions can address the need."
IMPACT OF DEREGULATION ONGOING
Liberalisation of premiums.
Market concentration among the Big Six and corporate bankruptcies.
Japanese non-life insurers extend range of voluntary motor products and underwrite 'third sector' niche lines like cancer insurance once dominated by foreign companies.
Japanese insurers overreach themselves and large scale defaults on payouts lead to temporary suspension of trading in 2005 and 2006 for two major players.
Tougher enforcement of corporate best practice by Japan's Financial Services Agency ongoing.
Yet to have a major impact on the corporate insurance market but more rapid need for, and appreciation for new insurance solutions mainly by Japanese multinationals.
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