Management IssuesofLife Insurance Companies
By Yasuo Kofuji

Public Interest Incorporated Foundation

Oriental Life Insurance Cultural Development CenterTokyo, Japan

「生保会社の経営課題」英語版に寄せて

この度、公益財団法人アジア生命保険振興センターより英語版の機会を頂きまして誠に有難うございます。感謝、申し上げます。
本書は、日本の生保が経済環境の変化とともにどのような対応を繰り広げてきたかを見ています。日本を取り巻く経済環境は著しく変化しています。な
かでも人口減少と少子高齢化は日本経済に活気を失わせています。
１９５０年代後半から６０年代までの高度経済成長期では、毎年のように１０％前後の高い所得の伸びが続いていました。多くの若い世帯が成長を牽引し、大量の生産と消費を生み出していました。すべてが拡大の方向へダイナミ
ックに動いていったのです。
生保もその動きに合わせるように、代表的経営指標の保有契約高を確実に増やしていきました。死亡保障を中心とした定期付き終身保険や定期付き養老保険などがサラリーマン世帯に浸透し、世帯加入率は９０％を超えていました。
日本の成長も生保の動きも、根底には若い世帯が大きな原動力となっていました。豊かな生活への強い願望が成長力を高め、そして生活上のリスクを抑える手段として保障型の生保商品も伸びていきました。
当時の広告用ポスターは、どの生保も若い夫婦が二人あるいは三人の子供と仲良く手をつなぐ構図が用いられていました。若い世帯が多くを占めていた時代の象徴的な現象と言えます。
その後、１９７０年代から安定成長期に入り、成長力にかつての勢いが見られなくなりました。しかし、８０年代後半にはバブル経済が突如として発生し、人々の暮らしに活気が見られましたが、それも束の間の出来事に過ぎませんでした。
１９９０年以降は、バブル経済の崩壊から長い低迷状態が続き、失われた３０年とも呼ばれたりしています。生保にとって日本経済が成長力を失ったのも大きなマイナス要因でありますが、日銀の長期にわたる超低金利政策も生保を苦しめています。大量の資金を持つ生保にとって、あまりにも運用環境が厳し過ぎるからです。
このように生保は、日本経済の浮沈とほぼ同じような動きを展開しています。
もちろん、日本経済がかつてのような高度成長が再現できれば、生保も同じ
1

歩調を歩むと考えられます。
しかし、わが国は人口減少と少子高齢化という日本の長い歴史のなかでも初めての重い課題を背負わされています。簡単に克服できるものではありません。日本経済の低迷状態は予想以上に長引くように思われます。同時にわが国の生保は日本を基盤とする限り、成長が見込めないように感じられます。
そうした隘路に陥った日本経済のなかで、生保がどのような対応策を講じているのでしょうか。本書ではその姿を２０１０年代を対象にしながら描いています。具体的には一部の大手相互会社による株式会社への組織形態の変更
や、資産と負債を総合的に管理するＡＬＭなどが挙げられます。
このほかに海外企業の買収戦略も積極的に取られています。新たな生保市場を求めて欧州からアジアに至るグローバルな展開を見せています。とりわけ、アジアの市場は魅力的です。かつての日本のように若い世帯が多数を占めているからです。蓄積されたノウハウを駆使しながら、飛躍的な活躍が期待されます。
海外進出は単にわが国の生保だけでなく、現地の方々にとっても好ましい結果を生み出します。長い時間を掛けて培った商品や販売チャネルの知識が、直接的あるいは間接的にアジアの生保市場を拡大の方向へ進ませていくでしょう。
そのためにも日本の生保市場の動きを知ることは必要です。成長著しいアジアの国々にとって生保の果たす役割は、ますます高まっていきます。その意味からも日本の経験が役立つのではないでしょうか。
その一方で、若さに溢れたアジアの国々も、成長がいつまでも続くとは限りません。日本のように低迷状態に陥る時期がいずれ訪れるかもしれません。
経済的に成熟した国は、人口減少と少子高齢化という現象を抱える傾向にあるからです。そのことも日本が参考になるのではないしょうか。
生保だけでなく経済の発展段階を知るためにも、本書がその助けになれば幸いと思っています。

専修大学商学部教授
小藤康夫
2

On preparing an English-language version of Management Issues of Life
Insurance Companies

Thank you very much for this opportunity to prepare an English-language
version of my book as granted by the Oriental Life Insurance Cultural
Development Center. I am truly grateful.
For this book, I sought to determine how Japanese life insurance companies
have attempted to accommodate changes in the economic environment. The
economic environment in which Japan exists has been undergoing dramaticchanges. The shrinking population, dwindling birthrate, and aging of the society
in particular have combined to sap the Japanese economy of its vigor.
During the years of spectacular economic growth between the second half ofthe 1950s and the 1960s, income rose at a phenomenal rate of around ten percent
a year. Many young households provided the engine for this growth and helped
generate large volumes of production and consumption. Everything back thenwas moving dynamically toward expansion.
In line with these societal trends, life insurance companies, too, managed tosteadily increase the total amount of insurance in force, a management indicator
commonly associated with this industry. Whole life insurance with term riderplans primarily designed to provide death protection and fixed-term endowment
insurance plans spread among households headed by businessmen, such thatover ninety percent of households had signed up for such plans.
The growth of Japan and changes affecting life insurance companies wereboth spurred heavily by young households. The strong desire for a better life on
the part of individuals enhanced growth. As a means of mitigating risks to living
standards, protection-type life insurance products also came to be sold in greaternumbers.
Life insurance companies invariably chose to depict a young couple, eitherwith two or three children, happily holding hands in advertising posters of theday. This pattern reflected an era in which young households were largely at thecenter of attention in most spheres of life.
The 1970s subsequently heralded the arrival of an era of stable growth,during which time the vigor of the past could no longer be seen in the growth ofthe economy. In the latter half of the 1980s, however, a bubble economy
appeared suddenly to inject vigor into the lives of people; but this proved to be3

nothing more than a fleeting phenomenon.
Since the collapse of the bubble economy in the 1990s, a long period ofstagnancy has persisted. These years are known as the Lost Decades or Lost
Thirty Years. While the fact that the Japanese economy lost its potential for
growth has caused life insurance companies to be negatively affected, the ultralow interest rate policy embraced by the Bank of Japan has also encumbered life
insurance companies. This is because this policy renders the investment
environment unduly harsh for life insurance companies with large amounts offunds.
In this way, life insurance companies have experienced ups and downs
largely in concert with the Japanese economy. Of course, it is conceivable thatlife insurance companies would be able to keep pace with the Japanese economy
if the high levels of growth we have seen in the past were to be somehow restored.
However, Japan is facing dire challenges that have never before arisen in herlong history: a shrinking population, dwindling birthrate, and aging society.
These are not challenges that will be easily overcome. This state of economic
stagnation in Japan appears set to persist for far longer than one might haveexpected. At the same time, Japanese life insurance companies are unlikely to
see any prospects for growth emerge as long as their main market is based inJapan.
What sorts of solutions will life insurance companies formulate given thestate of the Japanese economy, which finds itself struggling with a bottleneck?
Their efforts are depicted in this book with a focus on the 2010s. Specifically, I
have highlighted changes in organizational structure as reflected in thetransformation of certain major mutual companies into stock companies; asset
liability management (ALM), an approach to comprehensively managing assets
and liabilities; and other pertinent matters.
In addition, I have proactively examined the strategy by which overseas
companies are being acquired. Companies have been expanding globally from
Europe to Asia in search of new life insurance markets. Above all, the Asianmarket is ideal since the population appears to consist largely of young
households as did Japan many years ago. Dramatic activity can be expected
while accumulated know-how is wielded.
Foreign expansion will give rise to positive benefits not just for Japanese life
insurance companies but also for local people in these overseas markets.
Knowledge pertaining to products and sales channels cultivated over a long4

period of time will directly and indirectly steer the Asian life insurance market
onto a path of growth.
For this purpose as well, it will be necessary to understand how the Japaneselife insurance market is changing. The role to be played by life insurancecompanies will become increasingly important for Asian countries that are
rapidly growing. In this sense as well, it would be reasonable to assume that theJapanese experience would be helpful.
At the same time, Asian countries full of young people will not experienceongoing growth forever. It is possible that a time will come when they too will
undergo Japanese-style stagnation. This is because economically mature
countries tend to come face to face with the challenges of a shrinking population,
dwindling birthrate, and aging society. No doubt, Japan will also be a model forthese countries to study in this regard.
It would please me greatly to know that this book might help readers learn
more about not just life insurance companies but also the stages of economic
growth in general.

Yasuo KofujiProfessor, Faculty of Commerce, Senshu University

5Introduction
The economic environment in which the insurance industry operates ischanging at a dizzying pace. The biggest contributing factors behind this change
are the dwindling birthrate and an aging population. As the Japanese population
continues to shrink, the number of children is decreasing and society is steadily
aging. We also cannot ignore structural changes in society that are taking placein terms of increasing numbers of single-person and double-income households.
When we talk about life insurance, we invariably associate it with insurance
that is payable on death. In typical cases, life insurance is taken out for the sakeof the family to which the husband, who is the primary breadwinner for his
household, belongs. Normally, a significant amount of insurance money is to be
paid out to the wife, as the spouse, in the event that the husband dies. In theparlance of those who work in the insurance industry, the husband is the insured
person as well as the policyholder who pays the insurance premiums for his
policy. The beneficiary of the insurance money will be the wife as the spouse of
the husband.
However, the preconditions underpinning the selling of death insurance (lifeinsurance that is payable on death) have changed. This is due not just to the factthat there are fewer young people getting married, but also to an increase in thenumber of couples who continue to earn two incomes even after getting married.
Thus, the role played by death insurance is being attenuated.
Instead, demand is rising for life insurance that addresses personal concerns.
Roughly speaking, insurance can be divided into two categories. The first is
known as third-sector insurance, examples of which consist of health insurance,cancer insurance, and nursing-care insurance.
Under the Insurance Business Act, life insurance that covers people and thatpays beneficiaries a certain amount of insurance money is known as first-sector
insurance. In contrast, property or non-life insurance (insurance against loss) thatpays a non-fixed amount of insurance money while covering property (things)
is known as second-sector insurance.
You might think that health insurance and the like come under the scope offirst-sector insurance since they cover people. However, the insurance moneythat is paid is not known in advance, which means that it is a non-fixed amount.
In this way, these forms of insurance also satisfy some of the elements of secondsector insurance.
6

Therefore, they are separately categorized as third-sector insurance. Whether
you are single or married, there is always the chance that you might run into
health or nursing-care-related issues. Third-sector insurance plans are insurance
plans that will continue to grow in popularity.
At the same time, savings-type life insurance products are also enjoying agreater profile these days as insurance that addresses personal needs. Whilewhole-life insurance and endowment insurance are also typical examples of life
insurance that features a savings component, individual annuity insurance isbelieved to be the most easy-to-grasp example of a savings-type life insurance
product.
Since public pensions are, fundamentally speaking, current disbursement
schemes whereby currently working people pay insurance money to the elderly,
they depend on population demographics in terms of age. They are stable if there
are many people who belong to the younger generation and become unstable if,on the other hand, there are many elderly citizens. The combination of adwindling birthrate and an aging population is shaking the very foundation onwhich public pensions rest.
Thus, individual annuity insurance plans and other savings-type life
insurance products play an important role in supplementing public pension
schemes. This is unlikely to change so long as we can see no real signs ofimprovement with respect to the dwindling birthrate and aging population. This
clearly accounts for the fact that savings-type life insurance products are
outpacing protection-type life insurance products when it comes to growthamong life insurance options.
Whereas public pensions are current disbursement schemes that are
dependent on population demographics in terms of age, savings-type life
insurance products are funding methods, which means that they function in a
supplementary sense. Seen in this light, the raison d’être of savings-typeinsurance products can be understood. On the other hand, efforts must beceaselessly undertaken to ensure that life insurance products can yield highlevels of asset management results for these funding methods.
As it is widely known, assumed interest rates are set for life insurance
products. This is the minimal investment yield promised by each insurance plan.
Effective asset management must be carried out for a life insurance plan toensure that actual investment yields exceed the assumed interest rate
Of course, asset management constraints may be eased somewhat if theIntroduction 7

assumed interest rate is set low. However, the price of life insurance products
would rise in such a case and cause people to avoid purchasing them. Thus, theassumed interest rate must be set as high as possible. For this reason, life
insurance is constantly beset by asset management issues.
The asset management environment in Japan, however, remains quite severe.
Since the 1990s, which is when Japan’s bubble economy collapsed, interest ratelevels have been sinking and stock prices have continued to flounder. Moreover,
the yen has been on a rising path over the years. Under these circumstances, one
finds it difficult to achieve the desired management results. As the demand forsavings-type life insurance products increases, high levels of management yields
are sought. Unfortunately, the life insurance sector finds itself mired in thereality of a harsh asset management environment.
In this way, the life insurance industry is facing significant changes. There isa shift underway from a structure based primarily on protection-type life
insurance products to one that is based on savings-type life insurance products,
and from an era in which the asset management environment is characterized byhigh interest rates to one of low interest rates. Furthermore, the Japanese
economy cannot be expected to grow at a dramatic clip given that the populationis shrinking. It would be difficult to see just the life-insurance market expanding
as economic activities in Japan stay stagnant.
Various management issues affecting life insurance companies against the
backdrop of a severe economic environment will be explained in an easy-tounderstand manner in this book, with reference made to financial reports issued
yearly. The period we will be focusing on extends from the fiscal year that ended
in March 2010 to the fiscal year that ended in March 2017. While this period isshort, we believe that the transformation that life insurance companies have been
undergoing can be clearly discerned through this process.
For example, these life insurance companies have, in terms of their form,
become stock companies. While key life insurance companies used to primarily
consist of mutual companies, a few have begun to change into stock companies.
The approach to asset management is also changing. Interest is shifting to agreater degree to government-issued bonds due to a strategic focus on revising
the solvency margin ratio and prolonging duration.
In looking at sales channels for life insurance products, we see that there is
no longer a reliance on just conventional selling by exclusive career agents.
Products are also being sold more by bank tellers, but it is the emergence of8

independent agencies that is garnering attention. On a related note, the issue ofsales commissions has come to be identified as a matter to be addressed and may
be of the greatest interest to clients.
The economic environment in which life insurance companies operate
appears to be undergoing even more major changes. The shift by the Bank ofJapan to unprecedented easing measures marked by negative interest rates isputting pressure on asset management by life insurance companies. Since theJapanese economy remains unable to extricate itself from a state of deflation,
life insurance companies are focusing on not just the domestic market but also
overseas markets. By proactively acquiring overseas insurance companies, they
are pursuing globalization.
These themes are examined for each fiscal year. The draft copy of this bookwas written to report, in an easy-to-understand manner, situations that had
become problematic in the life insurance sector each time financial results wereannounced by life insurance companies. A summarization of contents has
accordingly been made on a chapter-by-chapter basis. Thus, you are invited toread this book by imagining that you are being taken on a journey back in time.
The life insurance market prior to the time period explored in this book is
examined in my book The Changing Life-Insurance Industry In Connection
With Financial Results (Zeimukeiri Kyokai, 2009). In the book, the life
insurance market as it existed between the fiscal year that ended in March 2002
and the fiscal year that ended in March 2009 is described. I recount how theindustry escaped the clutches of a crisis in life insurance and was able to embracesound management practices.
By reading that book in conjunction with this one, I believe that you will beable to correctly ascertain what has been happening in the life insurance market
over an even longer period of time. I hereby advise you of the existence of thisother book for reference purposes.

September 2017
Yasuo Kofuji

Introduction 9

10Table of Contents
Introduction .................................................................................................. 6

Chapter 1: <2010> Expectations and insecurities surrounding thetransformation of life insurance companies into stockcompanies
Part 1:(1)(2)

Part 2:

18

Announcing financial results for the fiscal year that ended in
March 2010 ................................................................................ 18
Financial results as affected by stock market conditions............... 18
Measures for producing a breakthrough in the floundering
insurance industry ........................................................................... 20(2)

The transformation of life insurance companies into stockcompanies has begun.................................................................. 22
The severe management environment in which life insurancecompanies operate .......................................................................... 22
Advantages of becoming a stock company.................................... 23

Part 3:(1)(2)

Differences between stock companies and mutual companies ... 24
Situation concerning American life insurance companies ............ 24
Demonstrating through statistical analysis..................................... 24

Part 4.

Examples of failures on the part of life insurance companies
constituting stock companies ..................................................... 26
Collapse of Yamato Life Insurance................................................ 26
Burden assumption according to organizational structure............. 28
Ideas to avoid becoming trapped .................................................... 28

(1)

(1)
(2)
(3)

Chapter 2: <2011> Seeking measures to revitalize the life insurance
industry
Part 1:
(1)
(2)

30

Announcing financial results for the fiscal year that ended in
March 2011 ................................................................................ 30
Impact of the earthquake disaster ................................................... 30
Recognized role of insurance ......................................................... 31
Table of Contents 11

Part 2:
(1)
(2)
Part 3:

Life insurance companies constituting stock companies fighting
against heavy odds ..................................................................... 32
Slumping prices of stocks of life insurance companies ................. 32
Managing the assumption of risks in a way that backfired ........... 35

(1)
(2)

The advantages and disadvantages of solvency margin ratio
measures ..................................................................................... 37
Impact of reinforcing capital controls ............................................ 37
Potential risks of capital controls ................................................... 38

Part 4:(1)(2)

The expected revitalization of life insurance companies............ 39
Selling pure endowment insurance ................................................ 39
Establishing a secondary market .................................................... 40

Chapter 3: <2012> Revising the solvency margin ratio and stock
investment actions taken by life insurance companies
Part 1:(1)(2)
Part 2:

42

Announcing financial results for the fiscal year that ended in
March 2012 ................................................................................ 42
Insurance premiums and other earnings and basic profits ............. 42
Adopting the new SM ratio ............................................................ 44(2)

The solvency margin ratio, an indicator in which people aretaking a growing interest ............................................................ 45
Background behind the revision of the solvency margin ratio by
the Financial Services Agency ....................................................... 45
Handling price fluctuation risks ..................................................... 47

Part 3:(1)(2)

Purpose of investments in stocks by life insurance companies .. 48
The selling of stocks as an ambiguous SM measure ..................... 48
Augmenting funds .......................................................................... 51

Part 4:

Holding stocks for pure investment purposes ............................ 52(1)

Chapter 4: <2013 (i)> Life insurance companies’ strategy of extending
asset-side durations
54
Part 1:

12

Announcing financial results for the fiscal year that ended in
March 2013 ................................................................................ 54

(1)
(2)

Major life insurance companies enjoy rising profits ..................... 54
Large volumes of government bonds held by life insurancecompanies ....................................................................................... 55

Part 2:(1)(2)

Shifting from cost to current market value ................................. 56
A past moment of truth for life insurance companies and themeasure taken in response .............................................................. 56
Economic value-based valuations .................................................. 57

Part 3:
(1)
(2)
(3)

Relationship between net assets and interest rates ..................... 58
Interest-rate-based fluctuations in assets and liabilities ................. 58
Current market value of liabilities .................................................. 59
Impact of the duration gap .............................................................. 60

Part 4:
(1)
(2)
(3)

Trends in asset-side durations .................................................... 61
Changes in composition by type of asset ....................................... 61
How to measure duration................................................................ 62
Prolongation strategy being pursued .............................................. 63

Part 5:

Other ALM strategies ................................................................. 64

Chapter 5: <2013 (ii)> Changing breakdown of the life insurance industry
by type of operation
66
Part 1:
(1)
(2)
(3)

The life insurance industry in transition ..................................... 66
The age of kanji-named life insurance companies......................... 66
Developments subsequent to the collapse of the bubble economy 67
Breakthroughs made by foreign-affiliated life insurance companies
and the life insurance affiliates of nonlife insurers ........................ 67

Part 2:
(1)
(2)
(3)

Attributes of the life insurance affiliates of nonlife insurers ...... 70
Three mega-nonlife insurers and their life insurance subsidiaries 70
Sales channels through agencies .................................................... 71
Attributes of products offered by nonlife insurers ......................... 72

Part 3:

From price competition to the reorganization of life insurancecompanies................................................................................... 72

Table of Contents 13

Chapter 6: <2014> Unprecedented easing measures of the Bank of Japanand asset-management actions undertaken by life insurancecompanies
75
Part 1:(1)(2)

Announcing financial results for the fiscal year that ended in
March 2014 ................................................................................ 75
Financial results corresponding to lower revenues and higher
profits .............................................................................................. 75
Investment stance of life insurance companies .............................. 76

Part 2:(1)(2)

Unprecedented easing measures enacted by the Bank of Japan . 77
Portfolio-rebalancing effect ............................................................ 77
Characteristics of money in the possession of life insurancecompanies ....................................................................................... 78

Part 3:(1)(2)

Current state of life insurance companies in the United States .. 81
Key data by organization type ........................................................ 81
Holding bonds as a means of managing risks ................................ 82

Part 4:(1)(2)

The form of life insurance companies in the future ................... 84
Asset management oriented towards the avoidance of risks ......... 84
Default risks associated with government bonds ........................... 85

Chapter 7: <2015> Interpreting insurance solicitation rules as learned fromreading textbooks on the economy
87
Part 1:

14

(1)
(2)

Announcing financial results for the fiscal year that ended in
March 2015 ................................................................................ 87
Favorable financial results and investment earnings ..................... 87
Effect of being number one ............................................................ 88

Part 2.
(1)
(2)
(3)

Economic background behind insurance-solicitation rules ........ 89
Establishing basic rules .................................................................. 89
Obligations and regulations ............................................................ 90
Promoting financial education........................................................ 91

Part 3:(1)

Insurance solicitation rules as decoded in economic textbooks . 92
Providing protection-type insurance products ............................... 92

(2)Providing savings-type insurance products.................................... 95

Part 4:

Discussions concerning commissions ........................................ 96

Chapter 8: <2016 (i)> The Bank of Japan’s negative interest rate policy andthe management of life insurance companies
98
Part 1:

Announcing financial results for the fiscal year that ended in
March 2016 ................................................................................ 98

Part 2:(1)

Introducing a negative interest rate policy ............................... 100
Background behind the Bank of Japan’s unprecedented easing
measures ........................................................................................ 100
Side effects affecting financial institutions .................................. 101(2)Part 3:(1)(2)
Part 4:
(1)
(2)
(3)

The management of life insurance companies in terms of basic
profit ......................................................................................... 102
Income calculation mechanism used by life insurance companies....................................................................................................... 102
Immediate impact and specific countermeasures ........................ 103
New developments for life insurance companies ..................... 106
Shockwaves emanating from the negative interest rate policy ... 106
Cost-consciousness of policyholders ........................................... 107
Pursuing greater scales of operation through mergers andacquisitions ................................................................................... 108

Chapter 9: <2016 (ii)> Domestic and overseas acquisition strategy as
carried out by major life insurance companies
110
Part 1:(1)(2)
Part 2.
(1)(2)

The transforming domestic life insurance market .................... 110
Active acquisition strategy undertaken by major life insurancecompanies ..................................................................................... 110
Circumstances surrounding life insurance companies ................. 111
Learning about insurance management from nonlife insurancecompanies................................................................................. 113
Leading nonlife insurance companies .......................................... 113
ERM framework ........................................................................... 114
Table of Contents 15

(3)Environmental changes underpinning ERM ................................ 116

Part 3:(1)(2)

Outcomes of large-scale acquisitions ....................................... 117
Diversification .............................................................................. 117
Competition over rankings ........................................................... 117

Chapter 10: <2017> Impact of a lowering of assumed interest rates on life
insurance companies
119
Part 1:(1)(2)

Announcing financial results for the fiscal year that ended in
March 2017 .............................................................................. 119
Spreading impact of the negative interest rate policy .................. 119
Countermeasures for life insurance companies ........................... 120

Part 2:(1)(2)

The Bank of Japan and the market for life insurance ............... 121
The Bank of Japan’s ultra-low interest rate policy ...................... 121
Lowering assumed interest rates .................................................. 123

Part 3:

Negating the portfolio-rebalancing effect ................................ 127

Conclusion

129<References>132

Introducing the author

133

16

Table of Contents 17

Chapter 1: <2010>
Expectations and insecurities surrounding the transformationof life insurance companies into stock companies
Part 1: Announcing financial results for the fiscal year that ended in March
2010(1) Financial results as affected by stock market conditions
The financial results for life insurance companies for the fiscal year that
ended in March 2010 were announced. Perhaps due in part to the lessening of
the impact that the worldwide financial crisis was having on the industry, manylife insurance companies enjoyed better management results over the previous
year. Nevertheless, this did not mean that all life insurance companies reported
similarly favorable financial results. For some life insurance companies, a delay
in recovery could be seen.
Figure 1-1 sets forth important data for assessing the management contentsof thirteen major life insurance companies. If we look at the growth indicatorconsisting of “insurance premiums and other earnings”, we see that many life
insurance companies reported higher revenues, but there were still five life
insurance companies that reported lower revenues.
A closer examination of these polarized movements reveals that sales ofannuity insurance by bank tellers was a determining factor. This is because life
insurance companies that actively sold products through tellers reported an
overall growth in revenue, but those that faltered in selling products throughtellers reported lower overall revenue.
If we focus next on profitability indicators, we see that three life insurancecompanies managed to go from negative to positive figures in terms of basic
profit. Basic profit comprises the basis of profit corresponding to the corebusiness of the company and equals the aggregate of the three surplus factors.
All life insurance companies reported significant improvements in unrealized
gains on securities. Whereas five companies were in the red when it came toafter-tax profit a year before, all thirteen companies reported that they wereoperating in the black by this measure. Insofar as we can assess from these
profitability indicators, these life insurance companies were able to escape froma critical situation.

