Learning About Life
Insurance
for the Very First Time
By Noboru Matsuzawa

Public Interest Incorporated Foundation

Oriental Life Insurance Cultural Development CenterTokyo, Japan

「はじめて学ぶ生命保険」英語版出版に寄せてまずは、本書を英語版に翻訳していただいたアジア保険振興センターの方々に御礼を申し上げます。
本書は「日本の生命保険業」について、初歩的ではあるものの、情報を幅広く網羅することを通じて、生命保険業についての理解を初心者であっても深められるようにしたものです。ここでは大きく三つのことを述べたいと存じます。
最初の一点目ですが、本書では「日本の」生命保険業を取り扱っています。
この意味として、まず一つ目が、日本の家族のかたちを前提として生命保険商品が設計され、事業が発展してきたということです。伝統的には、養老保険
や終身保険に、高額な定期保険を特約で付加するといった死亡保障を重視した商品が多く販売されてきました。これは戦後の核家族において、家計の主な収入源が夫であり、妻が専業主婦やパートなどであった戦後日本の家庭環境を前提としていました。貯蓄性がありつつも、死亡保障を重視するいわゆ
る遺族のための保険を販売してきました。しかし、女性の社会進出によって共働き世帯が当たり前となったことや、そもそも結婚しない人が増加したことなどを背景に、医療保障といった病気に備えた保障や、個人年金などの老後保障といった自分のための保険が多く販売されるようになりました。
二つ目には日本の社会保障制度との関係があります。日本では公的医療保険によって医療については国民皆保険が実現しています。医師の受診や薬の処方といった基本的な医療費の大部分（原則7割）は公的保険で給付されます。そのため民間医療保険は公的医療保険がカバーできていない保障
ニーズをカバーするように設計されています。日本で多く販売されている民間
医療保険は、差額ベッド代や入院による家族の交通費などをカバーするため、入院したことや入院日数によって、固定された金額で給付金を提供するような商品となってます。
三つめは生命保険の販売チャネルです。一つ目とも関係がありますが、伝統的な生命保険会社においては、主に女性である専業の生命保険募集人によって保険商品が販売されてきました。これは戦争によって配偶者をなくした
女性の働き先を確保することを意味していました。しかし、昨今では規制緩和
や通信技術の発展により大規模な乗合代理店や銀行窓販、あるいはネット販売が増加してきています。
次に、大きく二点目は、海外の生命保険事業との関係で注目すべき事情
1

があります。日本の生命保険業界には、戦後早くから海外からの生命保険会
社が参入してきていました。日本の生命保険会社が死亡保障を中心に販売していたのに対して、海外からの生命保険会社は日本において医療保険やがん保険などを中心に販売をしていました。
その後、高予定利率の貯蓄性商品を販売していた日本の生命保険会社がバブル崩壊に伴う逆ザヤなどの理由で破綻すると、その破綻会社を買収する
ことで、海外の保険会社が日本に多く進出するようになりました。これらの外
資保険会社は、定額個人年金や変額個人年金、あるいは外貨建保険など貯
蓄性・投資性の保険を中心に販売するようになってきました。
他方、日本の保険会社の海外展開も進んできています。当初は米国などへの進出が目立っていましたが、昨今は東南アジアや南アジア、あるいはオーストラリアなど、今後、生命保険が普及すると考えられる市場への参入を行うようになってきました。
そして最後、三点目ですが、現在の日本の生命保険会社においては、通信技術の発達によるビジネス展開や気候変動などへの対応が要請されてきています。
一つ目にはインシュアテックによる商品の開発が挙げられます。生命保険
会社においては、デジタルとの連動による健康増進型商品の開発・販売が行われ、また商品の説明から加入まですべてネットで完結するネット専用型保険などが販売されています。
二つ目にはサステナブルな事業展開が要請されていることです。世界の投資市場における大きな流れとして、ESG（環境、社会、ガバナンス）を投資基
準に組み込むことが求められます。生命保険会社では投融資にあたって、投資先がESGにどの程度取り組んでいるかを投資判断において考慮します。また生命保険会社の経営についてもサステナブルであることが求められています。
以上のような内容をこの本で学ぶことができます。全体的な生命保険事業の基本を押さえつつ、なるべく最新の状況を取り入れるように努めています。
本書によって多くの方に日本の生命保険業に関する理解が広まれば幸いです。

