Life Insurance Distribution Systems in Japanese Market--- Series 1: Pre-World War II Period ---Modern insurance system was imported into Japan after the Meiji Restoration. A famousbook introducing this system in details was published in 1867 by Yukichi Fukuzawa, titled

Travel in the Western World. Many businessmen and intellectuals became interested in theinsurance business after reading this book. Some of them pioneered the establishment ofdomestic insurance companies in later years.
Due to this background, most of Japanese insurance companies started their business byimitating the Western companies which included such as the product design or thedistribution systems. However, the business models adopted by the Japanese and Western
insurance companies differed in many points. In particular, the development of life
insurance distribution systems showed some characteristics that seemed to be unique toJapanese market.
In July 1881, the first modern Japanese life insurance company, Meiji Life, wasincorporated with an approval of the Tokyo Governor. Until March 1888 when the secondcompany, Teikoku Life, was founded, Meiji Life had been nearly monopolized the life
insurance market while competing with some mutual aid associations which were notconsidered as an incorporation. The third company was Nippon Life, established in July
1889. The three companies were founded as a stock company as well as the others
established later, despite of the fact that the mutual organizational form had not beenprohibited by law until June 1899.
The mutual organizational form, however, became re-legalized in July 1900, when thefirst Insurance Business Act came into effect. Soon after, twomutual companies, Dai-ichi Life and Chiyoda Life, wereestablished in 1902 and 1904 respectively. This two companies
later became one of the Big Five companies which also
included the above three stock companies. Given suchcircumstances, in addition to the fact that the insurance
industry was at the very early stage of the development, thedifference of organizational form had great influences on thedevelopment of Japanese life insurance distribution systems.
Before the mutual companies entered the market, theagency distribution system was most popular in the life
insurance business. At the beginning, most of agencies were1ⓒ JIANG

either the bankers or the local notables. Apparently the insurance companies’ intention wasto utilize their social influence and credibility to sell policies since the life insurance
business was not well-known yet. Needless to say, most of these agencies purchased thepolicies for themselves first, before conducting the solicitation activities. Meanwhile, some ofthem even were a shareholder of insurance company. For example, in the early years of
Teikoku Life and Nippon Life, many of their agencies held certain amount of company
shares, which was so-called shareholder-agency policy.
Besides the insurance solicitation, the agencies were also in charge of premium collection.
The reward was paid on a commission basis. They can earn a three to five per cent of insured
amount as a commission for selling apolicy. They also can take five per centof premium collected as a commission.
Consideringthegradualgrowthachieved by all the companies, wecould say that the agency system waseffective in the early years.
However, the insurance business
was no more than a side business tomost of these agencies. Many agencies
Picture of Tokyo Station in Taisyo Era (1912-1926) (Source:110 Years of History of Meiji Life, p.70)
Note: The Tokyo Station building was constructed as one ofsymbols of Japan’s modernization. The construction wasstarted in 1908 and completed in 1914.

becamemoreinterestedin

thepremium collection than the policy
sellingbusinessasinsurancecompanies’ policies in force increased.

Consequently, the overall operating rate of agencies began to deteriorate from the early
1900s.
At about the same time, Dai-ichi Life and Chiyoda Life, the first two domestic mutualcompanies, started their business. Both companies adopted the sales agent system which
was paid on a piecework basis. In the meantime, Chiyoda Life also introduced the agency
system, and most of its agencies were also the fund contributors. Moreover, mutualcompanies undertook an intensive promotion of the mutuality as their sales strategies,
which were embodied in their product design, namely the sales of with-profits policies.
According to their mutuality theory, only the mutual company truly considered theirpolicyholders first and all the company profits were be paid back to the policyholders as anowner’s profits. Obviously it was a sales promotion which typically focused on theorganizational differences rather than a simple price competition. In fact, the mutualcompanies tended to set a higher premium level than the stock companies at that time.

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However, they justified it by committing a higher policy dividend, which seemed to be
persuasive and widely accepted by the customers, considering the fact that the with-profits
policies later became the mainstream product. On the other hand, the competition among
the mutual companies was concentrated on the policy dividend.
Given the above circumstances, it is reasonable to say that the market competition had
become more complicated after the mutual companies entered the market, and the stockcompanies were required to reform their distribution systems to make them morecompetitive in order to stay in business. Concretely, they started to introduce the sales agent
system, while taking some specific measures such as the adoption of the piecework basis
payment to improve the operation rate of their existing sales agencies. The sales agent
channel eventually became the major distribution channel in the 1920s after the Meiji Life,
Teikoku Life and Nippon Life declared this channel as its major channel in 1920 and 1926
respectively.
The agency distribution channel kept playing an important role, however, since mostcompanies did not abandon this channel, and the new establishment had been continued
even during the World War II period, despite of the fact that its growth rate was lower thanthat of the sales agent. The gap between the growth rates of both channels increased more
rapidly in the post World War II period, which we will discuss more details in our nextreport.
(YingYing Jiang, Ph.D. in Commerce of Hitotsubashi University )3ⓒ JIANG