18

Next, in looking at soundness indicators, we see that all life insurancecompanies reported higher real net assets and improved solvency margin ratios,
an indicator that is unique to insurance companies. The 200% standard as
required by the Financial Services Agency was satisfied by wide margins.
Figure 1-1. Financial results for major life insurance companies for the fiscal
year that ended in March 2010

NipponDai-ichi
Meiji Yasuda

Domestic

Sumitomo
T&D

FukokuSony
Mitsui

Asahi

Foreign-affiliated

Alico

Note:

Aflac
Prudential
Axa (return toprofitability)(1) Growth indicator(2) Profitability indicators(3) Soundness indicators
Insurance premiums
Unrealized
Solvency
and other earnings
gains orAfter-tax
Real net
Basic profit
marginlosses on
profitassetsBank teller
ratio
securities
sales
48,1743,815
5,050
24,0152,520
68,062
1,006.0(▲4.4)(▲12.9)(▲6.5)(10,486)(38.8)(28.1)(101.6)37,005
7,977
3,779
8,514
556
33,216953.5(12.5)(102.8)(18.8)(1,565) (2.5 times)(22.9)(185.4)32,824
8,007
2,914
12,0491,427
35,006
1,187.5(22.2)(260.5)(▲11.5)(5,400)(14.7)(20.6)(88.8)
30,637
9,429
3,868
1,906
1,086
18,777955.1(20.9)(176.6)(160.4) (▲1,068)(2.1)(22.5)(117.9)18,983
2,914
1,310
2,289
242
11,347
1,120.6(return to(14.7)(37.1) profitability)(▲254)--(31.4)(299.9)9,201(2,824)
719
958
261
6,157
1,127.6(17.7)(133.4)(▲4.7)(▲360)(▲54.0)(19.3)(119.2)
7,001
7
639
199
461
5,634
2,637.3(5.8)(813.4)(68.4)(509)(36.6)(5.8)(576.8)
6,404
3
478
756
46
3,892
702.1
(return to(▲13.9)(▲99.5) profitability)(▲327)--(29.5)(100.1)
5,099
85
249
341
334
3,235
608.0
(▲3.3)--(▲23.8)(▲796)--(43.9)(24.9)
13,174
903
1,204
1,877
484
7,581
1,248.4(▲6.9)(▲65.0)(24.9)(▲2,821)--(305.2)(448.3)
12,31579
1,580▲1,259
410
5,008
939.3
(5.9)
(117.4)(7.0) (▲4,019)(▲30.3)(172.9)(165.7)
9,875
774
867
1,099
209
6,296
1,262.7(6.6)(151)(▲3.6)(▲629) (19.5 times)(63)(359.8)
7,009
1,030
542
1,570
523
5,248
1,081.4(return to(▲5.7)(10.1) profitability)(645)--(36.8)(262.8)

Unit: hundred million yen; ▲ denotes a negative value; [-] indicates that a comparison cannot
be drawn. The lower figure in each square is the percentage change over the preceding fiscal
year.
Provided, however, that the lower figure in squares coming under the unrealized gains orlosses on securities column is the figure for the fiscal year that ended in March 2009 and thelower figure in squares coming under the solvency margin ratio column is the amount bywhich the figure increased or decreased over the previous fiscal year.

In attempting to paint a picture of life insurance companies based on thesethree types of management benchmarks, we realize that profit from valuation
Chapter 1 19

gains on held stocks helped to improve the management picture for thesecompanies. The prices of held stocks, which had plummeted in the financial
crisis that hit in the fall of 2008, managed to recover, which in turn caused
unrealized gains on securities to suddenly rise and led to improvements in
profitability indicators and soundness indicators.
Since the financial results of these companies were excessively bad in thefiscal year before the impact of the financial crisis was directly felt, the figures
presented on this page might appear to show improved financial results.
However, these figures simply show that a management structure that relies on
profit from valuation gains on held stocks will give rise to such results.
If we, in this connection, examine the core components of the actual
management conditions at these companies, we see that life insurance companies
that are making less basic profit through their primary operations are notable.
There is growing polarization between life insurance companies that are
enjoying growth in terms of insurance premiums and other earnings, and life
insurance companies that continue to flounder in this sense. The pattern bywhich this trend is being supported by the selling of annuity insurance plans bytellers has been completed.
The selling of annuity insurance strongly tends to be determined as a functionof asset-management results. Stock price trends are an important factor. If we
get right down to the financial results for this fiscal year, we can determine thata rise in stock prices on the rebound after the financial crisis helped to promote
the selling of annuity insurance, which was then reflected in insurance premiums
received and other earnings.
(2) Measures for producing a breakthrough in the floundering insurance
industry
Ultimately, the financial results for this fiscal year represented nothing morethan the result of stock market conditions having a direct impact on thesecompanies. Leaving this aside, management at life insurance companies
remained unstable. As expected, life insurance companies are fundamentally tied
to protection-based operations. At the core of these operations are deathprotection-type products. If more of these products are sold, certain progress will
be indicated for insurance premiums and other earnings. Increases in themortality gain and expense profits, which are elements comprising the threesurplus factors for an insurance company, will lead to an increase in the basic
20

profit and, by extension, an increase in the net profit.
A company that relies only on annuity insurance suffers not only from a lackof stability but also an inability to increase profits. Thus, a life insurancecompany’s pattern of handling death-protection-type products is an importantfactor in predicting its management results.
However, flagship death-protection-type products offered by modern life
insurance companies continue to flounder. Emblematic of this is the total amountof individual insurance policies in force. Ever since this amount for the industry
as a whole hit a peak of 1,500 trillion yen in fiscal year 1996, there has been no
respite in its continuing decline.
The declining birthrate that is overwhelming the Japanese economy is putting
downward pressure on death-protection-type products and fortifying the serious
tapering of profits for life insurance companies. If this situation were to persist,it would place the very future of life insurance companies at risk. Of course, areversal of the declining birthrate would represent an ultimate tailwind for life
insurance companies, but the chances of this happening are virtually nil. The
declining birthrate will almost certainly continue.
As a way to overcome their stymied operations, life insurance companies
have been trying to cultivate overseas markets with a primary focus on Asia.
Major Japanese life insurance companies have already made a foray into
emerging countries in Asia that are growing at phenomenal rates: China, India,
and Vietnam.
To succeed in such overseas markets, mergers and acquisitions (M&As) areessential. A fair amount of capital is required for this purpose. To attain this goal,companies must break down conventional frameworks to their very core.
The transformation of life insurance companies into stock companies has
been drawing attention as an effective means of breaking down conventionalframeworks. The shift from mutual companies to stock corporations is expected
to trigger the demolition of an obstructed life insurance industry. At the sametime, profits are being pursued to such an extent that these companies are afraidthat they are engaging in risky conduct.
In this connection, let us explore below the transformation of life insurancecompanies into stock companies, a topic in which many people in the industry
are obviously interested.

Chapter 1 21

Part 2: The transformation of life insurance companies into stockcompanies has begun(1) The severe management environment in which life insurance companies
operateWe have discerned a number of features by looking at the financial results
reported by major life insurance companies. A theme of the greatest interest
these days for the life insurance industry is the transformation of the Dai-ichi
Life Insurance Company into a stock company. The transformation of thiscompany, the second largest in the industry, into a stock company and the listingof its stocks on the Tokyo Stock Exchange are believed to have acted as quite ashot in the arm for other life insurance companies.
Among major life insurance companies, we see that the Daido Life Insurance
Company and Taiyo Life Insurance Company became stock companies in 2002
and 2003, respectively. The Taiyo Life Insurance Company and Daido Life
Insurance Company established the T&D holding company and managed to list
its stocks on the market in 2004. The Mitsui Mutual Life Insurance Company
also became a stock company in 2004. Compared with these examples, however,the case of the Dai-ichi Life Insurance Company was clearly larger by an orderof magnitude.
As reflected in its name, the Dai-ichi Life Insurance Company is the first life
insurance company in Japan to be constituted as a mutual company. However, aresolution to transform the company into a stock company was adopted at a
general meeting of policyholders held in June of the previous year. It was thendecided that business would be developed under a new organizational structure
beginning in April 2010. With total shareholders numbering 1,371,000, a newcorporation whose shareholder count easily exceeded even that of NTT’s
1,030,000 shareholders was born.
The drastic changes affecting the economic environment in which Japaneselife insurance companies operate were what prompted this change to a stockcompany. While you can point to such changes in the social environment as theincrease in the number of single-person households and increase in the numberof dual-income families, there is no doubt that the shrinking population, asituation caused in large part by a falling birthrate, is the biggest factor.
More precisely speaking, the biggest factor is the shrinking of the workingage population, which consists of people between the ages of 15 and 64 years.
22Overcoming this situation represents an extremely difficult challenge, such thatno reversal in the shrinking of the population is likely to occur in the future.
These changes represent a headwind for life insurance companies that are inbusiness to provide people with economic security. There is a need to steer
management resources towards growth areas while changing conventional
business operations. There is a limit to a company’s ability to do this whileremaining a mutual company. In order to expeditiously develop a new businessmodel, an entity needs to become a stock company.
(2) Advantages of becoming a stock company
What are the advantages of becoming a stock company in order to satisfy
these requirements? This form of organization is superior in terms of financing.
A mutual company has no choice but to gradually amass a portion of its surplus
funds. Alternatively, it can engage in financing by establishing a fund. However,such a fund can be characterized as a liability. Yet, if stocks are issued, acompany can obtain a large amount of financing at once. Since this would notneed to be repaid, a company that issues stocks would enjoy a considerable
amount of economic freedom.
This allows an approach to management that is proactively focused on new
business opportunities to be undertaken. Life insurance companies need topromote business in the newly emerging countries of Asia where population
growth is significant rather than limit their operations to the domestic market. If
stocks can be issued, these companies can accelerate their activities in this regard.
By establishing a holding company, the organization as a whole can be
flexibly steered while placing subsidiaries within its purview. This framework
is important since an M&A strategy can be deployed without having to establish
a new company in a growth area.
If a company decided that it would establish a required company on its own,a significant amount of time would be incurred to put together a satisfying
package of all the necessary elements. In contrast, harnessing an M&A approach
will let you immediately obtain what you need, thereby enabling you to achievea result that would be equivalent to the act of buying time.
In this way, companies are looking to become stock companies as a quick
way to deal with the severe economic environment in which Japan is finding
itself. Life insurance companies that are embarking on this path are tossing theirhats into the ring one after another these days.
Chapter 1 23

Part 3: Differences between stock companies and mutual companies(1) Situation concerning American life insurance companies
In fact, the transformation of life insurance companies into stock companies
can be proactively seen not just in Japan but also overseas. If you take a look at
the United States, you will see that major life insurance companies Prudential
and Met Life have already transformed themselves into stock companies andhave had their stocks listed. While leveraging these changes, these companies
have quickly expanded their operations through mergers and acquisitions.
There is no doubt that the transformation of these companies into stockcompanies can be seen as an effective means of prevailing over the competition
for life insurance companies. On the other hand, however, there are also negative
aspects to this approach that can give rise to catastrophic results if it is taken too
far.
A global financial crisis was triggered by the Lehman Shock that occurred in
September 2008. In the midst of this event, the way in which the transformationof life insurance companies into stock companies was seen also underwent
significant changes. People began to look at not just the positive aspects but also
the negative aspects of this transformation. This is because AIG, a major
incorporated insurance company in the United States, incurred huge losses on its
investments in financial instruments tied to subprime loans. The excessive
pursuit of profit, the fundamental goal of stock companies, gave rise tocatastrophic results.
Perhaps as a backlash to what happened, the momentum for reconsidering
life insurance companies organized as mutual companies, some of which werelargely unaffected by the financial crisis, gained steam. The philosophy ofmutual companies lies in the spirit of providing mutual aid. The pursuit of profit
is not seen as a foremost priority for such entities.
(2) Demonstrating through statistical analysis
In this way, the transformation of life insurance companies into stockcompanies is understood to have not just positive aspects but also negative ones.
This is because the transformation of a company into a stock company
encourages it to pursue the acquisition of returns (profits) to such an extent thatrisks are run as a repercussion of this pursuit.
Figure 1-2 sets forth these points by comparing stock companies with mutual24

companies. With a mutual company, policyholders are clients and also exist tocontribute to management through general meetings of policyholders.
Figure 1-2. Organizational forms of life insurance companies

For this reason, mutual companies possess qualities that generally prevent
reckless acts of management of the sort that would force policyholders to run
risks from being carried out. They are highly inclined to prioritize safety overprofits.
In contrast, the desires of shareholders who seek to maximize profits are
directly reflected in the approach to management at stock companies, such that
there is a risk that risky conduct will be undertaken despite the possibility of
failure.
Accordingly, it can be presumed that a life insurance company constituting a
stock company would be more likely to engage in high-risk, high-return
management activities than a mutual life insurance company.
A paper demonstrating links between the organizational structure of life
insurance companies and the assumption of risks from an academic standpoint
was presented by Yanase, Asai, and Lai (2008).
For this paper, the authors sought to determine the expected ROE values(return) and standard deviation values (risk) for each type of organizational
structure by looking at 20 major life insurance companies in Japan between 1976
and 1995. These 20 life insurance companies consisted of 16 mutual companies
and 4 stock companies.
Figure 1-3 outlines the results of measurements taken in this study byorganizational structure with the x-axis corresponding to return and the y-axis
corresponding to risk. In looking at this figure, we see that incorporated life
insurance companies constituting stock companies are clustered in the upperright corner of the graph, while mutual life insurance companies are situated in
Chapter 1 25

the opposite bottom-left corner of the graph.
Figure 1-3. Link between the organizational structure of life insurancecompanies and the assumption of risk

In other words, we see that life insurance companies constituting stockcompanies are more committed to a high-risk, high-return management
approach than are mutual life insurance companies. The notion that there is alink between the organizational structure of life insurance companies and theassumption of risk was clearly demonstrated through simple descriptive statistics.
Of course, there are also some concerns over how these measurements weretaken. Some people believed that the results had been determined by nothing
more than the size of the entities in question. This is because life insurancecompanies constituting stock companies were overwhelmingly smaller thantheir mutual counterparts at the time, which meant that fluctuations in ROE
values as an indicator of profitability tended to increase as a matter of course.
While this interpretation is certainly possible, we are going to assume thatthese measurement results demonstrate a link between the organizational
structure of a company and the assumption of risk.
Part 4. Examples of failures on the part of life insurance companies
constituting stock companies(1) Collapse of Yamato Life Insurance
While we have to this point examined matters using a statistical approach, it26might be more persuasive to simply take up specific cases in which life insurancecompanies constituting stock companies engaged in risky conduct.
One specific example is the case of Yamato Life Insurance, which wentbankrupt in October 2008. It was the eighth life insurance company to go underin the post-war era, with the first having been Nissan Life Insurance, which wentbankrupt in April 1997.
Yamato Life Insurance was originally a mutual life insurance company.
However, it merged with Azami Life Insurance, a stock company established toacquire Taisho Life Insurance, which went bankrupt in August 2000. In April
2002, the Yamato Life Insurance Company was established. At the time, it wasa merged company that drew much attention as a life insurance company that
had been transformed into a stock company.
Yamato Life Insurance was known for its willingness to make riskier
investments than other life insurance companies. Securities accounted for a highpercentage of its managed asset pool. The company held not just stocks but also
stock investment trusts, real estate investment trusts, and other such instruments.
More than 30% of its pool of managed assets consisted of investments inderivatives, structured bonds, and other complex financial products. Yamato
Life Insurance was indeed maintaining a high-risk, high-return investment
stance.
The average assumed interest rate for insurance products was high at 3.35%.
The company proactively engaged in management to reach this level. Of course,
this was because the company’s asset management stance was bolstered when
the running of the company was steered in such a way that fear over risks was
lost.
The existence of certain managers supports this argument. The president of
the company, who reigned supreme among top executives, was not someone
with a background forged in the life insurance sector but rather someone who
had formerly belonged to a major securities firm, unconventionally.
The corporate climate and the attitude towards the running of operations
differ completely between the insurance industry and the securities industry.
Since someone with a background in the securities industry nevertheless took up
the top post in the company in June 2005, a policy of engaging in risky
operations came to be adopted at the time.
The result of these moves became clearly manifested in the global financial
crisis that was triggered by the Lehman Shock. Yamato Life Insurance was
Chapter 1 27

directly affected by this crisis and collapsed due to rapidly spreading losses on
securities held by the company.
(2) Burden assumption according to organizational structureWith the bankruptcy of Yamato Life Insurance, the biggest losers were, as
expected, policyholders. This is because the policy reserve was cut back to the
maximum allowable 10%, the new assumed interest rate was lowered to 1
percentage point, and insurance payouts and benefits were substantially reduced.
Since this was the second bankruptcy for policyholders with the former TaishoLife Insurance Company, this meant that they were forced to undergo a writedown twice.
At the same time, shareholders only had to suffer from a write-off of theirshares since they had only assumed a limited liability. Thus, the inducement toseek extensive profits in an all-or-nothing gamble remains with shareholders.
Likewise, executives who carry out actions in line with the wishes of suchshareholders need only resign upon failure.
For a life insurance company constituting a stock company structured in a
way that such risky conduct is induced, only policyholders are ultimately forced
to take big hits. In contrast, each policyholder of a mutual life insurancecompany can directly and indirectly influence to some degree the way thecompany is run. This means that there is some room for putting the brakes onrisky conduct.
Accordingly, the differences in terms of organizational structure as between
being a stock company and being a mutual company are an important issue forlife insurance companies in that these differences are tied to the extent to whichrisks are assumed.
(3) Ideas to avoid becoming trapped
While there are positive aspects behind the transformation of life insurancecompanies into stock companies in that such a transformation promotes theproactive running of these companies, there is also the negative aspect of forcing
policyholders to suffer substantially in a worst-case scenario brought about by
the excessive pursuit of profits.
Nevertheless, it would be wrong to assume that mutual companies are anorganizational structure that provides a greater degree of assured safety. Not
only have mutual life insurance companies become bankrupt as well, but it28

would be difficult for these companies to retain their current position so long as
they fail to transition to new ways of doing business in this era of a shrinking
population.
As expected, stock companies may potentially be dealing with onerous
problems, but they are nevertheless appealing in ways that mutual companies
are not. To ensure that the transformation of a life insurance company into a
stock company does not fall into a trap, a framework to ensure that governancefunctions work just as properly as they do with general companies and to keep a
constant check on the running of the company is absolutely imperative. I believethat the presence of such a framework will prevent a company from rushingheadlong into efforts to run it in an unreasonable manner.

Chapter 1 29

Chapter 2: <2011>
Seeking measures to revitalize the life insurance industry
Part 1: Announcing financial results for the fiscal year that ended in March
2011(1) Impact of the earthquake disaster
The financial results for major life insurance companies for the fiscal yearthat ended in March 2011 were announced. The Great East Japan Earthquake,
which struck on March 11 of the same year, caused unexpected damage to the
management of life insurance companies.
This is because the costs of settling insurance claims resulting from theearthquake reached approximately 190 billion yen, and because life insurancecompanies with large holdings of shares in TEPCO (Tokyo Electric Power Co.,
Inc.) ended up incurring huge losses.
While negative spreads, which had been a source of concern for a long time,
appeared to have finally been halved, this state of improvement was negatedwhen the earthquake struck.
Figure 2-1 summarizes such typical management benchmarks for major life
insurance companies. In looking first at insurance premiums and other earnings,
we see that this benchmark grew for some life insurance companies andremained stagnant for others.
It appears that the cause of this polarization can be found in differencesamong sales channels. Life insurance companies whose sales are rising not only
engage in traditional sales through their sales agents but also proactively utilizea different sales channel in bank tellers.
On the other hand, many life insurance companies reported lower basic
profits on a year-on-year basis. This is because they were directly affected by
unexpected losses, as you might have imagined from examining the various
earthquake-related charges that were assumed.
A special factor in terms of the sudden drop in stock prices caused by theearthquake disaster also had quite an impact. Due to this impact, there weremany life insurance companies whose bottom line – as seen in their after-tax
profit – decreased.
Attention concerning the financial results this year was directed at mattersrelating to the earthquake damage as well as at announcements of a solvency
30

margin (SM; a measure of a company’s reserve capacity to pay insurancemoney) ratio that was based on a new standard. Of course, the SM ratio as basedon the existing standard was also announced at the same time.
Calculated based on a strict standard, the SM ratio as based on a new standard
did not represent anything more than a reference value. As it was slated to becompletely adopted beginning in the fiscal year ending in March 2012, however,attention was drawn to the extent of any discrepancy between it and the value
obtained based on the existing standard.

ForeignaffiliatedDomestic

Figure 2-1. Financial results for major life insurance companies for the fiscal
year that ended in March 2011

Nippon
Meiji
YasudaDai-ichi
Sumitomo
T&D
Daido
Taiyo
FukokuSony
Mitsui
Asahi
Prudential
Aflac
Alico
Axa

Insurance premiums
and other earnings
Rate ofincreaseordecrease
48,964
1.6

Basic profit

Earthqua
keRate ofdisasterincrease
relatedorburdendecrease
5,163
2.2
426

After-tax profit

Solvency margin
ratio

Rate ofincrease
New
Existingorstandard standard
decrease
2,317
▲8.0
529.1
966.2

39,446

20.2

3,105

6.5

295

1,397

▲2.6

663.6

1,156.8

33,08230,03014,742
7,171
7,179
12,108
7,780
6,572
5,318
15,99013,707
12,941
6,338

▲10.6
▲2.0
▲22.3
▲16.7
0.6
31.6
9.9
2.6
4.3
10.6
11.3
▲1.8
▲9.6

2,735
2,652
1,077
621
504
690
547
129
207
1,355
1,658
1,135
434

▲27.6
▲31.4
▲17.8
6.0
▲1.0
▲4.0
▲14.4
▲72.9
▲17.0
▲7.5
5.0
▲5.8
▲19.9

305
273
170
118
49
57
59
34
50
67
16
37-54
106

191
1,103
238
160
125
415
402
137
440
646
137
691
914

▲65.6
1.6
▲1.7
▲20.8
▲13.4
58.9
▲12.8
199.0
31.5
▲28.8
▲66.5
42.6
74.8

547.7
636.5
－
720.6
670.8
668.4
1,720.0
423.0
361.2
656.8
512.2
868.0
608.4

983.9
1,002.2－
1,237.2
1,229.7
1,088.3
2,900.1
704.8
602.6
1,120.0
919.3
1,462.5
1,042.1

Note: Units: hundred million yen, %; ▲ denotes a negative value.

Upon comparing the two values, a significant gap became apparent andhighlighted just how strict the method of calculation based on the new standard
was. Nevertheless, every single major life insurance company managed to
exceed the 200% threshold as dictated by the Financial Services Agency, as anindicator of improved management.
(2) Recognized role of insurance
At magnitude 9.0, the Great East Japan Earthquake was the largest
earthquake to strike Japan in recorded history. No doubt, there were some who
probably felt anxious about whether life insurance companies could continue toChapter 2 31

run given the unexpected and sudden increase in the amount of insurance money
being paid out as a result of this disaster.
Yet, compared with the more than 2,300 billion yen in insurance money paidout for earthquake-disaster-related reasons in the non-life insurance sector, theamount paid out by life insurance companies was rather small. Thus, it is clearthat the earthquake disaster did not substantially affect the operations of life
insurance companies.
Actually, if we look at the after-tax profit figures outlined earlier, we see that
not a single major life insurance company ultimately slipped into the red.
Although it is a fact that the earthquake disaster caused a certain amount ofdamage to life insurance companies, the damage done was to an extent that could
be easily absorbed.
Whether we speak of life insurance or non-life insurance, insurancecompanies set aside reserves to cover any and all conceivable risks. Thus, they
are able to pay out insurance money as promised.
If anything, this year’s earthquake disaster can be regarded as an event for
which a positive aspect in terms of the ability of insurance companies to fulfill
their role as providers of protection overshadowed a negative aspect in terms of
the sense that life insurance companies were treading in dangerous waters.
Nevertheless, a long-term assessment of the life insurance industry in Japan
does not give one enough reason to feel so secure about the future. This isbecause there is no sense at all that the momentum of the past will carry forward.
While each life insurance company is formulating its own strategy, theirefforts are not proving to be very effective. I would like to explore ways that
insurance companies can proceed to break through the obstructions that are in
their way.
Part 2: Life insurance companies constituting stock companies fighting
against heavy odds
(1) Slumping prices of stocks of life insurance companies
What should be apparent to anyone examining the financial statements of life
insurance companies is that the life insurance industry in Japan is long past its
growth phase and has entered its mature phase. Although insurance premiums
and other earnings have increased slightly over the previous year, you can senseutterly no momentum of the sort that might remind you of past periods of growth.
32

As long as the rate of childbirth declines and the population continues to age,
there are probably going to be people who are resigned to the fate that the life
insurance industry is apparently facing. However, this state of obstruction cannot
be so easily accepted if you are to consider the evolution of the Japanese life
insurance industry as well as the future of this country.
The transformation of life insurance companies into stock companies is apossible solution to which many people have been turning their attention. As
long as a life insurance company remains a mutual company, it will be difficultfor it to smoothly secure financing and pursue mergers and acquisitions (M&A).
These issues can be easily overcome for a stock company. In particular, theadvantages of transforming into a stock company can definitely be harnessed
when implementing an M&A strategy by which a company seeks to target anoverseas insurance market.
Since the domestic life insurance business has peaked, growth is difficult toachieve without focusing on overseas operations. Recognizing this state ofaffairs, it was the second-ranked Dai-ichi Life Insurance Company that managed
to both transform into a stock company and become a publicly-listed company
in April 2010.
If we look only at the first year since these changes were made, however, it
is clear that the M&A strategy did not go as well as the company had hoped andthat the results thus far fell short of investors’ expectations.
Actually, the financial results for this fiscal year also revealed some gloom
in terms of insurance premiums and other earnings, since the company’s secondplace standing in the industry, which had long been maintained, was yielded to
the Meiji Yasuda Life Insurance Company. Dai-ichi Life Insurance Company
fell to third place for the first time in six decades.
If a solid growth strategy had been properly formulated, then we would haveseen not just insurance premiums and other earnings but also stock prices
definitely rise. However, the vagueness of the strategy set forth by the company
caused the company to suffer from an inability to deploy its actions as it had
intended.
In tracing the changes in the company’s stock prices over a period of a year,
we see that the Dai-ichi Life Insurance Company listed its stocks on April 1,
2010, and that the price of a stock of the company hit its peak of 168,800 yen a
day later on April 2, after which it continued to sink. Between August andNovember, the stock price eventually went below 100,000 yen. It subsequently
Chapter 2 33

recovered somewhat but continued to flounder thereafter.
Figure 2-2 shows changes in the price of a stock of the Dai-ichi Life
Insurance Company and compares it with the Nikkei average as well as with theprice of a stock of T&D Holdings, which had already transformed into a stockcompany and listed its stocks.
Figure 2-2. The Nikkei average and changes in the prices of the stocks of 2 life
insurance companies with April 2010 set as the base point in time and thebase equaling 100

The stock price for each was set to an index value of 100 as of April 2010.
Subsequent percentage changes extending to March 2011 were depicted on amonthly basis. If the graph dips above 100, then it means that the stock priceexceeded the stock price as of April. If it dips below 100, then it means that thestock price was less than the stock price as of April.
As is clear from perusing this figure, the price of a stock of the Dai-ichi Life
Insurance Company changed more or less in tandem with the Nikkei average.
The same can be said of the price of a stock of T&D.
As the Nikkei average began to trend downwards in the first half of the fiscal
year, the prices of the stocks of the two life insurance companies in question
likewise decreased. These figures began to trend up in the second half of the34fiscal year on their way back to their original levels.
What is more, the prices of stocks of both life insurance companies declined
by a greater degree than the Nikkei average. This is also a point of some concern.
Those who wholeheartedly supported the transformation of these companies
into stock companies may have expected the prices of the stocks of life insurancecompanies to continue to rise independently of changes in the Nikkei average.
Unfortunately, such an expectation proved to be unwarranted in light of theresults that were obtained over the course of the past year.
(2) Managing the assumption of risks in a way that backfired
While life insurance companies whose basic profit has shrunk as a feature of
their financial results are notable, we can discern a polarization of the industry
in that some life insurance companies are seeing an increase in their profits whileothers are seeing their profits go down.
While basic profits on the whole declined due to the impact of the earthquake
disaster, polarization is even more starkly revealed if we eliminate this special
factor. This can also be seen in the financial results for the period from April to
December 2010, which predated the earthquake.
Polarization is the result of having differences in sales strategies reflected inearnings. Some life insurance companies whose profits increased focused theirefforts on traditional whole-life insurance products but most life insurancecompanies that sustained a loss were proactively engaged in the selling of
annuity insurance.
Annuity insurance is divided into two types: fixed annuities and variableannuities; this categorization depends on whether the insurance plan in question
guarantees a fixed rate of return or not. While a fixed annuity guarantees a rateof return, variable annuities do not. Therefore, an insurance company offering afixed annuity plan bears asset-management risks associated with that annuity
plan, while any such risk is borne by the policyholder for a variable annuity plan.
Even with variable annuities, however, life insurance companies themselves
sustained asset-management losses due to falling stock prices, since principalguaranteed variable annuity plans were proactively sold. This is because life
insurance companies, whose basic profits were declining even as their insurance
premiums and other earnings were increasing, managed to increase sales of thistype of annuity insurance through bank tellers.
While it is true that a life insurance company will sustain a loss if it suffers a
Chapter 2 35

failure in terms of managing a principal-guaranteed product, it will conversely
earn a profit if it succeeds. In this sense, this sort of insurance product is one forwhich returns are sought even as risks are assumed.
For a life insurance company whose basic profit as reported in its financial
statements has gone substantially down, the sale of principal-guaranteed variableannuity plans can be said to have placed a millstone around its neck in complete
opposition to initial expectations. As can be understood by the drop in the Nikkei
average, life insurance companies that relied on this type of insurance productunfortunately sustained losses on the stock investment.
Many life insurance companies whose basic profit declined substantially had
focused their attention on principal-guaranteed variable annuities.
Representative of this type of life insurance company were listed stockcompanies consisting of the Dai-ichi Life Insurance Company and T&D.
As an unlisted company that had transformed into a stock company before
the Dai-ichi Life Insurance Company did, Mitsui Life Insurance, too, sustained
losses on principal-guaranteed variable annuities, which caused its basic profit
to decline by quite a bit.
While it may be too hasty to judge based on an examination of just threecompanies, it appears that profit-oriented growth strategies implemented bystock companies yielded results that betrayed expectations.
This is because the biggest mission of a stock company is to generate
maximum profits for shareholders, which necessitates an approach to
management that entails the assumption of risks.
In contrast, the Nippon Life Insurance Company and Fukoku Mutual Life
Insurance Company, major entities that are committed to remaining mutualcompanies, are the mirror opposites of the aforementioned three life insurancecompanies constituting stock companies. They do not offer principal-guaranteed
variable annuity plans.
In looking at this situation, we may yet see a pessimistic way of looking at
the transformation of life insurance companies into stock companies make acomeback in sharp contrast to how this trend was regarded the previous year.
However, this is the result of observations after just a single year. We must notforget to engage in discussions on the structure of organizations from a longerterm perspective.

36

Part 3: The advantages and disadvantages of solvency margin ratio
measures(1) Impact of reinforcing capital controls
The reconsideration of asset management can also be seen as a feature of thefinancial results for life insurance companies this year. Since capital controls
were set to be tightened beginning in the fiscal year ending in March 2012, life
insurance companies were already carrying out related measures.
As touched on earlier, the solvency margin (SM) ratio is a unique indicatorused by insurance companies to indicate the soundness of their financial affairs.
For the financial results for this fiscal year, an SM ratio was presented on thebasis of current standards as well as on the basis of new standards one year aheadof their adoption.
This indicator consists of a denominator reflecting various types of risks anda numerator equal to substantive equity capital. A ratio of 200% or more denotes
sound operations.
If the ratio dips below this figure, the Financial Services Agency, as theregulatory authority, will ask the insurance company to submit a managementamelioration plan. However, the most recent solvency margin ratios for the
Chiyoda Life Insurance Company and Kyoei Life Insurance Company, which
went bankrupt one after another in October 2000, and the Tokyo Life Insurance
Company, which went under in March 2001, had exceeded 200%.
More recently, the solvency margin ratio for the Yamato Life Insurance
Company, which went bankrupt upon becoming directly affected by the Lehman
Shock in October 2008, likewise exceeded 200%.
Under these circumstances, it is rather difficult to gain the trust ofpolicyholders. For this reason, the method by which risks are calculated was
required to become stricter.
In this connection, life insurance companies have been expanding theircapital holdings by accumulating retained earnings and funds or issuing
perpetual subordinated bonds in order to strengthen their financial underpinnings
and satisfy the new standards.
Life insurance companies have also undertaken a broad review of theirinvestment portfolio. This is because the risk of holding domestic stocks is set
to a higher level than before under the new method by which the SM ratio is tobe calculated. For this reason, stocks will tend to account for a lower percentage
Chapter 2 37

of total assets.
While an investigative commission to draft strict standards had already been
set up by the regulatory authority five years earlier, major life insurancecompanies have approximately halved their shareholdings compared with thattime. It is clear that life insurance companies have been steadily making moves
and selling stocks in anticipation of the new standards.
Instead, life insurance companies are increasing their holdings of bonds
issued by the government as well as other entities as they sell off stocks. It isdifficult for banks and other financial institutions to find favorable borrowers. In
this connection, life insurance companies are purchasing large amounts ofgovernment-issued bonds through a process of elimination, even though thisoption may not be that appealing as an investment asset.
In addition to this reason, however, life insurance companies are acquiring
government bonds due in large part to the method by which the SM ratio is
calculated.
(2) Potential risks of capital controls
In this way, life insurance companies are selling off stocks to accommodate
the strengthening of capital controls. It is true that this may be regarded as aneffective means of preventing the SM ratio from dropping. If you think about it
rationally, however, this approach can be characterized as risky and problematicin terms of giving rise to pro-cyclicality.
Let us say that a life insurance company proactively sold off high-risk stocks
while keeping the SM ratio in mind. The stock price would drop, thereby
negatively affecting the prices of other stocks and worsening the economic
climate itself.
This will in turn cause stock prices to further drop and worsen the financial
soundness of the life insurance company, thereby launching another round inwhich held stocks are sold off. This negative spiral is unfavorable towards boththe life insurance company itself and the Japanese economy.
On the other hand, it may be possible to prevent the SM ratio from decliningby shifting funds freed up by selling off held stocks into bonds issued by thegovernment and other entities. However, this approach too is risky in certain
ways.
While government bonds are better than stocks in terms of how risks arecalculated, they are simply not an ideal target of investment from the standpoint38

of investment earnings. If you continue to hold low-yield bonds, there is the riskthat negative spreads will once again increase.
The amount outstanding of Japanese government bonds has increased
substantially while their rating has declined. A sharp fall in the value ofgovernment bonds could occur as long as there is no clear prospect of a reductionin the fiscal deficit.
Even if such a crisis situation does not come to pass, the prices of government
bonds will inevitably decline. When that happens, life insurance companies thathave large holdings of government bonds will sustain a huge hit to their financial
strength in accordance with current value accounting.
On this basis then, actions taken to sell off stocks and purchase government
bonds in response to efforts to strengthen capital controls cannot always be
described as actions taken to avoid risks.
Part 4: The expected revitalization of life insurance companies
Today’s life insurance industry does not exude the sort of vigor we have seenin the past in terms of the selling of insurance products and by other measures.
Asset management results are also not taking much of a turn for the better. In
addition, the expansion of overseas operations is taking a lot of time to carry out.
The transformation of companies into stock companies is not generating benefits
as quickly as initially anticipated.
The dwindling birthrate and aging population are weighing heavily on theJapanese economy. As long as conventional business models are followed, wecannot hope to see growth in the life insurance industry. New tools or elements
will need to be discovered.
(1) Selling pure endowment insurance
For example, what can we say about selling pure endowment insurance? In
Japan, term insurance to deal with the risk of death as well as whole life
insurance and endowment insurance, both of which include a savings function,
are primarily offered.
These are all examples of life insurance that provides death protection.
However, the current state of the Japanese life insurance market is such that thismarket more or less lacks any pure endowment insurance options.
If this were an age in which the demographics were weighted more towards
Chapter 2 39

younger cohorts, then traditional life insurance products for which protection isemphasized might very well have been fine. However, societal age distribution
is changing dramatically, which means that it is rather difficult to promote suchproducts at a time in which the elderly account for an increasingly bigger sliceof the overall population.
People these days seek life insurance products that are designed to eliminate
longevity risks more than death risks. Pure endowment insurance that pays out
insurance money in the event that you remain alive after a certain period of time
is believed to be needed for the Japanese economy, given the concerns over the
declining birthrate and aging of society.
Above all, someone who feels insecure about what he or she will be receivingfrom his or her public pension plan will find that pure endowment insurance ismore attractive. Where the payment amount is reduced or the age at which
benefits begin to be paid out is raised, there will be no stability in people’s lives
unless there is some means of offsetting the shortfall.
In light of the foregoing as well, life insurance companies may want toseriously consider stepping into a new domain that involves the selling of pureendowment insurance policies.
(2) Establishing a secondary market
Another proposal for revitalizing the industry consists of the establishmentof a secondary market for life insurance products. In the West, a market forreselling insurance already exists and is known as the life settlement market.
In the case of Japan, while there is a market for the issuance of insurance
products, there is no secondary market for the buying and selling of existing
insurance products. You may have concluded a contract for a life insurance
product when you were young. Your needs, however, might fade with thepassage of years. Since there is no resale market that would allow you to unload
your contract, you will have no choice but to cancel your policy and be
reimbursed with a small amount of money.
If you could use a life settlement market, you might be able to have yourpolicy purchased by an investor for a price that is higher than the cash surrender
value of your policy. The investor will gain a stable rate of return that is higher
than the yield on stocks and bonds and that is unlikely to be affected much byfluctuations in the economy.
This market is appealing for both policyholders and investors. Positive40

benefits in terms of sales can be expected by the life insurance industry as awhole if liquidity features are introduced.
You may be inclined to agree that a new approach is worth trying if you were
to take notice of these advantages.

Chapter 2 41

Chapter 3: <2012>
Revising the solvency margin ratio and stock investment
actions taken by life insurance companies
Part 1: Announcing financial results for the fiscal year that ended in March
2012(1) Insurance premiums and other earnings and basic profits
The financial results for major life insurance companies for the fiscal yearthat ended in March 2012 were announced. These financial results were positive,
most notably for increased earnings and profits, which were welcomed bymanagement at life insurance companies.
Figure 3-1 outlines the three generally-accepted management benchmarks for
major life insurance companies. These benchmarks are the growth, profitability,
and soundness indicators.
Figure 3-1. Financial results for major life insurance companies for the fiscal
year that ended in March 2012
Insurance premiums andother earnings

Basic profit

ForeignaffiliatedDomestic

Rate ofincrease or
decrease
NipponMeiji Yasuda
Dai-ichi
Sumitomo
T&D
Daido
Taiyo
FukokuSony
Mitsui
Asahi
Prudential
Aflac
MetLife Alico
Axa(mutual)(mutual)(mutual)(mutual)(mutual)53,682
51,84034,04625,943
16,912
7,202
9,034
9,509
8,161
5,826
5,056
18,016
17,535
15,721
6,677

9.6
31.4
2.9
▲13.6
14.7
0.4
25.8
▲21.5
5.9
▲11.3
4.9
12.7
27.9
21.5
5.3

Solvency margin ratio
Rate ofincrease or
decrease

5,443
3,709
3,199
3,318
1,449
824
575
731
716
300
285
1,188
2,028
1,535
656

5.4
19.5
17.0
25.1
34.5
32.6
14.2
5.9
27.3
131.5
37.9
▲12.3
22.3
35.3
51.1

FY ended
March 2011
567.0
749.6
575.9
708.6
‐
851.9
747.3
741.1
1,980.4
486.7
426.6
720.6
609.6
847.2
599.5

529.1
663.6
547.7
636.5
‐
720.6
670.8
668.4
1,720.0
425.8
361.2
702.8
512.2
868.0
608.4

Notes: Units: hundred million yen, %; ▲ denotes a negative value; (mutual) = mutual company. The
solvency margin ratio for the fiscal year that ended in March 2011 is based on the newstandard.

If we look at the growth indicator as constituted by insurance premiums and42other earnings, we see that rankings within the industry were changing, albeit
slightly, compared with those of previous years. Illustrative of this change is thesmaller gap between first-place Nippon Life Insurance and second-place Meiji
Yasuda Life Insurance.
While each company reported higher earnings, it appears that the increased
demand for insurance in the wake of the Great East Japan Earthquake had some
impact on this result. Indeed, it was reported that more insurance policies weresigned in the Tohoku region.
More pertinent, however, is the fact that the rate of growth in sales of singlepayment whole life insurance plans for which interest rates were more favorable
than those for other financial instruments and for which the premium can be paidin a lump sum appears to have driven the changes seen in figures for insurance
premiums and other earnings. Interest on the part of people has definitely shiftedfrom protection-type insurance products to savings-type insurance products.
Thus, life insurance companies enjoying a high rate of growth in insurance
premiums and other earnings largely benefited from the brisk selling of singlepayment whole life insurance plans through bank tellers. In contrast, struggling
life insurance companies were affected by their efforts to keep sales of suchproducts in check out of a concern over negative spread risks.
If we then look at basic profits as an indicator of profitability that corresponds
to the profitability of the main operations of these companies, we see that profits
increased for all companies but one. This is tied to various special factors.
Contributing to the increase in profits at these companies was not just unrealized
gains on rising stock prices but also return gains that were generated, since theamount of insurance money paid out due to the Great East Japan Earthquake wasless than the expected amount.
In addition, the investment environment also improved somewhat, resulting
in increased income gains in the form of interest from held bonds and dividend
earnings from stocks. This suggests a pathway to resolving the problem ofnegative spreads, which had been encumbering the life insurance industry.
Many life insurance companies actually managed to lessen their negative
spread, and some even succeeded in attaining a positive spread. Nippon Life
Insurance had already solved their negative spread issues and has been enjoying
two consecutive terms in which a positive spread was attained. Meiji Yasuda
Life Insurance eliminated their negative spread issues for the first time in twenty
years.
Chapter 3 43

(2) Adopting the new SM ratio
If we next turn our attention to the solvency margin (SM) ratio, a typicalindicator of soundness associated with life insurance companies, we see that allof these life insurance companies satisfied the minimum standard of 200% by aconsiderable margin. For this reason, it can be deemed that these companies were
fully capable of paying insurance money in terms of how they were managed.
Beginning this fiscal year, all life insurance companies were subject to a
newly-revised SM ratio requirement. Values calculated in accordance with thisstricter benchmark were announced in the financial results a year earlier for no
more than reference purposes. Since this value was applied beginning this fiscal
year as the target of early remedial measures, it constituted an indicator ofinterest for concerned parties in the insurance business.
From the results, we see that each company definitely managed to reachbeyond the threshold value required of it. In addition, ratios also increased ascompared with ratios calculated a year earlier based on the new standard.
Accordingly, generally favorable results were also achieved for the soundness
indicator.
Compared with the older method by which it was calculated, the new SM
ratio was revised to ensure that the more a company holds stocks, the greater thisvalue falls, given the increase in price-fluctuation risks. Therefore, newspapers
and other media outlets occasionally report that life insurance companies sell
stocks in advance as a measure for dealing with the SM ratio.
If we examine the ratio of stocks to total assets held by life insurancecompanies throughout the industry, we see that life insurance companies
collectively halved their stockholdings since fiscal year 2005, right before
discussions on fortifying regulations began.
However, since the amount of stocks held as referred to here is expressed interms of the current market value, the amount would have gone down even
without a single stock being sold if the Nikkei average had declined. Thus, itdoes not necessarily mean that stocks were being relinquished by life insurancecompanies as a measure for dealing with the SM ratio.
Alternatively, if you were to purely regard stocks from an investment
standpoint, it would be natural to see stocks account for a lower percentage ofan investment portfolio whenever the stock market falters. If anything, that ought
to be considered the rational course of action to be taken.
In this connection, I would like to examine below whether life insurance44companies had truly been selling stocks as an effective means of dealing with
the SM ratio. I believe that this is a theme that is relevant for determining not
only the financial strength of life insurance companies but also, in broader terms,
the comprehensive capabilities of their management.
Part 2: The solvency margin ratio, an indicator in which people are taking
a growing interest(1) Background behind the revision of the solvency margin ratio by the
Financial Services Agency
People probably began to have a serious interest in the financial strength oflife insurance companies when the Nissan Life Insurance Company became thefirst life insurance company in the post-war era to go bankrupt in April 1997.
Like other companies operating in the economic sphere, life insurancecompanies too will go bankrupt if their financial condition takes a turn for theworse.
Those who were cognizant of this fact came to focus on the soundness of life
insurance companies. Introduced seemingly to accommodate such people wasthe concept of the SM ratio.
Even for ordinary people, the SM ratio is an exceedingly easy-to-use
benchmark. This is because it allows even those who lack expertise in this field
to immediately deem a given life insurance company to be reliable if this value
is at least 200%.
The problem, however, is that the SM ratio as reported in the wake of themost recent settlement of accounts for the Chiyoda Life Insurance Company andKyoei Life Insurance Company, which went bankrupt in October 2000, and theTokyo Life Insurance Company, which went under in March 2001, had exceeded
the threshold standard of 200%.
Under these circumstances, the significance of having an SM ratio at all was
lost. In an effort to raise the reliability of the SM ratio, the Financial Services
Agency formulated various proposals for revision.
A written report entitled Regarding Solvency Margin Ratio Calculation
Standards, which was released by the Financial Services Agency on April 3,
2007, set out to make considerable revisions.
Points subject to revision were set forth across a broad range of topics.
Broadly speaking, however, a revision of the SM ratio from two standpoints was
Chapter 3 45

indicated. The first focused on raising the risk coefficient as a short-term
measure. The other focused on carrying out evaluations on an economic value
basis as a medium-term measure.
The transition to an economic value basis with a focus on net assets
necessitated an investigation that would take some time while international
trends were observed. For this reason, specific reform measures were hammered
out with a view to raising the risk coefficient in the short term.
On February 7, 2008, the following year, Outline of the Revision of theSolvency Margin Ratio (Draft) was released by the Financial Services Agency.
A sweeping short-term proposal for a reexamination of the SM ratio was
specifically laid out.
Items applicable to domestic stocks and other risky assets were identified inthis outline. In addition, changes to the method by which the price fluctuation
risk, which is equivalent to the risk of a loss of principal caused by fluctuationsin asset prices, is calculated were also summarized.
According to the older calculation method, the risk coefficient was equal tothe difference between the minimum rate of return (hurdle rate) covering 90%
of events in accordance with the probability distribution graph and the zeroprofit rate (principal). This was changed to the difference between the minimum
rate of return covering 95% of events and the principal. This change enabled theprice fluctuation risk to be broadly estimated.
However, the Yamato Life Insurance Company, a medium-sized life
insurance company, suddenly went under on October 10, 2008. In response, it
became necessary to partially revise the draft outline. This was because the mostrecent SM ratio for the Yamato Life Insurance Company was 555%, whichclearly exceeded the threshold standard of 200%.
The Financial Services Agency released the Revised Outline for Revising theSolvency Margin Ratio (Draft) on August 28, 2009, taking the lesson found in
the bankruptcy of the Yamato Life Insurance Company to heart. In the revised
outline, the method by which the SM ratio is to be calculated was made evenstricter.
To illustrate, an unrealized loss on securities, as an item tied to stock
investments, lowers the core solvency margin. With this lowering of the coresolvency margin treated as a new constraint, a framework for lowering the SMratio was introduced. Nevertheless, the approach to estimating price fluctuation
risks remained unchanged. The level at which the minimum rate of return is to46

be considered reliable, which had been previously increased from 90%,
remained at 95%.
In this way, short-term measures for revising the SM ratio were announced
twice, one after another. As mentioned earlier, the revised SM ratio was
calculated as a reference indicator for financial results for the fiscal year that
ended in March 2011. It was made clear that it would be applied from this fiscal
year as a basis for determining remedial measures at an early stage.
If a life insurance company whose SM ratio came in below 200% were to
emerge, it would be required to submit a management-amelioration plan to the
Financial Services Agency.
(2) Handling price fluctuation risks
To prevent this from happening, a life insurance company needs toimplement effective SM measures by the deadline. What suddenly drew
considerable interest in connection with this matter was the handling of pricefluctuation risks that are present whenever domestic stocks are held.
Major Japanese life insurance companies hold stocks for pure investment
purposes to fulfill their role as institutional investors and as a means ofdeepening their ties with affiliated companies. In other words, they hold sharesfor strategic-holding-stock purposes.
When a life insurance company holds a large volume of stocks, however, theSM ratio will go down substantially if the new calculation method is used. The
worst-case scenario in which the 200% threshold standard for triggering an
administrative intervention is not met must be absolutely avoided.
Even if the threshold standard is sufficiently exceeded, a significant drop in
the SM ratio could cause policyholders and other stakeholders to become
concerned.
To dispel such concerns, a life insurance company will have to sell off heldstocks and lower its price fluctuation risks. While indicating specific numbers,
newspapers had been reporting that life insurance companies had been taking
measures to deal with the SM ratio by selling off domestic stocks ever since thenotion that the method of calculating the SM ratio should be revised began to be
discussed.
Yet, we should pay attention to the fact that data on stocks held as presented
by newspapers consisted of figures announced by companies when they released
their financial statements. Such data had been expressed in terms of the current
Chapter 3 47

market value.
If it is asserted that life insurance companies are selling off stocks as an SM
measure, then any assessment should be made based not on their current market
value but on their book value.
This is because, as mentioned earlier, the amount of held stocks with thecurrent market value approach will go down if stock prices themselves decline,
even if stocks are not sold off.
Under these circumstances, it is not possible to determine that stocks havebeen sold off. Indeed, you cannot definitively say that SM measures are being
implemented by a company. As long as calculations are not based on the bookvalue of stocks, you will be unable to accurately assess stock investment actions
being undertaken by a life insurance company.
In this connection, let us try to accurately trace pertinent changes by
estimating the book values of held stocks based on data provided in past financial
statements. I believe that this will allow us to clarify whether stocks wereactually being sold off as an SM measure as had been reported by mass media
outlets.
Part 3: Purpose of investments in stocks by life insurance companies(1) The selling of stocks as an ambiguous SM measure
When you examine stock-investment actions carried out by life insurancecompanies, you will typically look up net assets as announced in fiscal year-end
financial statements and the shareholding ratio as based on the current market
value of stocks. Alternatively, you might seek to determine the amount by which
the current market value of stocks has increased or decreased over the previous
year.
To properly examine stock-investment actions as they truly are, however,
you must calculate using the amount of stocks held as expressed in terms of theirbook value. Indeed, it is when the amount of stocks held in terms of their bookvalue continuously decreases that SM measures implemented by way of selling
off stocks are finally demonstrated. In this connection, you should deduct any
unrealized losses or gains from the current value of stocks in order to determine
the book value of these stocks.
Figure 3-2 shows financial data relating to life insurance companies based on
aggregate values for nine major life insurance companies in Japan (Nippon, Dai48

ichi, Meiji Yasuda, Sumitomo, Mitsui, Asahi, Taiyo, Daido, and Fukoku). The
surveyed period is a six-year period extending from fiscal year 2005, which was
right before studies conducted by the Financial Services Agency commenced, tofiscal year 2010.
Figure 3-2. Financial data for 9 major life insurance companies in Japan(1) Financial data <1>
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
Total assets
165,011,629 168,795,965 160,349,911 152,133,136 157,630,549 161,222,002
Current market value of stocks
29,839,573 31,179,444 23,057,779 15,182,637 18,153,136 15,599,174
Year‐on‐year rate of change in
39.1
4.5
▲26.0
▲34.2
19.6
▲14.1
the current market value ofstocksShareholding ratio
18.1
18.5
14.4
10.0
11.5
9.7
(2) Financial data <2>
FY 2005
Unrealized loss or gain on stocks 13, 699, 576
Book value of stocks (estimated) 16, 139, 997
Year‐on‐year rate of change in
5.1
the book value of stocks

FY 2006
14,728,206
16,451,238
1.9

FY 20076,879,112
16,178,667▲1.7

FY 2008542,293
14,640,344▲9.5

FY 20093,493,758
14,659,378
0.1

FY 20102,399,644
13,199,530▲10.0(3) Financial data <3>
SM ratio
Year‐on‐year rate of change in
the SM ratio
Funds
Year‐on‐year rate of change infunds

FY 2005
1,037.4
194.9

FY 2006
1,145.4
108.0

FY 2007
1,014.0▲131.4

FY 2008
832.1▲181.9FY 2009
964.9
132.8

FY 2010996.9
31.9

2,420,780
8.5

2,630,780
8.7

2,680,780
1.9

2,725,780
1.7

2,840,780
4.2

2,810,980▲1.0Note 1: Each data set consists of aggregate values for nine life insurance companies (Nippon, Dai-ichi,
Meiji Yasuda, Sumitomo, Mitsui, Asahi, Taiyo, Daido, and Fukoku). However, the SM ratio
values are simple average values for these nine life insurance companies.
Note 2: Units: million yen, %; ▲ denotes a negative value.

If we look at the shareholding ratio as calculated based on the use of current
market values, we see that it became halved in a period of six years. This was
widely interpreted by newspapers as the result of the selling off of stocks by life
insurance companies.
However, the year-on-year rate of change in the current market value ofstocks was not negative in every single year. From this, we can conclude thatlife insurance companies did not all undertake to sell off their stocks. (SeeFinancial data <1> in Figure 3-2.)
Thus, there is a sense that reporting on the selling off of stocks by life
insurance companies had been exaggerated. Since this alone, however, isinsufficient, let us further analyze matters, estimate the book value of stocks heldby life insurance companies based on unrealized gains or losses, and attempt todetermine the rate of year-on-year changes in this figure. This should allow us
Chapter 3 49

to ascertain actual investment actions taken with respect to stocks by life
insurance companies.
In examining the results of this process, we see that, as expected, positive
and negative periods were mixed together as was the case with the current
market value of stocks. Moreover, we see that the magnitude of fluctuations in
the book value of stocks was much smaller. (See Figure 3-2. Financial data <2>.)
If life insurance companies were endeavoring to sell off stocks in order tokeep price fluctuation risks in check, then it would not be strange at all to see theyear-on-year rate of change in the book value of stocks stay negative each year
and numerical values even increasing in magnitude. Yet, the results did notreveal that such a phenomenon was occurring.
Even if a different approach had been adopted, no picture of stocks as an SM
measure can be found. Figure 3-3 was put together for this purpose. This figure
shows the correlation between the year-on-year changes in the SM ratio andyear-on-year rate of change in the book value of stocks for the period from fiscal
year 2005 to fiscal year 2010.
Figure 3-3. Correlation between the book value of stocks and the SM ratio

While there are only six data points, an overall look at this figure appears toshow that there was more or less a positive correlation between the two variables.
This relationship runs counter to investment actions taken with respect to stocks50

as an SM measure.
This is because, if we regard stocks as a means of mitigating price fluctuation
risks, then investment actions taken with respect to stocks can only be said tohave taken financial soundness into account when a negative correlation
between the two variables is depicted.
(2) Augmenting funds
In what way then had life insurance companies been dealing with the revision
to the SM ratio? They had been attempting to resolve this matter by way of ahighly conventional approach by which funds are augmented. As can be
confirmed through data, funds were almost certainly being increased with eachpassing fiscal year. (See Figure 3-2. Financial data <3>.)
Of course, increasing funds will allow not just price fluctuation risks but also
various other risks affecting life insurance companies to be absorbed. In this way,life insurance companies appeared to be focused on soundness measures fromnot just a short-term standpoint but also a medium-term standpoint.
As mentioned earlier, a written report issued by the Financial Services
Agency contained recommendations in two stages: short-term initiatives andmedium-term initiatives. In this context, dealing with rising price fluctuation
risks corresponds to initiatives with a view to carrying out short-term revisions.
In contrast, a medium-term initiative is an action that takes into account aninternational trend consisting of the current market valuation of insurance
liabilities. If we engage in the current market valuation of not just assets but
liabilities as well, then interest rate-based fluctuations in net assets, as thedifference between the two, will increase. In a worst-case scenario, a company
could go deep enough into negative territory that it would effectively becomebankrupt.
To resolve this issue, companies must aspire to develop an asset liability
management (ALM) approach, which entails making adjustments to the maturity
dates of assets and liabilities. For this purpose, life insurance companies areproactively purchasing ultra-long-term government bonds matched up with thematurity dates of liabilities.
However, government bonds with maturity dates that can be matched up withthe ultra-long-term liabilities that are unique to life insurance companies do notexist. If they do happen to exist, they are of an insufficient amount. It is
impossible to perfectly adjust the maturity dates of assets and liabilities.
Chapter 3 51

In this connection, a method of expanding net assets by having external funds
injected by way of the augmentation of funds was being adopted. Through thisapproach, attempts were being made to not just revise the SM ratio but also
develop a system capable of absorbing various risks to which life insurancecompanies are exposed.
Part 4: Holding stocks for pure investment purposes
In looking back, we see that life insurance companies in the past regarded
stocks as a long-term strategic holding stock. In other words, they continued tohold shares in other companies as a means of establishing links to insurance
policies.
These days, however, the adoption of current value accounting means thatlosses will be incurred if stocks drop in value. Thus, companies tend to keepfrom engaging in actions by which shares are needlessly held and will seek tosell off shares while obtaining the understanding of other companies, unlessthere is a reasonable chance that stock prices will rise.
In other words, stocks represent a pure target of investment for modern life
insurance companies. Stocks are expected to yield high profit rates. Accordingly,
holdings of stocks will be proactively increased if it is believed that stock prices
are set to rise.
However, the Japanese economy had been rather unable to extricate itself
from its prolonged state of stagnancy. For this reason, profit rates were declining
and domestic stocks had been losing their sheen. That life insurance companies
did not desire to increase their holdings of domestic stocks appears to be more
attributable to management decisions taken from a pure investment standpoint
than to SM measures.
A life insurance company that is also an institutional investor must efficiently
manage funds entrusted to it by policyholders to ensure that as much profit as
possible can be generated. While such investment profits will be returned topolicyholders as a share of the profits (dividends), a portion of such profits willbe treated as retained earnings to raise the SM ratio itself.
In today’s investment environment, it is difficult to place much weight onstocks. If a favorable investment environment capable of instilling expectationsof high earnings can someday soon be restored, investments in stocks will surely
contribute to not just profitability but also to soundness.
52

Right now, the negative aspects of stocks are emphasized, and stocks tend to
be regarded as a factor behind the lowering of the SM ratio due to pricefluctuation risks. However, if the investment environment turns around for the
better, a different way of looking at these matters will become widespreadamong persons and parties tied to life insurance companies. When that timecomes, the weight assigned to stocks will no doubt be greater than it is today.

Chapter 3 53

Chapter 4: <2013 (i)>Life insurance companies’ strategy of extending asset-side
durations
Part 1: Announcing financial results for the fiscal year that ended in March
2013(1) Major life insurance companies enjoy rising profits
The financial results for major life insurance companies for the fiscal yearthat ended in March 2013 were announced. Abenomics, a set of economic
policies promoted by the Abe administration, appeared to have provided a
tailwind for life insurance companies.
Along with a change of government, a cheaper yen and an ascendant stock
market bolstered the financial results of life insurance companies. Figure 4-1
outlines the key management benchmarks of life insurance companies.

Foreign‐affiliatedDomestic

Figure 4-1. Financial results for major life insurance companies for the fiscal
year that ended in March 2013

NipponMeiji Yasuda
Dai‐ichi
Sumitomo
T&D
Sony
FukokuMitsui
Asahi
Prudential
AmericanFamilyMetLife
Alico
Axa

Insurance
premiums andother earnings
Rate ofincreaseordecrease
53,428▲0.5
36,593 ▲29.4
36,4683.0
31,842
20.4
19,409
14.8
9,258
13.5
8,622
▲9.3
5,782
▲0.8
4,603
▲9.0
25,337
40.6

Basic profit

Net profit

Rate ofincreaseordecrease
5,465
0.4
3,945
6.4
3,476
8.6
4,207
27.9
1,824
25.9
800
11.7
819
12.0
529
76.4
262
▲8.0
1,490
25.4

Rate ofincreaseordecrease
2,106
▲5.0
2,355
36.9
324
59.2
1,078
▲0.1
637
138.1
424
35.0
502
77.0
88 ▲40.9127
80.0

19,958

13.8

1,623

▲20.0

14,970

▲4.8

423

▲72.4

6,706

0.4

661

0.8

Positive or
negative spread

Solvency margin
ratio

Previous
fiscalyear

Previous
fiscal
year

317
425
▲584
▲505
18
21
22
▲530
▲803

316
696.4
567.0
192
930.3
749.6
▲907
702.4
575.9
▲668
843.9
708.6
▲202
943.9
810.6
▲15 2,281.8 1,980.4
▲48
994.6
741.1
▲561
601.3
486.7
▲837
495.8
426.6

Note 1: Units: hundred million yen, %; ▲ denotes a negative value.
Note 2: Rate of increase or decrease is the percentage change over the preceding fiscal year (%).
Note 3: The SM ratio is the solvency margin ratio (%).

If we first look at insurance premiums and other earnings, we see that there54was a division between life insurance companies that were growing and thosethat were floundering. This is because structural issues in Japan in the form of adeclining birthrate and aging society were having an impact. Companies would
continue to have a tough time selling conventional protection-type products.
The indicator that we need to focus on with these financial results is
profitability. Basic profit, an indicator of profitability that corresponds to the
profitability of the main operations of these companies, grew for many life
insurance companies. High rates of growth in terms of net profit were also seen.
For some of these companies, basic profit on the whole rose as interest
income received from foreign bonds increased due to a cheaper yen and as
valuation losses on securities shrank significantly due to rising stock prices. It
can be said that rapid changes in the investment environment truly helped toincrease profits accruing to life insurance companies.
In addition, higher investment earnings were causing negative spreads, along-time concern in this industry, to head towards shrinkage in the future.
Indeed, more and more life insurance companies were reporting a positive
spread whereby investment yields exceed assumed interest rates.
The SM ratio (solvency margin ratio), a benchmark of soundness, also started
to pick up again thanks to higher unrealized gains from stocks and bonds.
None of the major life insurance companies that were surveyed reported an
SM ratio in decline. For each of these companies, the SM ratio grew andexceeded the 200% threshold standard of soundness.
(2) Large volumes of government bonds held by life insurance companies
A cheaper yen and rising stock prices combined to give rise to more favorable
financial results as described above. However, there was no guarantee that theblessings of economic policies would continue to be granted on a permanent
basis. There was always the chance that the investment environment would shift
from providing a tailwind to throwing up a headwind.
Life insurance companies in those days held large volumes of government
bonds, which were wielded for investment purposes. While high investment
yields had been temporarily obtained from foreign currencies and stocks, thesecompanies could not feel secure as long as earnings generated by government
bonds did not rise.
However, government bond yields had been floundering over an extended
period of time, thereby limiting investment earnings by life insurance companies.
Chapter 4 55

Nevertheless, government bond holdings continued to increase, since attractive
investment alternatives remained unavailable.
Against this backdrop, the Bank of Japan introduced quantitative andqualitative easing measures of a wholly different nature in April 2013.
Consequently, the prices of government bonds underwent repeated cycles of
erratic fluctuations. Just when you thought that yields had dropped to asignificantly low point, they would climb in very short order.
Will those in charge of investments at life insurance companies continue topurchase government bonds in large volumes? Perhaps they might turn toforeign bonds as an alternative investment target. It is to this possibility thatmarket watchers were directing their attention.
Investment earnings are undeniably important for the management of life
insurance companies. Since government bonds accounted for a significant
percentage of invested funds, their existence was of considerable relevance.
For life insurance companies, however, government bonds were not held
simply for the purpose of obtaining earnings. They also served to help manage
risks. This has the effect of stabilizing management itself. Given the long-term
nature of insurance policies, the stabilization of management is, if anything,more important.
I would like to explore the effective use of government bonds, which accountfor a significant amount of investment activities undertaken by life insurancecompanies, as a means of managing risks.
Part 2: Shifting from cost to current market value(1) A past moment of truth for life insurance companies and the measuretaken in response
When we take a look at the financial results for this fiscal year, we see thatwhile there was some concern regarding insurance premiums and other earnings,
the results as announced were more or less acceptable. Yet, remaining in ourmemory is the fact that Japanese life insurance companies were visited by an
unparalleled crisis between the latter half of the 1990s and the beginning of 2001.
While the elements of this crisis were thought to be entirely unconnected toconcerns over management up to that point in time, the collapse of the bubble
economy sparked not just concerns over stymied growth in the number of newpolicies but also the serious issue of negative spreads caused by a long-term drop56

in interest rates.
Is there a way to avoid the risk of negative spreads in the changing investment
environment? Of course, there is. It is called asset liability management (ALM).
This is a means of suppressing the occurrence of a negative spread as muchas possible by shrinking the gap between asset-side and liability-side durations(maturity terms).
In this connection, I would like to explore possible solutions to the issue ofnegative spreads affecting life insurance companies, which is of interest to many
people. In other words, let us examine whether Japanese life insurancecompanies are properly implementing ALM as a means of avoiding negative
spreads while heeding the lessons of the crisis that hit life insurance companies
beginning in the latter half of the 1990s.
As an approach to be taken, the durations of negotiable securities and loans
receivables held by major life insurance companies will be measured each fiscal
year. For any life insurance company, liability-side durations are generally
greater than asset-side durations. Therefore, if the durations of typical held assets
are found to be increasing with each passing fiscal year, then measures for
reducing the risk of negative spreads can be deemed to have been implemented.
In fact, the purpose here is to measure and ascertain changes in asset-side
durations. Before proceeding, allow me to explain the concept of the economic
value basis, which is closely tied to ALM analysis.
(2) Economic value-based valuations
The solvency regime imposed on life insurance companies by the regulatory
authorities was reinforced in response to the crisis affecting life insurancecompanies. In Japan, solvency margin rules were introduced based in part on the
U.S.-drafted risk-based capital (RBC) requirements for the settlement ofaccounts in fiscal year 1996.
Various revisions were thereafter made. For the settlement of accounts infiscal year 2011, revisions known as “short-term measures” with a focus onrevising the risk coefficient were implemented. Revisions known as “mediumterm measures” based on the concept of the economic value basis are being
studied for the future.
While asset-side current market valuation has already been adopted,
liabilities remain valued at acquisition cost. Accordingly, the shift to an
economic value basis will notably and invariably direct our attention to changes
Chapter 4 57

in liability-side valuations.
Currently, assumptions pertaining to the policy reserve that accounts for thebulk of liabilities are locked in, which means that the assumed interest rate thatis set at the time a policy is entered into is fixed into the future. For this reason,an additional policy reserve needed in order to pay insurance money and benefits
in the future must be set aside where interest rates lower than the assumed
interest rate are expected to persist.
As long as the acquisition cost of a liability applies, however, this necessity
will not be expressly conveyed, and the policy reserve will continue to be
insufficient. While funds covering the negative spread amount ought to beaccumulated, this matter can be ignored as far as the accounting of it goes.
Therefore, you might have an insurance company suddenly go bankrupt as aresult of being stymied after a certain period of time when faced with the needto pay insurance money and benefits.
Liability-side current market value accounting is an attempt to address thisissue. By applying a lock-free approach, the assumed interest rate can change
each time valuations are undertaken. The policy reserve will automatically vary,such that it will be augmented when interest rates decline.
Since this approach allows anyone to verify the amount of policy reserve
needed for the future, a management crisis can be detected in advance.
Part 3: Relationship between net assets and interest rates(1) Interest-rate-based fluctuations in assets and liabilities
Allow me to reference the balance sheets of life insurance companies to shedlight on what I have just mentioned. Figure 4-2 outlines changes in assets andliabilities based on current market value accounting in the event that interest
rates fall.
First, let us look at what this figure is saying on the asset side of the table.
For a life insurance company, assets might consist primarily of securities
comprising government bonds, local government bonds, corporate bonds,
domestic stocks, foreign stocks, and foreign bonds. In addition, a life insurancecompany will hold loans receivable and various other assets. If interest rates fall,the economic value of held assets will increase.
Likewise, the economic value of the liability-side policy reserve will increase
if interest rates fall. Under the current accounting system, the policy reserve does58not change if interest rates fall. Under a system of accounting that is completely
based on current market values, funds required to pay future insurance moneyand benefits will be reflected in the accounting, which means that the policy
reserve as a liability will increase.
Figure 4-2. Impact of falling interest rates on the assets and liabilities of
insurance companies

What needs to be focused on here is the net assets, which is equivalent toequity capital. This is because the amount of net assets is an indicator of thesolvency of the life insurance company. Once it falls into negative territory, thecompany is effectively bankrupt.
Life insurance companies in Japan came to face a crisis situation because life
insurance companies whose net assets as calculated on a current market value
basis were negative emerged one after another.
(2) Current market value of liabilities
Under the current system of accounting, the liability-side policy reserve isstated on a book value basis. For this reason, any state of excessive liabilities
would not be realized until after bankruptcy is declared. In fact, however, net
assets would already have fallen into a negative state of excessive liabilities inline with a lowering of interest rates.
The policy reserve as stated on a current market value basis will in factincrease when interest rates decline. When the equity capital is depleted, theChapter 4 59

company will ultimately end up bankrupt. At the same time, however, assets will
also increase as interest rates decline.
Therefore, net assets, equaling the difference between assets and liabilities,
is not unilaterally determined as a function of changes in the liability-side policy
reserve. Asset-side changes also need to be taken into account as part of thisprocess.
In this figure, declining interest rates are shown to increase both assets andliabilities simultaneously; indeed, you can see how declining interest rates affect
net assets. In this case, both assets and liabilities appear to increase by the sameamount, such that net assets, which are equal to the difference between assets
and liabilities, remain more or less unchanged.
However, it is not necessarily always the case that both assets and liabilities
will change by the same extent. The bankruptcy of life insurance companies
occurred because liabilities increased to a greater extent than assets as interest
rates declined, which is a situation that should be immediately familiar to anyone
who lived through the crisis that affected life insurance companies.
These differences in how assets and liabilities fluctuate can be attributed todifferences in their respective durations. In this connection, allow me toconceptually set forth the effect that interest rates have on net assets throughassets and liabilities by referring to the notion of what is known as the duration
gap.
(3) Impact of the duration gap
Whether we speak of assets or liabilities, interest-rate-based changes in
economic value depend on their respective durations. Moreover, the greater thevalue of the asset or liability in question, the greater the change and vice-versa.
Thus, fluctuations in net assets are affected by the duration gap, whichcorresponds to the difference in duration between assets and liabilities. The
greater this value, the greater the fluctuation in net assets.
On the other hand, if the durations of assets and liabilities are matched, then
net assets will not be affected by interest rates whatsoever. ALM by life
insurance companies is in fact a strategy by which the duration gap is to bebrought as close to zero as possible.
Since a life insurance company will typically offer many long-term policies,
the full terms of liabilities will be greater than the durations of assets. For thisreason, the most effective means of abating interest rate fluctuations is a strategy
60

by which asset-side durations are prolonged. Specifically, this entails extending
the full terms of securities, loans receivable, and other assets held as assets bylife insurance companies.
Other effective means include a strategy by which liability-side durations areshortened and a strategy by which the capital-to-asset ratio is increased.
However, these have a drawback in that time is required for their implementation.
In contrast, the strategy by which asset-side durations are prolonged can beattained by changing the financial assets that are held by the company.
It can be presumed that if Japanese life insurance companies had been
attempting to overcome the negative spreads that had been the cause of theircrisis, then the strategy by which asset-side durations are prolonged would havebeen implemented.
In this connection, I would like to ascertain what the asset-side durations
were for life insurance companies and determine whether this approach was
actually attempted.
Part 4: Trends in asset-side durations(1) Changes in composition by type of asset
If we look at the assets of life insurance companies, we see that their
management changes with the times. During periods of advanced economic
growth, loans receivable accounted for a significant proportion of assets, while
securities accounted for a proportion of assets that was not especially high. Thesedays, however, the situation with respect to assets is the complete opposite.
Figure 4-3 outlines percentage changes in composition by type of asset for
all surveyed life insurance companies since fiscal year 2000. In looking at thisfigure, we see that securities accounted for an overwhelmingly large percentage
of assets throughout the years in question. On the other hand, the percentage ofassets accounted for by loans receivable continued to decline and presently sits
at just above 10%.
In addition, stocks accounted for a significantly different percentage of assets
this fiscal year than they did in the past. Stocks used to be an attractive
investment target, which explains why there was a time when stocks accounted
for nearly 30% of a company’s total assets. As with loans receivable, thepercentage of total assets accounted for by stocks declined into single-digit
territory.
Chapter 4 61

Figure 4-3. Changes in composition by type of asset for all surveyed life
insurance companies (%)
Securities
Government
bonds
Local
government
bonds
Corporatebonds
StocksForeignsecurities
Other
securities
Loans receivable
Other assets

FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010
57.6
60.2
61.4
65.3
68.8
71.9
73.7
72.6
71.6
75.3
76.3
16.6

17.8

19.4

19.3

21.9

21.3

22.1

23.2

26.4

27.8

30.5

3.9

3.9

4.1

3.4

3.1

2.7

2.5

2.5

2.6

2.7

2.5
8.6

9.3

9.7

10.7

10.2

9.5

8.7

8.7

9.1

9.4

9.0

15.4

13.4

9.6

11.6

11.5

14.7

14.7

11.2

7.6

8.6

7.2

11.4

14.3

16.1

18.3

19.1

18.8

18.8

19.4

19.1

19.5

20.1

1.0

1.1

1.5

2.5

3.7

5.7

6.9

7.2

6.5

7.9

7.3

26.1
16.3

25.5
14.3

24.7
13.9

22.6
12.1

20.0
11.2

17.5
10.6

15.9
10.4

16.0
11.4

16.0
12.4

14.1
10.6

13.1
10.6

Note 1: “Other assets” includes cash and deposits, call loans, monetary trusts, and tangible fixed assets.
Note 2: Source: Overview of the Life Insurance Business, Life Insurance Association of Japan

Not much changed for local government bonds and corporate bonds. Ifanything, the percentages of total assets accounted for by local government
bonds and corporate bonds appeared to have gone down, albeit by just a little. In
a completely contrastive manner, government bonds continued to increase as apercentage of total assets. By this fiscal year, they came to account for thebiggest slice of investment assets held by insurance companies.
Accordingly, we can see that securities accounted for a rising percentage of
total assets largely on the back of this trend in government bonds. For life
insurance companies at that time, government bonds were a major target ofinvestment. It can be said that characteristics of held government bonds weredirectly reflected in the nature of investments.
(2) How to measure duration
The investment stance adopted by life insurance companies had shifted toactions by which large volumes of government bonds were retained to a greater
extent than loans receivable and stocks. Furthermore, greater weight was being
placed on holding longer-term government bonds with each passing fiscal year.
Examples of government bonds include government bonds with a maturity
term of 10 years or less upon issuance, for which the face value is paid to theholder at maturity, and long-term government bonds with a maturity term greaterthan 10 years. In other words, these consist of government bonds with a maturity
62term of 20, 30, or 40 years. Life insurance companies were increasing the weight
they were placing on such ultra-long-term government bonds.
Given that the percentage of held total assets accounted for by government
bonds was rising and that these government bonds increasingly had ultra-longterms of maturity, it was expected that asset-side durations for life insurancecompanies would rise on their own.
In this connection, I attempted to measure the durations of government bonds
held by life insurance companies. At the same time, I also tried to measure thedurations of corporate bonds, local government bonds, and loans receivable.
With reference made to Journal of Life Insurance Management (2009),
written by Katsunori Shinko, for the method of calculation to be applied, I
focused on balances by remaining period as reported in an annual report, which
is published by each life insurance company each fiscal year, and determined
durations through the use of these figures.
Specifically speaking, I proceeded as follows. First, I specified the numberof years in advance according to the extent of the remaining period.
For example, 0.5 years was specified for assets whose remaining period is 1
year or less, 2 years was specified for assets whose remaining period is morethan 1 year and up to 3 years, 8.5 years was specified for assets whose remaining
period is more than 8 years and up to 10 years, and 15 years was specified for
assets whose remaining period is more than 10 years.
Next, I assigned weights to these figures based on the percentages of held
assets accounted for by the corresponding assets and arrived at estimates ofduration.
(3) Prolongation strategy being pursued
I obtained estimated durations for each type of negotiable assets held for 4
major companies (Nippon Life Insurance, Meiji Yasuda Life Insurance, Dai-ichi
Life Insurance, and Sumitomo Life Insurance) based on this approach andplotted the results in Figure 4-4.
In looking at this figure, we can see that the durations of local government
bonds had recently been declining, while those of government bonds, corporate
bonds, and loans receivable had more or less been steadily rising.
Above all, the durations of government bonds, which accounted for thebiggest proportion of total assets, were remarkably higher than those of otherassets.
Chapter 4 63

Figure 4-4. Changes in duration by type of assets held by 4 major life
insurance companies (years)

Notable here is the fact that the duration of each type of asset between fiscal
year 1997, when the crisis affecting life insurance companies first struck, andfiscal year 2000, which I have identified as the turning point, was trending
upwards. This was particularly true for government bonds. The durations ofgovernment bonds definitely rose since the time life insurance companies firstcame to be mired in a crisis situation.
This shows that insurance companies, stung by difficult bankruptcies causedby the issue of negative spreads, had been implementing an ALM strategy
designed to narrow the duration gap.
Part 5: Other ALM strategies
In this way, asset-side durations had been steadily rising as major life
insurance companies responded to the crisis that affected life insurancecompanies. By proactively purchasing ultra-long-term government bonds, they
had been closing the duration gap.
Thus, the reduction in net assets brought about by declining interest rates was
smaller than it was in the past. Obviously, this should mean that fewer companies
would go under in a manner attributable to negative spreads as we had seen
happen in the past.
While we have to date focused only on asset-side durations in carrying out
an ALM strategy, other options include a strategy by which liability-side
durations are shortened and a strategy by which the capital-to-asset ratio is64

increased.
It is thought that modern life insurance companies moderate fluctuations in
net assets by skillfully combining these three types of strategies. Therefore, itcannot be asserted that only asset-side durations are keeping net asset
fluctuations in check, as long as recent developments pertaining to liability-side
durations and the capital-to-asset ratio are not pursued.
These developments will need to be subjected to precise analysis as a future
research topic to be explored.

Chapter 4 65

Chapter 5: <2013 (ii)>
Changing breakdown of the life insurance industry by type ofoperation
Part 1: The life insurance industry in transition(1) The age of kanji-named life insurance companies
When we trace the history of the life insurance industry in Japan, we see thatchanges occurred in the latter half of the 1990s, corresponding to the point intime when the old order gave way to a new one.
Throughout the long post-war period, traditional kanji-named life insurancecompanies, which were emblematic of the industry, collectively accounted foran overwhelmingly large slice of the market. Broken down by size, seven ofthese companies were major life insurance companies, ten were mid-sized life
insurance companies, and three were small life insurance companies.
Namely, the seven major life insurance companies consisted of Nippon, Daiichi, Sumitomo, Meiji, Asahi, Mitsui, and Yasuda. The ten mid-sized life
insurance companies consisted of Taiyo, Chiyoda, Toho, Kyoei, Daihyaku,
Fukoku, Daido, Nihon Dantai, Tokyo, and Nissan. The three small life insurancecompanies consisted of Heiwa, Yamato, and Taisho.
Of course, foreign-affiliated life insurance companies had already entered theJapanese market, but they were not regarded yet as real competitors given their
low market share. For this reason, these twenty kanji-named life insurancecompanies primarily functioned as industry leaders. The large life insurancecompanies in particular enjoyed a huge presence. Some were famous for steadily
increasing the number of insurance policies under their belts while being tied toaffiliated groups that were distinctively Japanese and that were capable ofwielding influence over the Japanese economy.
Since competition among life insurance companies had been suppressed asmuch as possible in accordance with the convoy system of regulations as enacted
back then by the Ministry of Finance, fluctuations in company rankings were
eliminated alongside the removal of price competition.
Indeed, an era focused on maintaining industrial order lasted for many years.
The establishment of a rock-solid insurance system meant that the Japanese life
insurance industry could be expected to steadily grow. This intended effect was
impressively attained.
66

(2) Developments subsequent to the collapse of the bubble economy
This industrial order came to be slightly disturbed during the era of the bubble
economy that arose in the latter half of the 1980s. As stock and land prices rose
rapidly, single-payment endowment insurance plans and bank-sponsoredindividual annuity plans, which represented typical savings-type insurance
products, sold like crazy.
This is because their appeal as financial products was enhanced when highassumed interest rates were set. Mid-sized life insurance companies in particularwere aggressively engaged in selling these products as they sought to improvetheir relative rankings in the industry.
Consequently, the industrial order that had been reliably kept in place to date
had been disturbed, such that we saw the rankings of mid-sized life insurancecompanies change vis-à-vis one another. Such changes, however, were slight.
No such changes affected large life insurance companies.
Full-scale developments amounting to a reorganization of the life insurance
industry first began to be observed upon the collapse of the bubble economy.
Large negative spreads generated by life insurance products with high assumed
interest rates became onerous. In no time at all, management crises manifested
themselves, largely at mid-sized life insurance companies.
The crisis affecting life insurance companies came to a head. Starting withthe bankruptcy of Nissan Life Insurance in April 1997, one life insurancecompany after another faded away into obscurity. A critical situation descended
on the industry as seven life insurance companies would become bankrupt in aspan of just four years. In October 2008, even Yamato Life Insurance met its
end.
Amid this sequence of bankruptcies involving life insurance companies,
foreign-affiliated life insurance companies arrived on the scene to purchase thesefailed firms in succession. With this, power relationships among life insurancecompanies came to be forged in ways that could never have previously been
imagined.
(3) Breakthroughs made by foreign-affiliated life insurance companies andthe life insurance affiliates of nonlife insurers
The structural construct by which kanji-named life insurance companies
enjoyed an overwhelmingly dominant presence gradually weakened. Entering
the market to fill the void caused by this weakening, foreign-affiliated life
Chapter 5 67

insurance companies absorbed mid-sized life insurance companies to expand
rapidly.
Figure 5-1 presents the rankings of life insurance companies in terms ofpremiums and other earnings for fiscal years 1997 and 2012, as determined bylooking at all life insurance companies belonging to the Life Insurance
Association of Japan.
This figure shows the changes that affected the life insurance industry since
the fiscal year in which the first bankruptcy occurred. In fiscal year 1997, the top
13 companies were all kanji-named life insurance companies. Below them, we
see the first-ever appearance of a foreign-affiliated life insurance company insuch a list.
In contrast, if we look at the section corresponding to fiscal year 2012, we
see changes in that multiple foreign-affiliated life insurance companies were
now interspersed among kanji-named life insurance companies. While four large
kanji-named life insurance companies were ranked at the top of the list, a numberof foreign-affiliated life insurance companies ranked right behind them. Kanjinamed life insurance companies other than the four large kanji-named life
insurance companies ranked behind the aforementioned cluster of foreignaffiliated life insurance companies.
Moreover, life insurance companies that can be grouped together withforeign-affiliated life insurance companies as katakana-named life insurancecompanies, like Sony and Orix, were also making steady gains on kanji-named
life insurance companies.
In looking at these industrial rankings in this way, we see that the momentum
enjoyed by kanji-named life insurance companies, whose profile used to be
overwhelmingly dominant, was weakening. Above all, the profile of foreignaffiliated life insurance companies that grew in the wake of the crisis affecting
life insurance companies was quite substantial.
At the same time, the life insurance affiliates of nonlife insurers belonging to
the MS & AD, Tokyo Marine Nichido, and NKSJ groups could no longer beignored. As parent companies consisting of nonlife insurance companies had
coalesced into three groups, subsidiaries consisting of life insurance companies
concurrently merged in line with these developments to rapidly expand in termsof scale.

68Figure 5-1. Rankings of life insurance companies in terms of premiums andother earnings -comparing fiscal year 1997 with fiscal year 2012Order Category
1 Kanji
2 Kanji
3 Kanji
4 Kanji
5 Kanji
6 Kanji
7 Kanji
8 Kanji
9 Kanji
10 Kanji
11 Kanji
12 Kanji
13 Kanji
14 Katakana
15 Kanji
16 Kanji
17 Katakana
18 Katakana
19 Kanji
20 Katakana
21 Katakana
22 Katakana
23 Katakana
24 Kanji
25 Nonlife
26 Katakana
27 Kanji
28 Kanji
29 Nonlife
30 Nonlife
31 Katakana
32 Katakana
33 Nonlife
34 Nonlife
35 Nonlife
36 Nonlife
37 Nonlife
38 Nonlife
39 Nonlife
40 Katakana
41 Nonlife
42 Katakana
43 KatakanaLife insurance company
NipponDai‐ichi
Sumitomo
Meiji
Mitsui
Asahi
YasudaTaiyo
Daido
FukokuChiyodaKyoei
Nihon Dantai
American Family
Toho
DaihyakuSony
Alico Japan
Tokyo
Orix
Prudential
ING
INA Himawari
Heiwa
Tokio Marine Anshin
SaisonYamatoTaishoMitsui Marine Mirai
Sumitomo Marine Yu‐Yu
Orico
Nicos
NichidoDowa
Dai‐Tokyo Shiawase
Fuji
Chiyoda Kasai Ebisu
Nippon Fire Partner
Koa Fire Magokoro
Axa
Kyoei Kasai Shinrai
ZurichScandia

FY 1997
6,275,565
4,012,537
3,419,029
2,747,219
1,767,449
1,712,324
1,703,512
1,328,894
1,168,436
797,644780,292
747,536
662,471591,809521,133
447,006
277,706
256,735
210,472
118,855
117,617
96,39891,16878,56375,46673,90758,42347,731
26,214
26,21026,047
25,772
13,408
9,321
9,197
8,360
7,737
7,315
6,956
6,784
6,354
855
812

Order Category Life insurance company
1 OtherJapan Post
2 Kanji
Nippon3 Kanji
Meiji Yasuda
4 KanjiDai‐ichi
5 Kanji
Sumitomo
6 Katakana Prudential
7 Katakana American Family
8 Kanji
T&D
9 Katakana Met Life Alico
10 Katakana Sony
11 Nonlife
MS & AD
12 Kanji
Fukoku13 Katakana Axa
14 Kanji
Mitsui
15 Nonlife
Tokyo Marine Nichido
16 Katakana Manulife
17 KanjiAsahi
18 Nonlife
NKSJ
19 Katakana ING
20 Katakana Mass Mutual
21 Katakana Orix
22 Katakana Hartford
23 Katakana AIG Fuji
24 Katakana Sony Life Aegon
25 Katakana Cardiff
26 Other
Rakuten27 Katakana PCA
28 Katakana Zurich
29 Katakana Credit Agricole
30 OtherLife Net
31 OtherMidori32 Katakana Allianz

FY 2012
6,481,772
5,342,857
3,659,351
3,472,882
3,184,252
2,533,792
1,995,885
1,939,640
1,497,002
925,874
878,869
862,224
672,566
578,201
576,232
532,968
460,383
374,523
301,264
259,530
131,445
125,585
80,98751,182
34,56926,63813,312
10,030
7,062
5,915
5,003
152

In this connection, allow me to explore the life insurance affiliates of nonlife
insurers below.

Chapter 5 69

Part 2: Attributes of the life insurance affiliates of nonlife insurers(1) Three mega-nonlife insurers and their life insurance subsidiaries
Eleven life insurance affiliates of nonlife insurers began operations in
October 1996. This was made possible by the promulgation of the New
Insurance Business Act in June of the preceding year, which made it henceforth
possible for life and nonlife insurers to enter into each other’s area of businessby way of the establishment of subsidiaries for this purpose.
Insurance administration as based on the convoy system of regulations,which had long been maintained in Japan during the postwar era, transformed inline with the maturation of the country’s economy through necessity. It finallycame to be that it would have to become liberalized and deregulated.
This course of events came to be promoted by the New Insurance Business
Act, which represented a comprehensive set of revisions to the statute it replaced
as a way to overhaul a system that had been in place for more than half a century.
At the time, insurance talks between Japanese and American officials were also
intricately intertwined. The Big Bang deregulation of Japan’s financial markets
as put forth by Prime Minister Ryutaro Hashimoto also served to jumpstart theinsurance market in a major way.
Progress made in terms of liberalization and deregulation was especially
rapid in the nonlife insurance sector. As specific measures, the obligation toutilize rates as determined by the relevant rating organization was repealed andrisk sub-divided automotive insurance policies came to be allowed.
Restrictions on cancer and healthcare insurance plans that had been imposedon the life insurance subsidiaries of nonlife insurers as a measure to mitigate thedramatic impact of complicated reforms discussed by and between Japanese andAmerican officials were also lifted.
Nonlife insurers managed to nimbly respond to such changes in the
management environment in which the insurance industry was operating by
repeatedly undergoing consolidations and mergers. This resulted in theemergence of three mega-nonlife insurers: MS & AD, Tokyo Marine HD, andNKSJ. These three major nonlife insurance groups grabbed hefty slices of themarket for themselves through net premiums.
Amid these developments, subordinated life insurance subsidiaries, too,70

underwent consolidations and mergers to march in step with what their parent
companies were doing. The life insurance subsidiaries of the three mega-nonlife
insurers also expanded in scale as did their parent companies.
Even in looking at rankings of all life insurance companies in terms of
insurance premiums and other earnings, you will see that the life insurance
affiliates of nonlife insurers improved over where they were when they were
founded in a manner beyond comparison.
(2) Sales channels through agencies
The life insurance affiliates of nonlife insurers did in fact expand in terms ofmanagement scale in accordance with the rapid reorganization of their parent
companies. Accordingly, this development might be similar to that of foreignaffiliated life insurance companies from the standpoint of consolidations andmergers.
However, we need to focus on the sales channels used by the life insurance
affiliates of nonlife insurers. Generally speaking, life insurance products are
frequently sold primarily by female sales staff members. In contrast, the life
insurance affiliates of nonlife insurers typically harness the agency network inplace for the primary nonlife insurance operations of their parent companies.
With sales channels maintained through agencies, nonlife insurance products
as well as life insurance products are handled while the nonlife insurer’s clientbase is utilized. Indeed, this is a state of actions carried out on an integrated basis
by life insurance companies and nonlife insurers. These independent sales
channels help to increase the amount of new policies.
In the life insurance industry, questions about the efficiency of sales channels
have been posed for a long time. This is because there are ongoing concerns overhigh turnover, a problem manifested in the high rates of hiring and resignationof female sales staff members.
It appears that the life insurance affiliates of nonlife insurers that utilize
agency networks have overcome this problem. Agencies typically use theprocess of selling nonlife insurance products as a springboard to selling life
insurance products. This is because the selling of nonlife insurance products
would be negatively affected if salespersons quit with regularity.
To prevent this from happening, the fostering of long-term relationships withclients is an essential requirement. The fulfillment of this requirement forges tiesof trust between the company and the client and leads to an increase in sales.
Chapter 5 71

The breakthrough achieved by the life insurance affiliates of nonlife insurers
is believed to be attributable to not just the expansion of scale throughconsolidations and mergers but also to the appeal of sales channels of this type.
(3) Attributes of products offered by nonlife insurers
The difficulty of selling insurance products has long been recognized bymany in the industry. This is because insurance products, in contrast to general
goods, are intangible. The selling of life insurance products in particular is hard.
In the case of a nonlife insurance product providing coverage to protect anautomobile or a house, anyone can recognize what the potential risks are to acertain degree. However, the same cannot be said for life insurance products,
which means that the various risks pertaining to one’s life must be carefully laidout when selling such products.
Selling through sales staff members can be described as an approach
designed to overcome this problem. To have a client recognize such risks himself
or herself, however, requires the expending of much time and cost.
Thus, a sales staff person tends very highly to become completely absorbed
in sales to an excessive degree. This often gives rise to worst-case outcomes bycausing clients to develop an aversion to and desire to stand clear of suchproducts.
On the other hand, the life insurance affiliates of nonlife insurers do not
engage in such an extreme approach to sales, since they are steeped in theattributes of nonlife insurers. This is because clients who recognize risks andunderstand the need for nonlife insurance products often visit agencies on theirown.
This pattern is also reflected in the selling of life insurance products, suchthat the sort of relentless approach to sales seen in sales staff persons is kept incheck. Evidence suggests that, if anything, the approach taken by the life
insurance affiliates of nonlife insurers gives rise to a favorable impression on thepart of clients.
Part 3: From price competition to the reorganization of life insurancecompanies
As explained earlier, the Japanese life insurance industry was such that kanjinamed life insurance companies enjoyed dominant clout within the context ofthe convoy system. Power relationships, however, began to change in the second72half of the 1990s, as foreign-affiliated life insurance companies and the life
insurance affiliates of nonlife insurers started to exert their presence in themarket.
In order to specifically verify this change, Figure 5-2 presents changes inmarket share in terms of insurance premiums and other earnings by type of life
insurance operation in accordance with the same data for fiscal years 1997 and2012 as used earlier. All surveyed life insurance companies have been divided
into four categories: kanji-named life insurance companies, katakana-named life
insurance companies, the life insurance affiliates of nonlife insurers, and otherlife insurance companies.
Figure 5-2. Market share in terms of insurance premiums and other earnings
by type of life insurance operation-comparing fiscal year 1997 with fiscal year 2012-

In taking a look at this figure, we see that while kanji-named life insurancecompanies had accounted for more than 90% of the market in the past, this share
was lowered to fifty-something percent by 2012. On the other hand, katakananamed life insurance companies, which consisted of foreign-affiliated life
insurance companies and others, gained in market share from five-odd percent
to 25% over the same time period.
In addition, we see that the life insurance affiliates of nonlife insurers, who
Chapter 5 73

had not even gained 1% of the market, managed to lay claim to nearly 5% of themarket. Other life insurance companies, too, grew to corner almost 20% of themarket thanks to the privatization of Japan Post Insurance.
Seen in this light, the overwhelming dominance previously enjoyed by kanjinamed life insurance companies appeared to be weakening. Extrapolating fromwhat we are seeing here, it was conceivable that foreign-affiliated life insurancecompanies and others could have continued to siphon off market share fromkanji-named life insurance companies.
Representative of kanji-named life insurance companies, big (major) life
insurance companies shifted their offensive focus in recent years to efforts to
reduce the prices of their flagship offerings, perhaps due in part to risingconcerns over the criticality of the situation they faced. It was expected that themove to lower insurance premiums would be co-opted by other life insurancecompanies, thereby giving rise to all-out price competition within the industry.
If this did in fact become reality, it would no doubt have eventually caused
the life insurance industry to undergo further reorganization, at which time thebreakdown of market share by type of life insurance operation might have ended
up looking very different from how it came to be constituted at that time.

74

Chapter 6: <2014>
Unprecedented easing measures of the Bank of Japan andasset-management actions undertaken by life insurancecompanies
Part 1: Announcing financial results for the fiscal year that ended in March
2014(1) Financial results corresponding to lower revenues and higher profits
The financial results for major life insurance companies for the fiscal yearthat ended in March 2014 were announced. Insurance premiums and otherearnings, which had been rising in recent years, declined for the first time in halfa decade.
This is because sales of whole life insurance plans, individual annuity
insurance plans, and other savings-type insurance products, which had been
growing under a state of deflation in the economy, floundered. A reduction inassumed interest rates carried out in April 2013 caused the appeal of such plansas savings-type products to wane and the flow of funds to be diverted toinvestment trusts and other types of financial instruments.
Figure 6-1 outlines key data on financial results and reveals that insurance
premiums and other earnings declined for many life insurance companies. While
the slump in savings-type products had a substantial impact on this result, salesof medical insurance and other examples of insurance coming under the categoryof third-sector insurance grew, albeit not by enough to support overall growth.
A positive takeaway from these financial results this year is the fact that basic
profits, an indicator of the profitability of the primary operations of thesecompanies, appeared to be trending upwards. This was attributable to theincrease in the number of life insurance companies that had managed toovercome the problem of negative spreads and transition to positive spreads.
Thanks to considerable improvements in the investment environment madepossible by rising stock prices and a cheaper yen, investment yields finally came
to exceed assumed interest rates corresponding to yields promised topolicyholders.
In terms of aggregate numbers for key life insurance companies, this was thefirst time that negative spreads had been eliminated since investment results
were announced for the fiscal year that ended in March 2001. Consequently,
Chapter 6 75

some life insurance companies started to increase dividends to policyholders.

Foreign-affiliatedDomestic

Figure 6-1. Financial results for major life insurance companies for the fiscal
year that ended in March 2014

NipponDai-ichi
Meiji Yasuda
Sumitomo
T&D
Sony
FukokuMitsui
Asahi
Prudential

Insurance premiums andother earnings
Rate ofincrease or
decrease
48,255▲9.7
43,532
19.4
36,162▲1.2
25,228▲20.8
16,097
▲17.1
9,609
3.8
7,070
▲18.0
5,449
▲5.8
4,114
▲10.6
20,307▲19.0

Positive or negative
spread

5,924
4,284
4,604
3,939
2,102
723
901
516
269
1,261

Rate ofincrease or
decrease
8.4
23.2
16.7
▲6.4
15.2
▲9.6
10.0
▲2.5
2.7
▲15.4

Basic profit

Aflac
MetLife Alico

16,757
16,547

▲16.0
10.5

3,252
10

100.4
▲97.6

Axa

5,519

▲17.7

857

29.7

Previous
fiscal year
1,147
323
1,193
▲157
333
84
140
▲486
▲711
Positivespread257
Positivespread
380

317
▲584
425
▲507
18
21
22
▲530
▲803
▲93
126
317
▲584

Notes: Unit: hundred million yen. Rate of increase or decrease is the percentage change over thepreceding fiscal year (%); ▲ denotes a negative value.

(2) Investment stance of life insurance companies
In this way, the financial results for this fiscal year show that, even as
insurance premiums and other earnings – which are, taken as a whole, equivalent
to sales – flounder, basic profit was rising thanks to the elimination of negative
spreads.
Ironically, this was because the appeal of investment trusts and othercompeting financial instruments was bolstered further even as life insurancecompanies themselves attained better investment results as made possible by asignificantly improved investment environment.
Conventional life insurance products emphasizing the provision of death
protection were stagnating against the backdrop of a declining birthrate andaging society. If we look at the total amount of individual insurance policies inforce as a management indicator reflecting this reality, we can see a downward
trend emerging over an extended period of time.
As expected, as long as sales of savings-type products did not grow,insurance premiums and other earnings were unlikely to expand. For this reason,
their appeal in an investment sense must be enhanced to a greater extent than76

other financial instruments.
For an insurance company, efficient asset management is a condition not justfor overcoming the problem of negative spreads but also for growth.
Thus, if we regard the mission of life insurance companies in terms of theproper enforcement of insurance policies over many years, there is a sense thatthese companies cannot simply engage in proactive asset management activities.
In this context, recent unprecedented easing measures enacted by the Bankof Japan had the potential of affecting the management of assets by life insurancecompanies. It seems that the central bank hoped that there would be a shift in theway life insurance companies engage in investment activities.
In this connection, allow me to explore the investment stance taken by life
insurance companies in light of policy changes that were being implemented by
the Bank of Japan.
Part 2: Unprecedented easing measures enacted by the Bank of Japan(1) Portfolio-rebalancing effectIn April 2013, the Bank of Japan hammered out a set of bold easing measuresthat was both quantitatively and qualitatively unprecedented under the directionof Haruhiko Kuroda, who was the new governor of the Bank of Japan at the time.
These measures fostered great expectations that extrication from a deflationary
economy as promoted through Abenomics might be achieved.
One policy issue of importance for Japan concerned our ability to overcome
deflation and shift to an economy characterized by sustainable growth. The Bankof Japan’s new unprecedented qualitative and quantitative easing measures were
helping to realize its policy goals.
To enable the Japanese economy to dramatically grow, funds needed to beproactively shifted from savings to investments. In hopes of accelerating thisshift, the Bank of Japan wished to see a portfolio-rebalancing effect applied tofinancial institutions and institutional investors.
Specifically, financial easing measures had been implemented by purchasinglarge amounts of government bonds from private banks. Private banks shiftedinvestment funds freed up by lowering their holdings of government bonds toloans receivable and other risky assets. Consequently, funds flowed fromsavings to investments.
In contrast, money in the possession of life insurance companies was
Chapter 6 77

expected to be invested in foreign bonds. This was because long-term interest
rates would rapidly decline due to the Bank of Japan’s easing measures, which
would in turn make it impossible to secure sufficient investment earnings byholding onto government bonds.
If life insurance companies sold large amounts of government bonds to the
Bank of Japan and diverted the large amounts of funds freed up as a result of thisprocess into investments in foreign bonds, foreign currency markets would be
affected.
This would facilitate a shift from yen appreciation to yen depreciation toallow an economic environment that is favorable to iconic Japanese exportindustries to be cultivated.
The inducements to invest in foreign bonds as provided by the Bank of Japannot only enabled life insurance companies to attain higher yields but also gave
the Japanese economy a chance to extricate itself from a state of deflation.
Accordingly, it was hoped that the unprecedented easing measures as enacted
by the Bank of Japan would encourage not just private banks engaged in lending
activities but also life insurance companies acting as institutional investors to
shift from safe asset investment options primarily consisting of government
bonds to riskier asset investment options.
(2) Characteristics of money in the possession of life insurance companies
In the past, there was once a period of time in which Japanese life insurancecompanies were referred to overseas as the seiho (life insurance companies).
This was during the bubble economy of the second half of the 1980s. This term
emerged as these companies garnered much attention in global financial capital
markets due to their penchant for aggressively purchasing foreign bonds.
Although higher yields were sought, currency exchange risks unfortunately
surfaced and large losses were ultimately incurred. In light of the bitter
experiences of the past, life insurance companies would likely be forced to bewary of policy shifts of the sort we saw then on the part of the Bank of Japan.
In this connection, let us examine asset management actions carried out bylife insurance companies based on relevant data by focusing on what happened
before and after the unprecedented easing measures were implemented by the
Bank of Japan.
Figure 6-2 summarizes the balance of government bonds and foreign
securities held by all life insurance companies between the end of June 2012 and78

the end of December 2013, as determined based on materials issued by the Life
Insurance Association of Japan.
Figure 6-2. Changes in investment assets for all surveyed life insurancecompanies(1) Before the implementation of unprecedented easing measures by the Bank of Japan
Government
bonds
Foreignsecurities

End of June 2012
End of September 2012 End of December 2012
142,541,181
145,071,062
146,198,005(106.0)(105.5)(104.9)47,209,552
48,412,448
53,441,259(102.7)(110.4)(121.2)End of March 2013
148,769,242(105.3)55,986,474(119.2)(2) After the implementation of unprecedented easing measures by the Bank of Japan
Government
bonds
Foreignsecurities

End of June 2013
End of September 2013 End of December 2013
149,196,720
149,519,895
149,934,854(104.7)(103.1)(102.6)56,808,156
57,191,344
61,347,810(120.3)(118.1)(114.8)Note 1: The upper figure in each square is the amount (million yen); the lower figure is the year-on-yearchange expressed as a percentage.
Note 2: Source: Life Insurance Association of Japan

Taking April 2013, the month in which the Bank of Japan’s unprecedented
easing measures were announced, as the boundary between before and after, I
compared changes in holdings of government bonds and foreign securities
before and after this point in time.
First, the balance of government bonds held by life insurance companies was
hardly affected by the Bank of Japan’s announcement, as it is shown to havegrown at more or less a fixed rate. If the portfolio-rebalancing effect had beenfunctioning as intended, then we should have expected to see this balance
continuously decrease through the selling off of government bonds.
Since the balance of government bonds nevertheless continued to increase, itmeans that a result that had not been intended by the Bank of Japan occurred.
In contrast, it may be possible to construe the changes in foreign securities as
having occurred in accordance with the Bank of Japan’s expectations. This isbecause the balance of foreign securities held by life insurance companies
increased after the Bank of Japan’s announcement.
However, life insurance companies had been proactively purchasing foreign
securities since before the central bank’s announcement was made. It is notnecessarily true that these companies increased their holdings of foreign
securities by taking advantage of the Bank of Japan’s policy shift.
It had been reported that private-sector banks moved to lend funds freed up
Chapter 6 79

when the Bank of Japan started its large-scale purchasing of government bonds.
Indeed, it can be said that this situation was unfolding as scripted by the Bank ofJapan.
Yet, there was no real sense that there had been sufficiently significant
changes affecting the management of assets by life insurance companies.
While holdings of foreign securities were definitely on the rise, asset
management practices by life insurance companies remained very much focusedon purchasing reliably safe government bonds.
Indeed, the increase in the stock of these companies’ portfolios accounted forby ultra-long-term government bonds was causing the average full-term duration
to rise.
At the end of the day, the tendency on the part of life insurance companies toseek to avoid risks by holding large amounts of government bonds despitewhatever drastic changes in policy were implemented by the government or the
Bank of Japan was strong. This was believed to be an inherent characteristic ofmoney in the possession of life insurance companies.
Since the core of a life insurance company’s operations involves theprovision of protection, risk avoidance is a natural action to be taken by such anenterprise. This is because funds must be properly managed to ensure that there
is no delay in the payment of insurance money in the future.
For this purpose, a company will consider asset management to avoid risks
as much as possible. Moreover, since coverage must be reliably provided overthe long term, asset-side durations must correspond to liability-side durations.
At the same time, it is also a fact that many policyholders wish to see theirinsurance providers engage in the proactive management of assets in hopes ofreceiving high amounts of dividend. In this connection, I will seek to ascertain
whether a risk-avoidance investment stance is a trend that can only be seenamong Japanese life insurance companies.
If a careful investment stance as typified by large holdings of government
bonds is a fundamental trait associated with life insurance companies, then theportfolio-rebalancing effect that was anticipated by the Bank of Japan can beconstrued to have been an impossible notion from the beginning insofar as life
insurance companies are concerned.
To clarify this matter, I would like to explore the nature of asset managementwith reference made to the life insurance industry in the United States, thebiggest market for insurance in the world.
80

Part 3: Current state of life insurance companies in the United States(1) Key data by organization type
Allow me to provide an overview of the industry while referring to Figure 63, which outlines the current state of life insurance companies in the UnitedStates as based on data provided by the 2013 ACLI (American Council of Life
Insurers) Life Insurers Fact Book.
First, it should be noted that there were 868 life insurance companies in the
United States, a number which was far greater than the 43 life insurancecompanies operating in Japan. While there were around 2,300 life insurancecompanies that were active in the United States in the second half of the 1980s,
this number had been continuously declining since that time. This is because
companies repeatedly undergo restructuring due to tough regulations that havebeen put in place in response to the bankruptcies of life insurance companies.
Figure 6-3. Key data by type of organizational structure with respect to life
insurance companies in the United States (2012)
Organizational structure(1) Number of companies(2) Financial data
Amount of insurance
policies in force
Amount of new businessTotal assets
Payments
Insurance premiums andother earnings

Stock companies
Mutual companies
660
120

Cooperatives

Total
88

868

13,742,216

5,094,851

483,849

19,320,916

2,039,778
4,412,993
422,724

764,144
1,217,035
101,78153,023
147,392
9,665

2,856,945
5,777,420
534,170

514,542

128,832

12,414

655,788

Note 1: Unit used for financial data: million dollars
Note 2: ACLI (American Council of Life Insurers) Life Insurers Fact Book (2013); same for Figures 64 and 6-5.

In breaking down the data by organizational structure, we see that life
insurance companies constituting stock companies accounted for quite a bigger
percentage of the industry than life insurance companies constituting mutualcompanies did, not just in terms of company numbers but also in terms of theamount of insurance policies in force and other pieces of financial data.
Figure 6-4 outlines the state of asset management by life insurancecompanies in the United States. In this figure, a division is made between generalaccounts corresponding to life insurance products promising coverage amounts
or benefit amounts and separate investment accounts for which life insurance
products that fluctuate in terms of the balance sheet depending on investment
Chapter 6 81

results are handled.
Figure 6-4. Asset management by account as engaged in by life insurancecompanies in the United States (2012)
General accounts
Bonds
StocksMortgages
Real estate
Policyholder loans
OthersTotal

2,636,436
82,391
345,60221,725130,348
491,137
3,707,639

Percentage
71.1
2.2
9.3
0.6
3.5
13.3
100.0

Separate investment
accounts
Percentage
299,269
14.5
1,642,868
79.4
8,452
0.4
8,834
0.4
367
0.0
109,992
5.3
2,069,782
100.0

Total
2,935,705
1,725,259
354,053
30,559130,715
601,129
5,777,420

Percentage
50.8
29.9
6.1
0.5
2.3
10.4
100.0

Note: Units: million dollars and %.

With general accounts, investments are primarily made in bonds, since stableinterest earnings must be secured over the long term. In contrast, stocks are themain focus of investments with separate investment accounts, since the goal is
to obtain higher earnings while assuming risks.
Since life insurance companies constituting stock companies accounted forquite a bigger percentage of the industry than life insurance companies
constituting mutual companies did, not just in terms of company numbers but
also in terms of total assets, there may be some who feel a bit perplexed to see
an investment system focusing on bonds dominating the mainstay generalaccounts column.
This is due to the fact that since a stock company engages in actions for the
primary goal of maximizing profits for shareholders, it would normally be
assumed that such a company would carry out high-risk investments not justwith separate investment accounts but also with general accounts.
However, actions are actually carried out with a focus on bonds in accordancewith an investment approach that emphasizes safety. We should then determine
the duration corresponding to the average full term of held bonds.
(2) Holding bonds as a means of managing risks
For a life insurance company, the duration of held assets must be long term
to match that of liabilities. This will enable the company to be sufficiently
capable of making future payments.
This role is notably filled by bonds, which account for a significant
percentage of held assets. In this connection, let me examine the durations of82

bonds held by American life insurance companies.
For Figure 6-5, the estimated values of durations were computed based onheld bonds for the period between 2004 and 2012. Changes in these values are
depicted in this figure.
Figure 6-5. Changes in the durations of bonds held by life insurancecompanies in the United States (general accounts)

In looking at this figure, we see that bond durations had been rising since2008. From this, we can conclude that the number of remaining years for bonds
held by American life insurance companies was rising.
This is because asset liability management (ALM), by which asset-side
durations are matched with liability-side durations, was being undertaken. It isclear that a system for absorbing unforeseen interest rate fluctuation risks was
being steadily put into place.
What we should focus our attention on, however, are the contents of heldbonds. If we look at bond types under general accounts in 2012 in terms ofpercentage of total assets, we see that U.S. government bonds, foreign
government bonds, corporate bonds, and securitized instruments accounted for
8.5%, 2.1%, 47.5%, and 13.1% of total assets, respectively.
Bonds held by Japanese life insurance companies typically consist of
government bonds. In contrast, government bonds do not account for as big a
percentage of held bonds in the United States. There, bonds consist primarily ofinvestment-grade corporate bonds. This indicates that companies might be
Chapter 6 83

attempting to secure stable sources of interest earnings but are neverthelessseeking higher earnings that can be obtained from government bonds.
In any case, this does not change the fact that companies were extending
durations with a focus on highly safe corporate bonds while emphasizing a
stance of commitment to asset liability management.
Part 4: The form of life insurance companies in the future(1) Asset management oriented towards the avoidance of risks
As can be seen from examining approaches to asset management in the life
insurance industry in Japan and the United States, companies are inclined to
avoid risks in both countries.
While Japanese life insurance companies place a greater weight on
government bonds and American life insurance companies place a greater
weight on corporate bonds, there is no difference in the sense that the approach
to investment is one that emphasizes safety. Indeed, investment durations are
getting longer in both countries.
While I have thus far pointed out similarities with Japanese life insurancecompanies while examining American life insurance companies, the same things
can be said of life insurance companies in Europe.
For example, a look at the composition of assets belonging to key life
insurance companies in such countries as the United Kingdom, Germany, andFrance reveals that bonds are held with a focus on low-risk offerings while
higher-risk assets account for quite a small percentage of total assets.
When all is said and done, long-term asset management for the avoidance ofrisks by Japanese life insurance companies is a common feature found in the life
insurance industry of each of the world’s leading industrialized nations.
Underpinning this is the strong influence exerted by global solvency controls on
insurance companies.
These controls encourage life insurance companies to compute the quantities
of different risks for which insurance companies provide coverage based on
proprietary formulas and secure sufficient capital to accommodate such risks.
If a company is to be in accordance with formulas for computing asset
management risks incorporated into this process, then it must excessively
increase capital if risky assets are added. To avoid this problem, the company
will increase the weight it places on reliably safe bonds.
84

The ultimate objective of the quantitative easing measures put forth by
Governor Kuroda of the Bank of Japan was to direct the flow of capital fromsavings to investments. Indeed, the success of Abenomics hinges on theapproach taken by private-sector companies in making capital investments.
For this purpose, funds must be directed towards risky investment targets,
such as loans and stocks, primarily by private-sector banks and institutional
investors.
However, if you are familiar with the nature of money in the possession oflife insurance companies, then you should be able to easily deduce that theapproach taken by life insurance companies to the management of assets cannot
be changed without difficulty regardless of any bold change in policy made by
the Bank of Japan.
(2) Default risks associated with government bonds
Life insurance companies must reliably provide protection to clients, whichgoes to the core of their operations. Since the reinforcement of solvency controls
has become a global trend in recent years, a conservative investment stance forthe avoidance of risks on the part of these companies is unlikely to change
anytime soon.
Nevertheless, funds will need to be diverted from savings to investments inorder to enable the Japanese economy to fully extricate itself from its
deflationary state and become converted into an economy based on sustainablegrowth. To this end, if life insurance companies could also examine matters froma longer-term point of view, then they should ideally engage in assetmanagement practices for which a certain degree of risks would be assumed.
Compared to the lowest point in the past when the problem of negative
spreads had arisen, the financial strength of life insurance companies has
increased substantially. Even so, it is clear that no rock-solid system facilitating
the proactive assumption of risks is in place.
When you think about the future of life insurance companies, however, it ishoped that they will at some point shift towards seeking to secure high levels ofinvestment earnings. It is conceivable that, by that time, life insurancecompanies will also be enjoying a big enough profile to spur on the diversion offunds from savings to investments.
At present, life insurance companies have huge holdings of ultra-long-term
government bonds, which are regarded as reliably safe investment targets.
Chapter 6 85

Against this backdrop, the national debt has continued to balloon. As of the endof September 2013, it had exceeded 1,000 trillion yen, which means that if thenational debt were apportioned equally to everyone in the country, every man,woman, and child in the country could be said to owe approximately 7.94 million
yen.
The direction in which the national debt is going is such that the situation canbe likened to a runaway train. As the prospect of ever repaying the debt in wholecontinues to disappear, the time may yet come when people will feel insecure
about the investment stance being taken by life insurance companies, whereby
massive amounts of government bonds continue to be held.
While life insurance companies hold large amounts of government bonds outof a desire for safety, these bonds can be regarded as dangerous in light of thedefault risk associated with government bonds. If this perception were to takehold, then changes in investment policy would no doubt be in the process of
being implemented.

86Chapter 7: <2015>
Interpreting insurance solicitation rules as learned fromreading textbooks on the economy
Part 1: Announcing financial results for the fiscal year that ended in March
2015(1) Favorable financial results and investment earnings
The financial results for major life insurance companies for the fiscal yearthat ended in March 2015 were announced. Numerous life insurance companies
posted positive results, setting new all-time records in terms of earnings.
Equivalent to sales, insurance premiums and other earnings had by and large
increased over the previous fiscal year. In addition, basic profits, an indicator of
the profitability of the primary operations of these companies, and bottom-line
net profits were both trending upwards.
Improvements in investment earnings can be regarded as a significant factor
behind these favorable financial results. This is because, with Abenomics
helping to keep the yen down and elevate stock prices, yen-denominated interest
income from foreign bonds and dividends from stocks held by life insurancecompanies increased.
Consequently, some life insurance companies managed to exceed
conventional expectations by significant margins and increase positive spreads,
while others were able to finally liberate themselves from the problem ofnegative spreads, whereby investment returns fell short of returns promised topolicyholders.
Increasing profits were leading to higher dividends made to policyholders. In
complete contrast to the time when these companies were stuck trying to address
the problem of negative spreads, a greater willingness to return profits topolicyholders had emerged.
It appears that this shift from negative spreads to positive spreads had been
having a huge impact on the management of life insurance companies. It is clearthat this favorable turnaround in the investment environment was benefiting
policyholders through an increase in the amounts of dividends being made.
Figure 7-1 outlines insurance premiums and other earnings, basic profits, andnegative/positive spreads by dividing the financial results for 13 major life
insurance companies into those for domestic life insurance companies and those
Chapter 7 87

for foreign-affiliated life insurance companies.
These values reveal that the situation for many life insurance companies was
improving. While higher numbers for insurance premiums and other earnings
are notable, it is also clear to see that higher basic profits were a function ofdevelopments concerning negative and positive spreads.
Basic profits increased as positive spreads rose or negative spreads shrank.
The fact that asset management results dictated how financial results would beobtained by life insurance companies is highly evident.

ForeignaffiliatedDomestic

Figure 7-1. Financial results for major life insurance companies for the fiscal
year that ended in March 2015

Dai-ichiNipponMeiji Yasuda
Sumitomo
T&D
Sony
FukokuMitsui
Asahi
Prudential

Insurance premiums andother earnings
Rate ofincrease or
decrease
54,32724.8
53,371
10.6
34,084▲5.7
25,971
2.9
19,580
21.6
9,140
▲4.9
7,964
12.6
5,451
0.0
4,059
▲1.3
21,157
4.2

Basic profit

4,720
6,790
5,063
4,050
1,827
765
959
590
276
1,683

MetLife

17,476

5.6

696

Aflac
Axa

15,316
5,489

▲8.6
▲0.5

4,529
617

Rate ofincrease or
decrease
5.8
14.6
10.0
2.8
▲13.1
5.7
6.4
14.3
2.4
33.5

Positive or negative
spreadPrevious
fiscal year

743
323
1,906
1,147
1,686
1,193
81
▲157
345
333
130
84
236
140
▲462
▲486
▲649
▲711
Positive spread(amount is not disclosed)
68 times
Positive spread(amount is not disclosed)
39.3
437
257
▲28.0
282
380

Notes: Units: hundred million yen, %. Rate of increase or decrease is the percentage change over thepreceding fiscal year. ▲ denotes a negative value.

(2) Effect of being number one
Garnering attention with respect to the announcement of financial results thistime was the change in the top of the leaderboard in terms of insurance premiums
and other earnings. This marked the first time in the postwar era when Nippon
Life Insurance ceded the top spot to Dai-ichi Life Insurance for an entire fiscal
year.
It appears that the Dai-ichi Frontier Life Insurance Company, a subsidiary of
the Dai-ichi Life Insurance Company offering savings-type insurance products
for sale through bank tellers, propped up the numbers for insurance premiums
and other earnings. The rate by which premiums and other earnings grew for this88company was 50%.
However, the company did not manage to pass Nippon Life Insurance interms of basic profit. These two companies remained apart when it came to profit.
The fact that these two companies switched places at the top of the rankings interms of sales was nevertheless a remarkable development in the life insurance
industry.
For the life insurance industry, the so-called number-one effect is highly
influential. Not only is the trust placed in the company elevated but the potential
for growth is also fortified. Thus, the possibility that a leading company mightfall from the top of the leaderboard also grows smaller.
By proactively selling highly-popular new insurance products, Nippon Life
Insurance sought to recover its industry-leading status. However, thecompetition between Dai-ichi Life Insurance and Nippon Life Insurance wasalso linked to debates surrounding the form of management to be adopted by life
insurance companies.
This is because the traditional loyalty of the market towards mutualcompanies may be weakening as a result of mutual company Nippon Life
Insurance being overtaken by Dai-ichi Life Insurance, a company that had
transformed itself into a stock company.
In any case, changes in insurance premiums and other earnings are, for thelife insurance industry, an important management indicator to which attention isalways paid. In this connection, let us focus on trends concerning the selling of
insurance below.
In recent years, activities being carried out by independent agencies havegarnered notice. Allow me to explain while also maintaining a focus on thisdevelopment.
Part 2. Economic background behind insurance-solicitation rules(1) Establishing basic rules
In June 2013, a working group of the Financial System Council released areport entitled Modalities for New Insurance Products/Services and Solicitation
Rules. In response, the Act for Partial Revision of the Insurance Business Act
was enacted in May 2014.
While insurance products and services also incorporate highly interesting
Chapter 7 89

contents, I will limit the scope of my explanation to the solicitation rules
applicable to insurance.
Regulations governing insurance solicitation originally were composed of
the Act on the Control of Insurance Solicitation, which was enacted in 1948, and
the Act on the Revision, etc., of Related Acts for the Financial System Reform,
which was adopted in 1998.
At the same time, sales channels became notably diversified in the context ofsales. Independent agencies, including brick-and-mortar offices visited byclients, came to assume greater prominence alongside bancassurance andwebsites and other non-face-to-face means of engaging in sales.
The insurance solicitation system that had traditionally been anchored byfull-time staff members belonging to insurance companies appeared to beundergoing a sea change.
In the aforementioned report, which became the basis for amending the law
governing the industry, the “establishment of basic rules for insurance
solicitation” and the “regulations applicable to insurance solicitors” are outlined
for the accommodation of environmental changes.
(2) Obligations and regulations
Basic rules governing insurance solicitation cover two obligations: theobligation to ascertain the client’s intent and the obligation to provide
information to the client.
In soliciting insurance products, you must first ascertain the client’s intent
and verify that the insurance product in question meets the client’s needs before
concluding an agreement. For this purpose, information needs to be provided tothe client. This allows the client to deepen his or her understanding of insurance
products.
A system designed to provide an opportunity to check whether arecommended insurance product matches the client’s own needs with the use ofa written confirmation of intent had already been put into place. Apparently,
however, this system was not sufficiently effective.
In addition, the provision of product information to clients used to lackbalance in comparison with other financial instruments. Savings accounts andother products exist as easy-to-understand financial instruments. For these typesof financial instruments, the provision of information is mandated. In contrast,
no provision mandating the proactive provision of information had been set forth90

in the Insurance Business Act prior to its amendment.
The basic rules governing insurance solicitation have been summarized inaccordance with these points. However, as long as the insurance solicitor
standing between an insurance company and a client does not appropriately
engage in his or her duties, the proclamation of these two obligations represents
nothing more than a desire on the part of policymakers.
In this connection, an obligation to develop systems was put forth as aregulation to be applied to insurance solicitors. While an obligation to develop
systems had long been imposed on insurance companies, insurance solicitors
had not been subject to this obligation.
In this context, independent agencies and other examples of large-scale sales
channels emerged to mark significant changes to the environment in which
insurance operations were undertaken. Consequently, it came to be mandated
that not only insurance companies but insurance solicitors as well would be
required to develop systems to appropriately engage in operations and duties.
This allowed the competent authorities to shift from a system for indirectlysupervising insurance solicitors through insurance companies to a system bywhich direct supervision was made possible.
However, the system of supervision varied in accordance with the scale andcharacteristics of operations and duties undertaken by insurance solicitors. It was
not necessarily the case that a universal set of regulations applied to all insurance
solicitors.
For example, it was possible to limit supervision to the indirect supervisionof the sales staff members of an insurance company provided that an appropriate
training system was being run.
(3) Promoting financial education
In this way, the report in question explicitly outlined regulations applicable
to insurance solicitors after indicating the obligation to ascertain the intent ofeach client and the obligation to provide information to each client as basic rules
for insurance solicitation. The contents of this report were in fact reflected in theamendments made to the Insurance Business Act.
While the imposition of regulations on insurance solicitors constituted theestablishment of a new framework, these changes felt like nothing more than thefortification of the basic rules governing insurance solicitation throughcodification mandating what had been a conventional approach to the matters in
Chapter 7 91

question.
An insurance solicitor should, at all times, ascertain the intent of a client andprovide appropriate insurance products while providing information to the client.
This stance should apply equally whether you are talking about the past or the
future.
Notwithstanding this point, why was the Insurance Business Act partiallyamended? As mentioned earlier, it was likely done in part to ensure consistency
with other statutes.
Specifically, the amendments were likely based on efforts to achieve
consistency with the Banking Act and the Financial Instruments and ExchangeAct.
An industry-regulating statute is to be amended not in anticipation ofdevelopments in reality but when it no longer conforms to actual conditions. If
one accepts that this view is correct, then one gets the sense that the heightenedcompetitiveness of insurance products in comparison with general financial
instruments over time constituted the backdrop to the given amendments thatwere made to the Insurance Business Act.
The report summary sought to further urge the insurance industry and otherconcerned parties to engage in financial education initiatives. This was becausea certain degree of knowledge concerning financial matters is required to have aclient enroll in an insurance plan that matches his or her needs.
No matter how much an insurance solicitor carefully explains the features ofan insurance product that is appropriate for a client, such actions will not lead toenrollment as long as the client himself or herself does not possess financial
knowledge. The spread of financial education will help promote the growth of
insurance.
In the next part, I will introduce mechanisms for determining insurance
products based on normal economics textbooks that constitute a basis forworking out ways to provide financial education. I believe that this will enable
the report to be understood in greater depth.
Part 3: Insurance solicitation rules as decoded in economic textbooks(1) Providing protection-type insurance products
In our lives, we are confronted with all sorts of risks. In order to lead an
economically fulfilling life, you will need to recognize these risks. You must92

also strive to secure a stable life for your future.
A protection-type insurance product is designed to eliminate existing risks,
while a savings-type insurance product is designed to stabilize the client’s futurelife.
If we were to harness tools of analysis as used in economics textbooks, we
can depict these roles as fulfilled by insurance products as shown in Figures 7-2(1) and (2). These figures indicate rational mechanisms for determining income
to the satisfaction of people not just in the present but in the future as well.
First, let us examine Figure 7-2 (1). This figure presents a state in whichcurrent income (Y0) is exposed to risks. In the unfortunate event that a riskmaterializes, income (Y1) would be the outcome.
From utility curve UU, which shows the level of satisfaction generated fromdifferent levels of income, we see the level of utility (U0) corresponding to thepoint in time at which income equals income (Y0) and the level of utility (U1)corresponding to the point in time at which income equals income (Y1).
The current state corresponds to point A. The state when a risk materializes
is shown as corresponding to point B. The expected value of utility arising from2 types of income according to the probability that a risk will materialize is utility(U2) from point C. This is referred to as expected utility.
The income that is equivalent to satisfaction is income (Y2) from point D.
This represents a risk-free level of income that is capable of properly covering astate of exposure to realistic risks.
In this context, a protection-type insurance product functions effectively,
since any shortfall in income suffered in the event that a risk materializes will befully offset. By paying a pure premium, utility is raised to a determined level atpoint E.
However, the insurance premium consists of a net premium and loading
equivalent to the service fee imposed on an insurance contract (policy). Thus, aclient must pay an amount equivalent to the difference between income (Y0) andincome (Y2) as the maximum insurance premium that can be selected.
The probability that a given risk will materialize is a subjective probability
as assumed by the individual in question. Some people are risk-averse whileothers are risk-tolerant. Trends in protection-type insurance products are afunction of differences in the degree to which a given risk is avoided.

Chapter 7 93

Figure 7-2. Mechanism for determining an insurance product94

Accordingly, an insurance solicitor needs to surmise the extent to which aclient wishes to avoid risks while accepting the client’s intent. Alternatively, if
the client is completely unaware of the risks involved, an insurance solicitor will
also need to explain these risks while providing information.
This should cause the client to become more inclined to purchase aprotection-type insurance product in order to raise his or her own level of
expected utility. This is what is supposed to happen when the basic rules of
insurance solicitation are properly followed.
It should be noted that insurance products are not the only means by whichrisks can be eliminated. By accumulating funds, risks can be covered. Of course,
this is not to say that one can be fully relieved of all risks.
That said, general financial instruments can also be described in terms ofcompeting with protection-type insurance products, since they function to somedegree as a means of covering existing risks.
(2) Providing savings-type insurance products
We cannot live while thinking only about our current financial state. We mustalso give serious thought to our own future. On this note, Figure 7-2 (2) depicts
an individual’s present and future income situations.
Point F in this figure lies at the intersection of present income (Y0) and future
income (Y3). However, since the individual is enrolled in a protection-typeinsurance plan to eliminate existing risks, the effective income at present isincome (Y2), which equals present income (Y0) less the insurance premium.
Thus, point G captures the individual’s true financial state.
People tend to set aside a portion of their present income as savings for the
future. In this figure, a budget line combining present and future incomes isshown as a straight line extending in an upper-left direction from point G.
The combination of present and future incomes generating maximum
satisfaction on this line is point H, which is where this line comes into contact
with indifference curve U’U’. This curve depicts income combinations for which
satisfaction is at a constant level.
While there exists an infinite number of indifference curves, the maximum
combination that is budget-feasible is at point H, where the indifference curvecomes into contact with the budget line. In this case, present consumption is C1*
and future consumption is C2*.
Thus, present income (Y2) less present consumption (C1*) is committed to
Chapter 7 95

the future as savings to facilitate future consumption (C2*).
Savings are what enables the fulfilment of an important role in determining
the apportionment of present and future incomes. Various financial instruments
are the means by which such savings are carried out. Examples include a bankdeposit or savings account and investment trusts and stocks offered by securities
firms.
Of course, savings-type insurance products offered by insurance companies
are also a typical example of a savings vehicle. For instance, an individual
annuity insurance plan is the most easy-to-understand savings vehicle that one
can find. The same can be said of endowment insurance plans and whole life
insurance plans.
The degree of time preference by an individual towards the present on the
one hand and the future on the other determines the magnitude of savings. Somepeople prefer to consume in the present more than in the future while others
prefer the opposite. This is shown by the slope of the indifference curve.
Accordingly, where a savings-type insurance product is being sold, theinsurance solicitor needs to know the time preference of the client and tie it towhatever contract is concluded, after explaining the insurance product that is
consistent with the client’s preference. It goes without saying that this applies
equally well to any typical financial instrument constituting an alternative to asavings-type insurance product.
Part 4: Discussions concerning commissions
The report in question also discusses the appropriateness of the disclosure ofcommissions. In this context, doubts arose as to whether independent agencies
recommended, from among multiple options, products with high commissions
to their clients.
This is because independent agencies used to receive little in the way of
instructions as issued by insurance companies compared to insurance solicitors
belonging exclusively to a single company. However, this problem would
disappear if an appropriate system were to be developed. For this reason, thereport did not seek the disclosure of commissions.
The job of an insurance solicitor begins with the ascertainment of risks
affecting a client and the provision of precise advice to allow the client to achievefinancial stability into the future. This was learned from economics textbooks.
96

A commission can also be thought of as consideration for services renderedby an insurance solicitor. If there is no ascertainment of risks affecting a clientand no effort undertaken to lay out a plan for the future, then massive losses may
eventually be incurred. The advice provided by an insurance solicitor is meant
to impart value greater than the commission to the client.
At the same time, the advice provided by an insurance solicitor may well be
unnecessary if a client is sufficiently knowledgeable about risks and futureplanning. In such a case, the commission should be lowered.
Such a description could very well be applied directly to non-face-to-facesales through online channels. The appeal of Internet sales can be found incheaper insurance premiums. This is because there is no need to receive advice
when seeking a policy via the Internet.
If a commission is expressly disclosed, the amount could be construed as anadvisory signal made to the client. Would it not make interactions with insurance
solicitors easier to understand for clients?
It is said that amendments to the Insurance Business Act were made toachieve consistency with other industries. In terms of economic rationale, it isbelieved that these amendments were made since insurance products areconstituted in such a way that they effectively compete as alternatives to general
financial instruments.
Meanwhile, commissions are disclosed for investment trusts. The
competitive relationship between investment trusts and insurance products soldthrough bank tellers is further intensifying. A system in which commissions are
not disclosed for only insurance products is a confusing one for clientspurchasing financial instruments.
In the life insurance industry, discussions were held concerning thedisclosure of the three surplus factors (profit or loss attributed to differences inrisks, profit or loss attributed to differences in interest rates, and profit or loss
attributed to differences in expenses). The industry declined to disclose the threesurplus factors on the grounds that they were equivalent to a disclosure of costs.
However, these are announced at the time financial results are disclosed prettymuch as a matter of course by many major life insurance companies these days.
In light of these aspects of the past, you may conclude that solicitationcommissions might someday come to be disclosed.

Chapter 7 97

Chapter 8: <2016 (i)>The Bank of Japan’s negative interest rate policy and the
management of life insurance companies
Part 1: Announcing financial results for the fiscal year that ended in March
2016
The financial results for major life insurance companies for the fiscal yearthat ended in March 2016 were announced. Figure 8-1 summarizes thesefinancial results for 12 major life insurance companies and Japan Post Insurance.
Let us examine insurance premiums and other earnings, a figure that isequivalent to sales, and basic profits, a figure that is equivalent to operating
income.
Figure 8-1. Financial results for major life insurance companies for the fiscal
year that ended in March 2016
Insurance premiums andother earnings

Basic profit

ForeignaffiliatedDomestic

Year-on-yearchangeYear-on-yearchangeNippon62,620

16.6

7,076

3.9

Dai-ichi

55,860

2.8

5,351

13.4

Meiji Yasuda

33,578

▼1.5

4,599

▲9.2

Sumitomo

30,448

17.3

3,017

▲25.5

T&D

15,745

▲19.6

1,530

▲16.2

Sony

10,280

12.5

430

▲43.8

Fukoku

7,888

▲1.0

948

▲1.2

Asahi

4,014

▲1.1

259

▲6.2

Prudential

22,289

5.4

1,708

1.5

MetLife

16,313

▲6.7

383

▲45.0

Aflac

15,333

0.1

2,602

▲42.6

Axa

6,044

10.1

419

▲32.1

4,642

▲9.9

Japan Post
54,138▲9.1
Note: Units: hundred million yen, %. ▲ denotes a negative value.

For the first time in two years, Nippon Life Insurance topped the industry
leaderboard in terms of insurance premiums and other earnings. This was
attributable in part to the positive performance of foreign currency-denominatedwhole life insurance plans as sold through bank tellers under conditions of ultra98

low interest rates and to the effect of the acquisition of Mitsui Life Insurance, acompany with which a business merger was concluded in December 2015.
Likewise, Dai-ichi Life Insurance also benefited from the positive
performance of foreign currency-denominated products as sold through banktellers and saw its insurance premiums and other earnings grow thanks in part to
the influence of U.S.-based Protective, which it purchased in February 2015. The
company nevertheless failed to retain its hold on first place.
While jostling for ranking position, both Nippon Life Insurance and Dai-ichi
Life Insurance reported favorable increases in earnings and profit but, generally
speaking, there were more companies in the industry that suffered from lower
earnings than companies that posted higher earnings. Similarly, more life
insurance companies incurred a loss rather than a profit in terms of basic profit.
This was because yields from government bonds, which play a central rolein the midst of an ultra-low interest rate environment, were decreasing. Thus,
insurance premiums on single-payment insurance plans came to be increased
and sales of plans came to be discontinued one after another, thereby holdingback performance results.
While proactive engagements in investments and loans and foreign bondinvestments through which high interest earnings can be obtained areconceivable, there is a limit to the schemes that can be conceived for investment
capabilities. As the currency market wavered with the rising of the yen andweakening of the dollar, some life insurance companies notably sustained losses
while their interest incomes from foreign bonds decreased.
As long as the ultra-low interest rate investment environment did not change,
life insurance companies would continue to be buttressed by increasingly harshwinds. Surprisingly, however, the Bank of Japan decided to shift its focus froman ultra-low interest rate policy to an even more aggressive negative interest rate
policy. Savings-type products would likely undergo further price hikes anddecisions made by companies to refrain from selling these products. It appeared
as if life insurance companies would become even tougher to run than everbefore.
Below, I shall specifically explore, from an accounting perspective, thequestion of how life insurance companies would seek to absorb this latest shock
while focusing on the Bank of Japan’s negative interest rate policy. I would also
like to touch on long-term solutions in accordance with my findings.

Chapter 8 99

Part 2: Introducing a negative interest rate policy(1) Background behind the Bank of Japan’s unprecedented easing
measures
Since April 2013, Governor Haruhiko Kuroda of the Bank of Japan had been
implementing unprecedent easing measures and lowering interest rates bypurchasing large amounts of government bonds. In October 2014, he expanded
the scale of government bond acquisitions to reinforce the central bank’s
monetary easing stance.
Despite these moves, the rate of inflation did not reach the initial policy goalof 2%. In this connection, the Bank of Japan finally embarked on the
introduction of a negative interest rate policy on January 29, 2016.
Figure 8-2. Yield curves for government bonds

This meant that a lending bank would instead have to pay interest out of a
portion of its current account balance with the Bank of Japan.
Figure 8-2 depicts different yield curves for government bonds: a yield curve
three years before the Bank of Japan’s unprecedented easing measures went into
effect (April 1, 2013), a yield curve just prior to the adoption of the negativeinterest rate policy (January 28, 2016), and a yield curve as of the end of May
2016 (May 27, 2016).
As can be understood by taking a look at this figure, interest rates in generalshifted downwards as a result of the central bank’s large-scale acquisitions ofgovernment bonds. The introduction of a negative interest rate policy had anespecially profound impact. Not only did the yield curve shift downwards but
100the portion of the curve corresponding to 10-year long-term government bondyields dipped below zero.
While the Bank of Japan was hoping to see a positive impact on consumption
and investments resulting from a lowering of real interest rates, the reality
unfortunately is that we remained unable to extricate ourselves from a state ofdeflation and thereby attain the original objective behind this measure. Instead,the side effects from the negative interest rate policy were putting a strain on therunning of financial institutions.
(2) Side effects affecting financial institutions
Faced with difficulties in further lowering deposit interest rates, banks
lowered interest rates on loans. Consequently, profit margins shrank. If such astate persists, the management of banks would become more volatile and theirability to serve as financial mediators could become compromised.
A flagship product of securities firms, money management funds (MMF) had
also become directly affected by negative interest rates. With stable yields nolonger possible to secure, companies were finally forced to discontinue
investment activities and sales.
Likewise, life insurance companies were being exposed to a harsh investment
environment. It had become difficult to secure yields promised to policyholders
thanks to negative interest rates. Above all, reductions in long-term interest rates
were having quite an impact given the nature of life insurance products.
While the Bank of Japan’s unprecedented easing measures had alreadycaused companies to stop selling single-payment endowment insurance plans
and single-payment fixed-amount annuity insurance plans, it had also become
difficult for companies to engage in the selling of single-payment whole life
insurance plans. For this reason, life insurance companies that were choosing topartially suspend sales or substantially raise insurance premiums had also
emerged.
Single-payment whole life insurance plans were popular as an instrument
highly geared towards savings for those seeking a way to invest their retirement
allowance money. This was because you could obtain relatively higher yields
than you could with fixed-term deposits offered by banks dealing with ultra-low
interest rates. However, personal investment targets were regarded as being
likely change to some extent in the future.

Chapter 8 101

Part 3: The management of life insurance companies in terms of basic
profit(1) Income calculation mechanism used by life insurance companies
Life insurance companies responded to the Bank of Japan’s ultra-low interest
rate policy by suspending sales of flagship life insurance products and raising
insurance premiums. It is believed that these actions were squeezing the business
operations of these companies.
Insofar as the financial results for this year reveal, however, the situation had
not become as serious as you might have thought. These results could not be
described as favorable but neither were they all that bad. Some major life
insurance companies had even announced increased dividends in successive
fiscal periods.
While this situation might have appeared to be full of inconsistencies, it iseasy to understand if the way in which income was calculated at life insurancecompanies is known. Countermeasures that might be taken by life insurancecompanies when negative interest rates are maintained can also be anticipated tosome degree.
In this connection, I will begin by describing the mechanism by which life
insurance companies calculate income with reference made to Figure 8-3. I willthen explore the impact that the Bank of Japan’s ultra-low interest rate policy
will have on the management of life insurance companies.
Figure 8-3. Income calculation process at life insurance companies(1) Ordinary profit[1] Basic profit[1]＋[2]＋[3](i) + (ii) + (iii)(i) Profit attributed to differences in risks(ii) Profit attributed to differences in expenses(iii) Profit attributed to differences in interest rates[2] Capital profit or loss
[3] Non‐recurring profit or loss
(2) Extraordinary profits or losses(3) Corporate taxes and other taxes and dues
(4) Unappropriated surplus for the current term

(1) + (2) – (3)A primary variable used by life insurance companies when calculating
income is basic profit, which is equivalent to the sum of the three surplus factors(profit attributed to differences in risks, profit attributed to differences in102

expenses, and profit attributed to differences in interest rates). Basic profit is anindicator of the profitability of the primary operations of these companies. A
detailed explanation of the three surplus factors is as follows.
Profit attributed to differences in risks is the difference between the payment
amount as required based on the expected risk materialization rate (expectedmortality) and the actually materialized payment amount. Profit attributed todifferences in expenses is the difference between the business expenses as
required based on the expected rate of expenses and the actual business expenses.
Profit attributed to differences in interest rates is the difference between
investment earnings as calculated based on assumed interest rates and the actual
investment earnings.
Basic profit plus the capital profit or loss from securities and any nonrecurring profit or loss equals ordinary profit. By adding extraordinary profits orlosses and deducting corporate taxes, you are ultimately left with anunappropriated surplus for the current term. Part of this is distributed topolicyholders as dividends.
As expected, basic profit is what effectively determines how much surplus
funds a company has. If the amount of basic profit is high, then surplus funds
will also increase as will dividends to policyholders. For this reason, if a life
insurance company is to be assessed in terms of its management, then changes
in the three surplus factors comprising basic profit will no doubt be watchedclosely.
(2) Immediate impact and specific countermeasures
Life insurance companies for which basic profit declined over the preceding
fiscal year thanks in part to the impact of lower interest rates were a generally
notable aspect of the financial results for this year. This is because such results
are attributable to stagnancy in terms of interest gains.
The fact that companies were nevertheless earning sufficient basic profits did
not appear to be changing. To illustrate, the sum of the basic profits earned by
the four big life insurance companies in the industry (Nippon, Dai-ichi, Meiji
Yasuda, and Sumitomo) exceeded two trillion yen, a high level indeed.
However, if the ultra-low interest rate investment environment remained in
effect over the long-term, it would become increasingly difficult to secure profit
attributed to differences in interest rates. This is because government bonds
accounted for a significantly high percentage of assets held by life insurance
Chapter 8 103

companies, which means that interest earnings obtainable from such assets
would become more and more stagnant over time.
Figure 8-4 outlines changes in investment assets for all life insurancecompanies. Holdings of securities accounted for an overwhelmingly large
percentage of investment assets. Moreover, Figure 8-5 reveals that government
bonds constituted a typical asset type within the category of securities. The
durations (full terms) of held government bonds were extended in accordancewith the characteristic of products offered by life insurance companies.
Figure 8-4. Changes in investment assets for all life insurance companies
FY 2010
FY 2011
FY 2012FY 2013
FY 2014

Cash andMonetary
Loans
TangibleCall loans
Securities
deposits
trustsreceivable fixed assets
36,097
14,13918,458 1,708,079
293,296
66,831
(1.6)
(0.6)
(0.8)
(76.3)(13.1)(3.0)
22,905
19,115
17,716 1,829,732
282,448
65,153
(1.0)
(0.8)
(0.8)
(78.4)(12.1)(2.8)
28,50725,634
18,031 2,056,866
275,530
63,740
(1.1)
(1.0)
(0.7)
(80.8)(10.8)(2.5)
27,532
24,396
18,775 2,156,527
270,786
62,306
(1.0)
(0.9)
(0.7)
(81.8)(10.3)(2.4)
34,02032,275
18,976 2,331,523
268,329
61,977
(1.2)
(1.1)
(0.7)
(82.6)(9.5)(2.2)

Others102,141(4.6)
95,569(4.1)
77,046(3.0)
74,614(2.8)
76,330(2.7)

Total assets
2,239,044(100.0)2,332,641(100.0)2,545,357(100.0)2,634,939(100.0)2,823,432(100.0)Note 1: Amount of total assets for all life insurance companies; exclusive of Japan Post Insurance.
Note 2: Units: hundred million yen; %. Parentheses denote composition ratios expressed as percentage
figures. Source: Life Insurance Trends (2015), Life Insurance Association of Japan.

Accordingly, even if the adoption of the Bank of Japan’s negative interest
rate policy were to rapidly cause yield curves to shift downwards, it would nothave an impact on the investment earnings of life insurance companies in the
short run. This is because nothing more would happen than the replacement of asmall percentage of government bonds each fiscal year. However, if a state ofultra-low interest rates were to persist over a prolonged period of time, a serious
problem would emerge due to reductions in interest earnings.
While a certain amount of profit attributed to differences in interest rates was
secured as reflected in the financial results for this fiscal year, it is not possible
to believe that such a result could be maintained in the future with assurance. As
countermeasures, companies discontinued sales of single-payment whole-life
insurance plans or raised insurance premiums in line with changes in assumed
interest rates. What other options might they have been able to entertain?

104

Figure 8-5. Changes in securities for all life insurance companies

FY 2010
FY 2011
FY 2012FY 2013
FY 2014

local
Government
government
bonds
bonds
682,957
56,606(40.0)(3.3)
813,135
53,851(44.4)(2.9)
922,966
52,361(44.9)(2.5)
972,928
48,351(45.1)(2.2)
1,006,752
43,127(43.2)(1.8)

Corporatebonds
191,930(11.2)
191,154(10.4)
186,713(9.1)
184,540(8.6)
182,028(7.8)

Stocks162,149(9.5)
147,434(8.1)
167,246(8.1)
180,289(8.4)
226,969(9.7)

Foreignsecurities
450,147(26.4)
463,081(25.3)
550,842(26.8)
602,114(27.9)
712,990(30.6)

Others164,288(9.6)
161,074(8.8)
176,735(8.6)
168,303(7.8)
159,654
(6.8)

Total
1,708,079(100.0)1,829,732(100.0)2,056,866(100.0)2,156,527(100.0)2,331,523(100.0)Note 1: Amount of securities for all life insurance companies; exclusive of Japan Post Insurance.
Note 2: Units: hundred million yen; %. Parentheses denote composition ratios expressed aspercentage figures. Source: Life Insurance Trends (2015), Life Insurance Association ofJapan.

One was the proactive shifting of investments from safe assets consisting ofgovernment bonds to risky assets consisting of foreign securities and other suchvehicles. This would increase interest and dividend earnings and cause profit
attributed to differences in interest rates to increase. Life insurance companies
were actually increasing their investments in foreign securities.
This can also help promote a rise in stock prices and a weakening of the yen
as desired by the Bank of Japan. In light of the characteristics of products offeredby life insurance companies, however, there would appear to be limits to an
approach to asset management that entails a full-scale assumption of risks.
Another option might have been, given the severity of the investment
environment, a conversion of existing high assumed interest rate life insurance
products into low assumed interest rate life insurance products. However, talks
would have needed to proceed after policyholders came to a sufficientunderstanding of the complex structure of life insurance products. For thisreason, there was also a sense that there is was limit to the extent to which life
insurance products can be converted.
Of course, a more conventional approach would have been to thoroughly
promote life insurance products that were sufficiently adaptive to even a difficult
investment environment. Specifically, such life insurance products feature
characteristics that emphasize protection over savings.
With this approach, there would not have been much of a burden placed on
the management of life insurance companies. However, companies cannot afford
Chapter 8 105

to disregard savings characteristics if they hope to offer life insurance productsthat can be of assistance to clients in their retirement years as society continues
to age.
Part 4: New developments for life insurance companies(1) Shockwaves emanating from the negative interest rate policy
The Bank of Japan’s negative interest rate policy further worsened theearnings of banks, both city (commercial) banks and local regional banks. The
situation was especially serious for local regional banks since many of themserved local economies that had been battered due to a shrinking population base.
In recent years, local regional banks had been actively engaged in repeatedmergers and consolidations with one another in hopes of mitigating, in however
small a way, the harshness of the asset management environment in which they
were operating.
An expansion of scale does not just stabilize the management base. It also
helps to suppress the shrinking of profit margins. Various other advantages arealso generated. For these reasons, major local regional banks are at the vanguardof efforts to broaden the geographical scope of markets.
To ensure that banks mired in a harsh asset management environment canreliably accrue earnings, they must shift their focus from a traditional stockbased approach to business through the provision of loans to a fee-based
approach to business by which they will seek to obtain commissions.
This would enable companies to offset losses even with the adoption of anegative interest rate policy. I believe that these banks will take actions with aview to obtaining commissions in the future.
It is in this context that banks were becoming interested in commissions thatcan be earned through the selling of insurance. While sales of products throughbank tellers had been positive for some time then, it was expected that this sales
channel would become further fortified.
If commissions are high, then surely banks would place even more emphasison the selling of insurance. This could result in greater moves to sell unnecessary
insurance plans with misdirected vigor.
This sort of concern can be fully traced to the non-disclosure of commissions
for the selling of products. Greater transparency ought to ease misgivings on thepart of policyholders. Thus, shockwaves from the Bank of Japan’s negative106

interest rate policy ranged from a strengthening of banks’ fee businesses to thedisclosure of commissions for the selling of insurance.
Consequently, it appeared that commissions for the selling of variableannuity plans and foreign currency-denominated insurance plans through banktellers would be disclosed beginning in the fall of this year as is the case forinvestment trusts.
(2) Cost-consciousness of policyholders
If this course of developments strengthened, then there will be, in the case oflife insurance companies, a greater focus on profit attributed to differences in
expenses, which is a component of basic profit. If commissions for the sellingof products are unnecessarily high, then profit attributed to differences in
expenses will decrease by this extent. Since a portion of profit attributed todifferences in expenses is distributed as dividends, policyholders likely wish tosee commissions for the selling of products lowered as much as possible.
In addition, the cost consciousness of policyholders is not limited to justcommissions for the selling of products. It is also directed at the structure of thethree surplus factors for life insurance companies. In the first place, there is roomto spare with respect to profit attributed to differences in expenses because theexpected rate of expenses is set at a high level. If this were to be decreased, thenadditional premiums themselves would be lowered.
Contributing to basic profit the most is profit attributed to differences in risks.
If we break down the three surplus factors for fiscal year 2014 in terms of the
cumulative totals for the top four life insurance companies, we see that profit
attributed to differences in risks accounted for 68%, while profit attributed todifferences in expenses and profit attributed to differences in interest rates
accounted for 10% and 22%, respectively.
That profit attributed to differences in risk is both extensive and greater than
it is even for overseas life insurance companies is due to the fact that the
expected risk materialization rate is set at a conservatively high level. If this werelowered, then net insurance premiums too would be reduced. This would also
make it clearer why dividends are generated for life insurance products that arehighly geared towards the provision of protection.
Life insurance companies were being squeezed when it came to asset
management thanks to the adoption of a negative interest rate policy by the Bankof Japan. Concerns over the possibility that negative spreads may arise, as actual
Chapter 8 107

investment yields fall short of expected yields, could not be dispelled. However,basic profit could still be positive in the event that negative spreads arise as aresult of profit attributed to a difference in interest rates descending into negative
territory, as long as this situation is offset by profit attributed to a difference inrisks and profit attributed to a difference in expenses.
Seen in this light, there was a sense that there was an overall margin of safety
when it came to the management of life insurance companies, since basic profit
had essentially been designed to stay in the black. Nevertheless, if policyholders
expressed greater interest in the three surplus factors for life insurancecompanies in response to discussions on the disclosure of commissions for the
selling of products, it was thought that pressure to lower insurance premiums
would increase.
(3) Pursuing greater scales of operation through mergers and acquisitions
How would life insurance companies respond if faced with such a situation?
An effective countermeasure is the expansion of scale through a strategy ofmergers and acquisitions, as can be seen in recent years with local regional banks.
By pursuing economies of scale, it would first be possible to lower the expected
rate of expenses.
As the scale in terms of financing increases, higher yields that are stable
thanks to efficient asset management could be obtained. This could help curb
any lowering of assumed interest rates.
If the number of policyholders increases, the law of large numbers would
facilitate the accurate ascertainment of the risk materialization rate. For thisreason, there would be less of a need to set the assumed risk materialization rate
at a conservatively high level.
A strategy of mergers and acquisitions does not only stabilize themanagement of life insurance companies operating in a harsh earnings
environment. It also allows the demands of policyholders to be accommodated
through improvements to the three surplus factors.
While it was unknown how much longer the Bank of Japan’s negativeinterest rate policy would remain in effect, it was possible that we might begin
to see huge waves of change in the form of the restructuring of life insurancecompanies through repeated processes of mergers and acquisitions if thisstrategy stayed in place over an extended period of time.
Analysts frequently invoke the law of three. While this law is non-scientific108and cannot be academically proven, it is a law that says that an industry will
ultimately end up with three companies as competition within the industry
intensifies.
The city banking sector and nonlife insurance industry appear to conform to
the law of three. Will the life insurance industry also come to align with this law
in response to the Bank of Japan’s negative interest rate policy? It is aninteresting question to ponder.

Chapter 8 109

Chapter 9: <2016 (ii)>
Domestic and overseas acquisition strategy as carried out by
major life insurance companies
Part 1: The transforming domestic life insurance market(1) Active acquisition strategy undertaken by major life insurancecompanies
Recent developments in the life insurance industry have been quite dynamic.
This is was in the proactive efforts to make a foray into overseas markets on thepart of four major life insurance companies. Figure 9-1 outlines the overseas
expansion of these companies on a country-by-country basis.
Figure 9-1. Strategy of overseas acquisitions on the part of major life
insurance companies
Dai‐ichiU.S.

Protective (2015)

NipponMeiji Yasuda

Sumitomo

Nippon Life
Pacific Guardian
SymmetraInsurance Company (1976),(announced inof America (1991)
StanCorp
2015)(announced in 2015)

PolandTU Europa Warta(2012)

China

Great Wall
Changsheng (2009)

India

Star Union Dai‐ichi(2009)

Reliance (2011)

Indonesia

Panin Dai‐ichi Life
(2013)

Sequis Life (2014)

VietnamDai‐ichi Life
Vietnam (2007)

Thailand

Ocean Life (2008)

Australia

TAL (2008)

PKU Founder Life(2010)

Avrist (2012)

BNI Life (2014)
Bao Viet (2013)

Thai Life (2013)

Overseas life insurance companies, especially those in Asian countries –China, India, Indonesia, Vietnam, and Thailand – were purchased. The emphasis
appeared to be shifting from emerging countries in Asia to the United States, adeveloped nation.
110

Companies were also expanding in terms of scope as characterized by theacquisition of U.S.-based Protective by Dai-ichi Life Insurance (580 billion yen),
the acquisition of the U.S.-based StanCorp Financial Group by Meiji Yasuda
Life Insurance (525 billion yen), and the acquisition of U.S.-based Symmetra
Financial by Sumitomo Life Insurance (465 billion yen).
While it could be hoped that the untapped Asian market would grow at highrates, this market was also beset by numerous issues, such as restrictions on
foreign investments. Substantial amounts of time would be incurred to generatea profit flow. In addition, the small size of the market gave rise to the risk thatan unexpected event would have a suddenly destabilizing impact.
Comparatively speaking, the U.S. market was bigger, such that a sense ofstability was imparted. It was fairly straightforward to directly cultivate higher
sales and profits by operating in this market. For this reason, companies werealso proactively expanding into the U.S. market rather than staying exclusively
bound to the Asian market.
Acquisitions by major life insurance companies encompassed not justoverseas targets but domestic ones as well. As the biggest player in the industry,
Nippon Life Insurance acquired major life insurance company Mitsui Life
Insurance and transformed it into a subsidiary. The company was purchased fora real amount in the upper end of the 200-billion-yen range.
Domestic life insurance companies are undergoing large-scale restructuring
for the first time since 2004. In that year, Meiji Life Insurance and Yasuda Life
Insurance merged to create Meiji Yasuda Life Insurance. It was also then thatT&D Holdings emerged. Despite the passage of many years since that time, itappeared as if major life insurance companies were finally beginning to maketheir moves.
(2) Circumstances surrounding life insurance companies
The maturation of the domestic market constituted an underlying factor
explaining why major life insurance companies were then vigorously seeking to
make purchases in Japan and overseas. Compared to the global insurance market,
the life insurance market in Japan was growing at a relatively low rate. Proactive
acquisitions were being carried out in order to overcome this difficult domestic
state.
Figure 9-2 depicts changes in insurance penetration collectively for all lifeand nonlife insurance companies. The graph shows the percentage of the gross
Chapter 9 111

domestic product (GDP) that was accounted for by premium income on anindustry basis. Two lines are shown; the solid one denotes life insurance
penetration.
This figure outlines developments extending from the era of high economic
growth during the postwar years to today. After the bubble economy collapsedin the 1990s, you can see how growth appeared to be stalled. Furthermore, life
insurance penetration in Japan was higher than it was in a number of developed
countries, namely the United States, Canada, the United Kingdom, France, andGermany.
Figure 9-2. Changes in life and nonlife insurance penetration

The fact that the insurance market in Japan is not growing can be traced to
the facts that our population is shrinking, the birthrate is declining, and oursociety is aging. If younger cohorts could continue to bolster their numbers, theneconomic activities would be stimulated accordingly. Income levels would also
go up, and demand for life insurance products would naturally rise.
However, developments today are going in the opposite direction. There areutterly no signs of a potential increase in the population. If this means that theJapanese economy will be rendered incapable of being as dynamic as it once wasand that we cannot expect life insurance penetration to increase, then there would
be no choice for companies but to go off in a new direction whereby domestic
and overseas life insurance companies are acquired.
112

Neither can we ignore changes in the asset management environment. As
long-term interest rates decline, it is becoming harder and harder to generatesufficient investment yields. Ultra-long-term government bonds are central toasset-management practices carried out by life insurance companies. Their
yields have declined to abnormally-low levels thanks to large-scale easing
measures being implemented on an extended basis by the Bank of Japan.
If the decline in the birthrate and the aging of society are not stemmed, then
the weights assigned to products being sold should simply be changed. Emphasisshould be shifted from traditional protection-type life insurance products thatprimarily provide death protection to single-payment whole-life insurance plans
and endowment insurance plans as well as to individual annuity plans and othertypes of savings-type life insurance products.
However, Japan’s asset management environment has been harsher than
expected, such that the risk that actual yields will fall short of yields promised
to policyholders (assumed interest rates) has arisen. Thus, it will come to passthat the selling of savings-type life insurance products will be reexamined.
Part 2. Learning about insurance management from nonlife insurancecompanies(1) Leading nonlife insurance companies
While nonlife insurance companies had, like their life insurance counterparts,
been engaged repeatedly in domestic and overseas mergers and acquisitions,they started quite a bit earlier than life insurance companies did.
Major nonlife insurance companies quickly underwent consolidation in thewake of the liberalization of regulations governing nonlife insurance rates in
1998. City banks coalesced into three mega-banks through a process by which
financial institutions merged and integrated with one another. In line with thesedevelopments, the nonlife insurance sector, too, bore witness to the birth of three
mega-nonlife insurance companies.
Moreover, companies had also been busy in terms of overseas acquisitions.
Recent examples include the acquisition of U.K.-based Canopius by Sompo
Japan (as it was known at the time) (100 billion yen), the acquisition of U.S.based HCC Insurance Holdings by Tokio Marine Holdings (940 billion yen),and the acquisition of U.K.-based Amlin by Mitsui Sumitomo Marine (642billion yen).
Chapter 9 113

Acquisitions were also getting bigger. Another characteristic of nonlife
insurance companies was the shift we were seeing from a strategy focusing on
Asia to one focusing on the West. For the three mega-nonlife insurancecompanies that are based in Japan, their overseas insurance divisions haveunderpinned growth in premium income and are also contributing quite a bit toprofits these days.
It is clear that nonlife insurance companies embarked on the acquisition ofdomestic and overseas companies before life insurance companies did as the
population began shrinking, and the domestic market started to peak as a result.
What then is the specific situation with regard to the penetration of nonlife
insurance?
Figure 9-2 shows changes in the penetration of nonlife insurance relative tochanges in the penetration of life insurance. This figure reveals that thepenetration of nonlife insurance remained on an upward path in contrast to thepenetration of life insurance.
In contrast to the situation with respect to life insurance, values for the
penetration of nonlife insurance are relatively lower than they are for majorcountries in the West. This suggests that the domestic market still has room to
grow.
Nevertheless, it is conceivable that the keen sense of danger with respect tothe management of companies is what caused rapid actions to be taken from anearly stage.
Promoting this was the approach to management called enterprise risk
management (ERM). In this connection, I would like to discuss ERM
management, which is often put forth as a framework for the management of
nonlife insurance companies, while seeking to apply it to the management of life
insurance companies.
I believe that this will allow the current form of the life insurance industry to
be reworked and also its future form to be predicted. While ERM is sometimes
regarded in terms of the management of company-wide risks, I will be referringto this term in its literal sense (enterprise risk management).
(2) ERM framework
Insurance companies, whether they are life insurance companies or nonlife
insurance companies, obtain returns (earnings) in return for taking on risks(bearing risks). Figure 9-3 provides a full picture of ERM for insurance114

companies seeking to maximize enterprise value while appropriately controllingrisks and returns.
Figure 9-3. Framework of ERM at an insurance company

Today’s insurance companies are proactively engaged not just in domestic
operations but also in overseas operations. In light of this reality, the breakdownof domestic and overseas operations must be investigated from a risk-versusprofitability perspective.
In the course of comparing profits from domestic operations and profits fromoverseas operations, the optimal ratio of these operations should be determinedwhile taking different risks materializing through each of these operations into
account.
Insurance companies repeatedly engage in the acquisition of domestic andoverseas companies in hopes of improving returns in line with risks by altering
the ratio of their domestic and overseas operations. If it is determined that there
is room for improving domestic operations, a company will embark on domestic
mergers and acquisitions. If overseas operations are relatively more attractive,then a company will direct its attention to mergers and acquisitions in foreign
lands.
In this way, overall profit is expanded by raising the efficiency of capital.
While this profit goes towards retained earnings, a part of it is distributed as
dividends. While mutual life insurance companies distribute profit as part oftheir dividend scheme to policyholders (with policyholders regarded as
members), life and nonlife insurance companies organized as stock companies
Chapter 9 115

distribute profit both as part of their dividend scheme to policyholders and as
dividends to shareholders.
When distributing profit, a company just cannot distribute it in full. To
facilitate the smooth operations of an insurance company, equity capital of anamount sufficient to absorb all risks to management is required. For this reason,
profit is not fully distributed. Instead, some of it is also diverted to capital.
The accumulation of capital is not undertaken from just a soundness
standpoint in terms of the absorption of risks. It can also induce growth if capitalis bolstered. This allows new profit to be generated and capital to be further
increased, which in turn promotes the sustainability of growth.
By perpetuating such a virtuous cycle, all stakeholders, including
policyholders and shareholders, should be satisfied. Thus, increasing enterprisevalue is the ultimate goal of any insurance company.
(3) Environmental changes underpinning ERM
Various risks arise as an insurance company expands its operations. ERM isa means of carrying out sound management practices while emphasizing themanagement of risks. A company will thereby grow through its ability to obtainappropriate profits in line with the risks to which it is exposed.
The development of a proper environment is required for the appropriate
management of risks. This entails the involvement of international insurance
accounting standards and insurance oversight regulations. Efforts are underway
to develop a system for monitoring the soundness of insurance companies, onethat is based primarily on the International Financial Reporting Standards (IFRS),
the International Association of Insurance Supervisors (IAIS), and the EU
Solvency II project.
Under this system, one is constantly focused on figuring out the extent towhich net assets, equal to the difference between assets and liabilities on acurrent market valuation basis, exceeds the total amount of risks. Initiatives
being undertaken by supervisory authorities in countries around the world also
promote ERM on the part of insurance companies.
The increase in foreign stockholding ratios is also serving to encourage
insurance companies to engage in ERM. For each of the three mega-nonlife
insurance companies, the foreign stockholding ratio is high at around 40%. For
major life insurance company Dai-ichi Life Insurance, this ratio is likewise at
forty-something percent.
116Compared to domestic shareholders, foreign shareholders are believed to bestricter when it comes to demands placed on insurance companies. They will
likely require an approach to management that entails the further pursuit ofcapital efficiency. Due to its excessive riskiness, over-reaching management
must pay attention to the soundness of capital.
As an approach to management that prioritizes the striking of a balance
between risks and returns, ERM will probably garner more and more attention
as foreign stockholding ratios rise.
Part 3: Outcomes of large-scale acquisitions(1) Diversification
Japan continues to be beleaguered by typhoon damage every year. Nonlife
insurance companies can also accommodate insurance payments for wind andflood damage through sales of fire insurance, automobile insurance, and otherforms of insurance. In recent years, Japan has found itself in the direct path of
more and more typhoons, albeit with a fluctuation in number from year to year,
and the monetary amount of damage sustained is also growing larger.
Nonlife insurance companies are making a foray into overseas markets notjust in order to expand earnings. Diversification effects to mitigate fluctuations
affecting domestic operations are also expected. This will allow company-widerisks affecting nonlife insurance companies to be reduced.
In contrast to nonlife insurance companies, life insurance companies do not
suffer as much in the way of fluctuations affecting domestic operations, but there
are still expectations that making a foray into overseas markets will allow
company-wide risks affecting life insurance companies to be eliminated throughdiversification.
In terms of scale, both life and nonlife insurance companies place anoverwhelmingly greater weight on domestic operations. If more risk
diversification is sought, then the acquisitions of overseas insurance companies
is likely to continue.
(2) Competition over rankings
Major life insurance company Nippon Life Insurance had long maintained
its firm hold on the top of the industry leaderboard in terms of both premiumincome and total assets. However, Dai-ichi Life Insurance managed to overtake,
Chapter 9 117

in terms of premium income, Nippon Life Insurance, a company that was once
referred to as Gulliver1. This happened as revealed in the financial results forfiscal year 2014.
This year, Nippon Life Insurance staged a comeback to reclaim the top spotfrom Dai-ichi Life Insurance in terms of premium income by purchasing MitsuiLife Insurance. The competition for ranking among life insurance companies
was fierce indeed. Of course, the same can be said of nonlife insurancecompanies.
Among the three mega-nonlife insurance companies, Tokio Marine Holdings
was ranked number one. However, the acquisition of U.K.-based Amlin by
Mitsui Sumitomo Marine allowed MS & AD to come within striking distance ofthe current leader.
Mergers and acquisitions were undertaken by insurance companies in order
to increase earnings and diversify risks. In addition, however, competition overrankings cannot be ignored as another factor behind these actions. Above all, theeffect of being number one has a huge impact.
If you are an industry leader, you can enjoy advantages in terms of brandstrength and other conditions. This status will elevate your earning power andability to control risks for a positive spiral effect.
Domestic and overseas acquisitions by major life insurance companies andthe three mega-nonlife insurance companies appeared to represent the
manifestation of a long-term growth strategy being carried out while taking
industry rankings into account.
The mutual company structure adopted by many major life insurancecompanies is disadvantageous in certain ways for carrying out mergers andacquisitions. Dai-ichi Life Insurance was able to rapidly expand in terms of scaleby transforming itself into a stock company.
For a life insurance company seeking to expedite its management strategy,transformation into a stock company is an urgent matter to be properly pondered.
It is believed that this will help to further promote the restructuring of life
insurance companies.

1

Gulliver is a protagonist in Gulliver’s Travels, a book written by Jonathan Swift. During
his first voyage, Gulliver stumbles across a country inhabited by people who are only
fifteen centimeters tall. In Japan, “Gulliver” has become a shorthand for a hugecompany that enjoys overwhelming power in a given industry.

118

Chapter 10: <2017>
Impact of a lowering of assumed interest rates on life
insurance companies
Part 1: Announcing financial results for the fiscal year that ended in March
2017(1) Spreading impact of the negative interest rate policy
The financial results for major life insurance companies for the fiscal yearthat ended in March 2017 were announced. The impact of the Bank of Japan’s
negative interest rate policy was vividly captured in financial results that weresevere for the companies in question. Figure 10-1 summarizes these financial
results for 13 key life insurance companies, consisting of major domestic life
insurance companies and foreign-affiliated life insurance companies as well asJapan Post Insurance.
Figure 10-1. Financial results for major life insurance companies for the fiscal
year that ended in March 2017

ForeignaffiliatedDomestic

Insurance premiums andother earnings
Year-on-yearchangeNippon52,360▲16.4
Dai-ichi
44,687▲20.0
Sumitomo
34,588
13.6
Meiji Yasuda
28,663▲15.2
T&D
15,052
▲4.4
Sony
9,567
▲6.9
Fukoku
6,487
▲17.8
Asahi
3,837
▲4.4
MetLife
22,85740.1
Prudential
21,398▲4.0
Aflac
14,399
▲6.1
Axa
6,191
2.4
Japan Post
50,418▲6.9
Note: Units: hundred million yen, %. ▲ denotes a negative value.

Basic profit
Year-on-yearchange
6,855
▲3.1
5,584
2.7
3,330
7.8
4,962
6.5
1,599
4.5
838
94.9
915
▲3.5
220
▲14.9
1,105
188.5
1,686
▲1.3
2,586
▲0.6
357
▲14.8
3,900
▲16.0

On the whole, the reduction in insurance premiums and other earnings isremarkable. Earnings declined by over a trillion yen for Nippon Life Insurance
and Dai-ichi Life Insurance. Ten out of the thirteen companies surveyed reported
lower earnings than they did in the preceding fiscal year. Moreover, some life
insurance companies notably posted double-digit drops in earnings. This can be
Chapter 10 119

attributed to the restraints imposed on high assumed interest rate life insurance
products, such as single-payment whole-life insurance plans, by a difficult
investment environment.
An indicator of the profitability of the primary operations of these companies,
basic profit also sustained heavy damage due to reductions in interest income
and dividends caused by the introduction of the negative interest rate policy.
Nevertheless, there were still some life insurance companies whose basic profit
increased as contributions made by overseas life insurance companies that they
had purchased helped offset declines in value brought about by the difficult
investment environment. For this reason, there were fewer life insurancecompanies whose basic profit went down than life insurance companies
reporting lower insurance premiums and other earnings.
In this way, the negative interest rate policy has had a negative impact on thelife insurance market in terms of both sales and profit. This is because assumed
interest rates embedded in life insurance products are linked to the core of the
problem in question. Lower investment yields mean that it has become moredifficult to exceed assumed interest rates. Consequently, companies are being
forced to stop sales of life insurance products.
(2) Countermeasures for life insurance companies
Under these circumstances, the life insurance market will continue to shrink.
Accordingly, assumed interest rates need to be lowered.
We have already seen assumed interest rates lowered for single-payment life
insurance products. Beginning in April 2017, assumed interest rates were slated
to go down for level-payment life insurance products as well. Since level
payment life insurance products are considered a more typical type of life
insurance product than single-payment life insurance products, the impact of thisdevelopment will be quite significant.
The harmful effects on profit from declining investment yields resulting fromthese developments can be absorbed to a certain extent. It should be possible forthe shrinkage in basic profit to be kept in check even without relying much on
contributions made by overseas businesses.
Since any decline in assumed interest rates goes hand in hand with anincrease in insurance premium rates, however, a considerable burden will beplaced on those who are in charge of sales at these companies. A risk that
insurance premiums and other earnings will decline further will emerge.
120Ironically, any policy designed to secure profit will raise the likelihood thatdevelopments will shift in such a way that sales will be constrained.
At the same time, the management of assets by life insurance companies
might also become affected. The Bank of Japan promoted measures to shift theweight from government bonds to foreign bonds in order to induce a weakeningof the yen. If life insurance companies continue to hold large amounts of low
interest rate government bonds, it will be difficult to exceed expected yields. In
this connection, companies have been proactively purchasing higher yieldforeign bonds.
However, the lowering of assumed interest rates could cause a reversion in
the approach to asset management on the part of life insurance companies. Thisis because there would no longer be any need to continue to take risks inpurchasing foreign bonds if a difference between assumed interest rates andinvestment yields could be secured. If this were to happen, the Bank of Japan’s
intended policy would become effectively overturned.
In this way, the lowering of assumed interest rates will affect the managementof life insurance companies in various ways. In this chapter, I will examine theseeffects on asset management while exploring, in a theoretical sense, themechanisms that have an impact on the demand for insurance products.
Part 2: The Bank of Japan and the market for life insurance(1) The Bank of Japan’s ultra-low interest rate policy
As I mentioned several times in a number of previous chapters of this book,the Bank of Japan announced financial easing measures that were unprecedented
in both a quantitative and qualitative sense in April 2013. The central bank aimed
to achieve a 2% annual inflation rate in two years by implementing proactive
financial easing measures, such as by purchasing government bonds at a 50trillion-yen-a-year pace.
The central bank sought to extricate the Japanese economy from a long-term
state of deflation. However, satisfactory results were not forthcoming with ease.
In October 2014, the amount of government bonds to be purchased yearly wasraised to 80 trillion yen.
The set of financial easing measures in question caused the level of interest
rates on government bonds to remain low. However, evidence that thesemeasures were helping to raise expectations of inflation was sorely lacking andChapter 10 121

economic activities continued to flounder.
In response, the Bank of Japan took the plunge in January 2016 andintroduced a negative interest rate policy for the first time in the country’s history.
The level of interest rates on government bonds was pushed down even further.
At the same time, the side effects of the Bank of Japan’s financial measures
also came to be notable. The extreme drop in interest rate levels caused thepositive spread, which is equal to the difference between interest rates on loans
and interest rates on deposits, to shrink and the generation of profit to become
more difficult.
To counter these side effects, organizations began to take steps to obtain
service fee earnings. For life insurance companies, reductions in investment
yields made it more difficult to secure assumed interest rates and forced thesecompanies to stop selling insurance products that are highly geared towards
savings.
In this connection, the Bank of Japan shifted its guideposts from quantity tointerest rates in September 2016. Yield curve controls were hammered out tocurb to some degree the lowering of interest rates while taking the managementof financial institutions into account.
The central bank aimed to restore long-term interest rates (yields on 10-year
government bonds) to about 0% while continuing to maintain short-term interest
rates (some interest rates on current accounts at the Bank of Japan) at negative
0.1%.
Nevertheless, the goal remained to stably maintain the rate of inflation at 2%
while government bonds valued at 80 trillion yen were slated to be purchased
per year. Thus, a stance by which interest rate levels are to be seen on the wholeas corresponding to low levels will not change.
Figure 10-2 outlines government bond yields for 10-year, 20-year, 30-year,
and 40-year government bonds from April 2013, when the Bank of Japan’s
unprecedented easing measures began going into effect, to now.
A look at this figure reveals that government bond yields are, in the main,
trending downwards. Moreover, the downward pressure on government bondyields is intensifying due to the adoption of negative interest rates. In addition,
the yield spread is shrinking with each passing period.
While yields are generally higher the longer the term of maturity is forgovernment bonds, the spread in yields is rapidly getting smaller. In other words,
the slope of the yield curve is flattening.
122

Figure 10-2. Changes in government bond yields

Government bond yields are not just decreasing on the whole in this manner.
Long-term yields, too, are shifting more significantly downwards than they werein the past. This development is squeezing life insurance companies in theirefforts to engage in the management of assets.
Since government bonds account for a large percentage – forty-something
percent – of the assets invested by life insurance companies, it is clear to see thatdeclining government bond yields are striking a terrible blow to the investment
income being earned by life insurance companies.
Of course, interest income is not earned just from government bonds. It canalso be obtained from local government bonds, corporate bonds, and loans.
Together with interest earned from government bonds, interest accounts for
sixty-something percent of investment earnings. The situation is also further
compounded by the fact that such yields are declining, linked as they are togovernment bond yields.
(2) Lowering assumed interest rates
The Bank of Japan boldly embarked on its unprecedented easing measures inhopes of extricating the Japanese economy from a state of deflation. The central
bank has also been trying to turn around an economy that had been struggling
over the course of many years. Nevertheless, it failed to reach its goal ofachieving 2% inflation in two years. While the results that had initially been
expected have so far remained beyond its reach, only time has passed since these
Chapter 10 123

measures were first implemented.
The impact of this can be seen in the stagnation of the total amount of
individual insurance policies in force for life insurance companies. Figure 10-3
shows changes in the total amount of insurance policies for individuals – equal
to the sum of individual insurance policies and individual annuity insurance
policies – in force based on monthly data since April 2013, when the central
bank’s unprecedented easing policies were first implemented.
Figure 10-3. Changes in the total amount of insurance policies for individuals
in force

If the Bank of Japan’s bold financial measures succeed, we should see thetotal amount of insurance in force trending upwards in line with the growth ofthe economy. Unfortunately, however, the total amount of insurance in force
continues to rise at a sluggish pace.
Moreover, these unprecedented easing measures have also caused assumed
interest rates to decline for life insurance companies. Operating under anenvironment of ultra-low interest rates, life insurance companies found it
increasingly difficult to get investment yields to exceed assumed interest rates.
If these circumstances persist, negative spreads will arise.
Negative spreads can constitute a serious issue affecting the core of elementsof the management of life insurance companies. To avoid this, there is probably124

no effective means other than the lowering of assumed interest rates.
Figure 10-4 traces changes in standard interest rates, a factor determining
assumed interest rates. Following what happened with single-payment plans,level-payment life insurance products also underwent a drop in standard interest
rates from 1.0% to 0.25% in April 2017. This caused assumed interest rates forwhich a certain level of investment yields was promised to policyholders to belowered and, conversely, insurance premiums to be raised.
Since an increase in insurance premiums means an increase in the price of
insurance for policyholders, there is a risk that this will lead to a slump ininsurance sales. Alternatively, sales may come to be discontinued as they were
for single-payment whole-life insurance plans. For this reason, the total amountof insurance in force is expected to shrink.
Figure 10-4. Changes in standard interest rates

Figure 10-5 conceptually outlines these possible sequences of events. With
Quadrant A in the bottom-left part of this figure, the state of concordance
between investment yields and assumed interest rates is depicted with a 45degree line. Neither negative spreads nor positive spreads will arise under thesecircumstances. For example, if the investment yield is at x0, then the assumed
interest rate from point A is r0.
In contrast, the relationships between insurance premiums and assumed
interest rates are shown in Quadrant B in the upper-left part of the figure. If theassumed interest rate is r0, then the insurance premium from Point B is p0. In
Quadrant C in the upper-right part of the figure, the relationship between
insurance premiums and life insurance demand is shown as a downwardssloping curve.
Chapter 10 125

Figure 10-5. Mechanism by which investment yields affect demand for life
insurance

Thus, if the insurance premium is p0, then the demand for life insurance from
Point C is Q0, thereby determining the amount of new policies coming into force.
However, the deteriorating investment environment today is causing
investment yields to trend downwards. This is depicted by Point D in Quadrant
A. If the investment yield is lower than x0 at x1, the assumed interest rate will
likely be lowered from r0 to r1 in order to prevent negative spreads from arising.
In such a case, the insurance premium from point E in Quadrant B will
increase from p0 to p1, and the demand for life insurance from point F in
Quadrant C will decline from Q0 to Q1.
In this way, a lowering of investment yields will cause insurance premiums
to rise through the lowering of assumed interest rates, which in turn will cause
126

life insurance demand to flounder. This will bring down the number of newpolicies coming into force, thereby ultimately shrinking the total amount of
insurance policies in force and assailing the life insurance market.
Part 3: Negating the portfolio-rebalancing effect
The Bank of Japan’s unprecedented easing measures gave rise to an
investment environment that has proven to be very difficult for life insurancecompanies since the lowering of investment yields forced them to reduce
assumed interest rates.
Under normal conditions, these measures would have elevated the Japanese
economy, thereby automatically leading to increased demand for life insurance
products. The resulting expansion in the number of new policies coming into
force would have also increased the total amount of insurance policies in force.
However, the Japanese economy has, contrary to expectations, been unable
to extricate itself from a deflationary state. The resulting outcome is one in which
only interest rates have been lowered to abnormal levels. For life insurancecompanies, adverse winds blow accordingly.
In light of these developments, will the portfolio-rebalancing effect as testedby the Bank of Japan continue to be promoted as initially speculated? If interest
rate levels generally decline, the appeal of safe assets typified by government
bonds will fall on a relative basis.
Since the weight assigned to riskier foreign bonds will increase, a weakeningof the yen is conceivable. Life insurance companies are in fact increasing theirholdings of foreign bonds as a percentage of total assets while lowering theirholdings of government bonds as a percentage of total assets.
In this context, the lowering of assumed interest rates could induce adverse
developments, since the possibility that a company can avoid negative spreads
even if it does not increase its holdings of riskier assets will rise. If this is thecase, it would not be strange to see a shift towards lowering holdings of foreign
bonds as a percentage of total assets from the standpoint of emphasizing thestability of financial affairs.
The biggest mission of a life insurance company is to properly carry out
insurance policies to which it is bound. Such a company should choose to engage
in sound investments to properly ensure that assumed interest rates are achieved
rather than seek to obtain high levels of dividends through unreasonable
Chapter 10 127

investments.
Therefore, life insurance companies will likely come to hold large amountsof highly safe assets while complying with a conservative investment philosophy.
This approach would be more welcomed by policyholders as well.
The Bank of Japan lowered interest rate levels through its unprecedented
easing measures and has been promoting a shift from government bonds toforeign bonds in hopes of getting life insurance companies and other financial
institutions to achieve a portfolio-rebalancing effect. However, if life insurancecompanies were to lower their assumed interest rates, adverse developments
could arise. As a result, they may shift from foreign bonds to government bonds,
thereby negating moves to weaken the yen as sought by the Bank of Japan.
Ultimately, the Bank of Japan’s unprecedented easing measures appears
likely to bring about results that are contrary to expectations with the passage oftime. There may be a further erosion of insurance policies, and we will notnecessarily see holdings of foreign bonds turn favorably towards expansion. Thisis because unduly drastic financial easing measures caused interest rate levels to
substantially decline, which in turn caused life insurance companies to lower
assumed interest rates as a preventive measure. It is conceivable that this impact
will gradually become more obvious in the coming years.

128

Conclusion
Declining birthrates and aging societies are a common feature of advanced
nations everywhere. Once income levels increase and wealth to a certain extent
is accumulated, the number of children in a country tends to decrease, while thenumber of elderly persons conversely increases. These trends have a negative
impact on various areas of economics. One such example is the pension issue.
Pay-as-you-go public pension schemes rely on age distribution, such that adeclining birthrate and aging society naturally combine to give rise to an impasse.
In any case, benefit amounts will be cut. Shortfalls are offset by savings-type life
insurance products, such as individual insurance plans offered by private-sector
life insurance companies.
However, an ultra-low interest rate investment environment has persisted
over an extended period of time. Under these conditions, high investment yields
cannot be expected. For this reason, companies have no choice but to chargehigh premiums to fund a certain level of benefits as assumed interest rates fall.
While it is true that such plans serve as a means of complementing public
pension schemes, life insurance products are invariably subject to limits as wellin the context of such a severe investment environment.
Amid this state of affairs, the problem of longevity risks is clamoring to beheard. Lifespans are increasing for both men and women, such that it is no longer
uncommon to see centenarians out and about. While long life is certainly
something to celebrate, a bankruptcy in one’s post-retirement years is a distinct
possibility in light of how funds might be managed over the lifetime of anindividual.
In fact, there are more and more elderly persons whose funds become
depleted and who are unable to live properly with just the benefits provided bytheir public pension plans. Someone who managed to live in financial comfort
in his or her younger days would likely have enough savings for his or her postretirement years and can thus adequately absorb the longevity risks in question,
but this is perhaps beyond reach for many in society.
Even people who have worked hard their entire lives can potentially be
reduced to poverty by living longer than they might have expected. In response
to such changes in the economic environment, life insurance companies continue
to provide conventional savings-type life insurance products.

Conclusion 129

While it is true that savings-type life insurance products bolster funds needed
for post-retirement living, these funds could become depleted with age. Given
how difficult it is to determine how much longer a client might live, a company
is unable to easily formulate a solid financial plan.
Moreover, the more an individual grows older, the more he or she incurs
medical expenses and becomes living in a state of anxiety. At the same time,
there is a limit to how well you can amass sufficient funds for your postretirement years from a young age.
Irrespective of the fact that longevity risks are materializing, the current
reality is that effective solutions have not been identified. Nevertheless, if life
insurance companies were to change their conventional mindset, they might still
be able to offer people a sense of security to some extent for the leading of postretirement lives. As mentioned in this book, this entails the selling of pureendowment insurance.
Individual annuity plans and other examples of modern pure endowment
insurance products also include death protection. With a pure endowment
insurance plan that provides coverage only for the protection of existence andthat is moreover a fixed-term insurance plan, the difference between insurancemoney and insurance premiums increases with age. If this difference wereregarded as earnings, it would be reflected in fairly attractive financial
instruments.
Of course, pure endowment insurance is such that no insurance money would
be paid out if the client dies. While it is a type of insurance product that ismeaningless to an elderly person hoping to leave some money behind forsurviving family members, death protection is not needed by an elderly person
who is single or who has no children. Instead, funds for his or her own life would
be more important for such a person. Thus, such a life insurance product would
constitute a potent financial instrument capable of providing support for leading
a post-retirement life.
Since earnings increase the longer clients live, this type of insurance not only
provides economic benefits to provide support for leading a post-retirement life
but also works positively from a psychological standpoint, since it naturally
boosts a client’s zest for life.
As age brackets get higher, the number of policyholders in a given age
bracket declines, such that a limit to how much insurance can be sold might
possibly emerge at some point. These sorts of policies, however, can be130sufficiently sold within certain bounds. I believe that this can ease, even if only
to a small extent, a declining birthrate and aging society, problems that remain
thorns in the side of the Japanese economy.
Generally speaking, life insurance products are associated with an importantfactor consisting of investment yields. No matter how much a company seeks toformulate an advanced investment strategy, high yields cannot be realisticallysought given today’s ultra-low interest rate investment environment. Even if you
cannot expect to obtain much in terms of investment yields from a pure life
insurance policy, the results for any given client are determined according to theprobability of survival as calculated in accordance with a mortality table. Thus,
higher rates of return can be obtained and greater stability is provided as clients
get older.
The economic environment in which Japan operates is utterly at odds withwhat it was like in the past. Life insurance companies must sell products that
also keep pace with everything that has changed over the years. Doing so will
not only allow life insurance companies to grow but also give rise to favorable
outcomes in terms of the economic welfare of the people.

Conclusion 131

<References>
This book was written with reference made to papers that have been
published in the past. References to sources made in each chapter are as follows.
Chapter 1: “Expectations and insecurities surrounding the transformationof life insurance companies into stock companies,” Mutual Aid and Insurance,
July 2010; pp 34-41.
Chapter 2: “Seeking measures to revitalize the life insurance industry,”
Mutual Aid and Insurance, July 2011; pp 14-21.
Chapter 3: “Revising the solvency margin ratio and stock investment
actions taken by life insurance companies,” Mutual Aid and Insurance, July
2012; pp 14-21.
Chapter 4: “Japanese life insurance companies’ strategy of extending
asset-side durations,” Mutual Aid and Insurance, July 2013; pp 20-26.
Chapter 5: Original text.
Chapter 6: “Unprecedented easing measures of the Bank of Japan andasset-management actions undertaken by life insurance companies,” Mutual Aid
and Insurance, August 2014; pp 4-9.
Chapter 7: “Interpreting insurance solicitation rules as learned fromreading textbooks on the economy,” Mutual Aid and Insurance, July 2015; pp 49.
Chapter 8: “The Bank of Japan’s negative interest rate policy and the
management of life insurance companies,” Mutual Aid and Insurance, July
2016; pp 12-17.
Chapter 9: Original text.
Chapter 10: Original text.

132

Introducing the author
Yasuo Kofuji
Background
October 1953: Born in Tokyo.
March 1981: Completed a doctoral degree program offered by the Graduate
School of Commerce and Management, Hitotsubashi University.
Currently: Professor, Faculty of Commerce, Senshu University
Ph.D. in Commerce (Hitotsubashi University).

133

134

All rights reserved. No part of this publication may be
reproduced without the prior permission of the publisher.
Public Interest Incorporated Foundation
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The Prudential Tower 20F, 2-13-10 Nagata-cho
Chiyoda-ku, Tokyo 100-0014, Japan
Telephone: 81-3-5501-6570 Fax: 81-3-5501-6448
E-mail: info@olis.or.jp
Website: www.olis.or.jp

This book was originally published by Zeimukeiri Kyokai Co., LTD., in March 2018. With theconsent of the author and the publisher, the OLICD Center translated the book into English in December
2019.

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