2022年10月
松澤 登
2

On preparing an English-language version of Learning About Life
Insurance for the Very First Time.
I would like to begin by expressing my appreciation to everyone at theOriental Life Insurance Cultural Development Center for translating this bookinto English (and Chinese).
This book is intended to help even beginners deepen their understanding of
the life insurance industry by covering a broad range of information, albeit of anelementary nature, on Japan’s life insurance industry. I would like to expoundon three major points here.
The first point goes to the fact that this book deals with the life insurance
industry in Japan. What this means, firstly, is that life insurance products havebeen designed and business has been developed on the basis of the structure of
the family in Japan. Traditionally speaking, many products that emphasized theprovision of death coverage whereby term insurance offering a higher death
benefit amount was added as a rider to an endowment insurance or whole-life
insurance plan were sold. This was predicated on the way families werestructured in postwar Japan, such that the husband served as the main
breadwinner and the wife served as a homemaker or part-time worker. Despite
having a savings component, insurance was typically sold with a focus onproviding death coverage; in other words, this type of insurance was meant forsurviving family members. However, as women entered the workforce to usher
in an era in which dual-earner households became the norm and, indeed, as thenumber of people who never married increased, more and more policies
designed for the policyholder, such as plans that provide medical insurance
coverage against illnesses and plans that offer individual annuities for old-age
coverage, came to be sold.
Secondly, there is a relationship between insurance and Japan’s social
security system. In Japan, universal healthcare is provided through a public
medical insurance scheme. A significant portion of basic medical costs (inprinciple, 70%), including costs for doctors’ visits and prescriptions for drugs iscovered by the public system. Thus, private medical insurance is designed toaddress coverage needs that are not covered by the public medical insurance
scheme. Many private medical insurance plans sold in Japan are products thatprovide a fixed amount of benefits upon hospitalization or in accordance withthe length of a hospitalization stay in order to cover, for example, the cost of a3hospital room upgrade or the costs of transportation for family members due tohospitalization.
Thirdly, sales channels for life insurance products are also uniquely Japanese.
At long-established life insurance companies, insurance products have been soldby captive-agents consisting primarily of women, a phenomenon that is tied towhat I noted above regarding the structure of the family in Japan. In other words,
women who had lost their husbands in the Second World War were able tosecure jobs for themselves in this industry. These days, however, deregulation
and advancements in communication technology have given rise to an increasein large-scale independent agencies, the selling of products on an over-thecounter basis at banks, and Internet sales.
The second significant point goes to circumstances that should be noted inconnection with the overseas life insurance business. Foreign life insurancecompanies began entering the Japanese life insurance industry soon after the endof the Second World War. Whereas Japanese life insurance companies werefocused on selling policies providing death coverage, life insurance companies
from abroad chose to sell primarily medical insurance, cancer insurance, andother such options in the Japanese market.
Japanese life insurance companies that had been selling savings-type
products that came with high assumed interest rates subsequently went bankrupt
due in part to negative spreads and other issues caused by the collapse of the
bubble economy, whereupon many overseas insurance companies were thenable to enter the Japanese market by acquiring such failed companies. These
foreign-affiliated insurance companies then came to sell mainly savings- andinvestment-type products, including fixed-amount individual annuities,
variable-amount individual annuities, and foreign currency-denominatedinsurance.
At the same time, Japanese insurance companies have also been making
progress in their efforts to expand overseas. While forays into such markets as
the United States in the beginning were notable, companies have more recently
been entering markets – such as Southeast Asia, South Asia, and Australia –where life insurance is expected to become increasingly popular in the years tocome.
Finally, the third significant point goes to the fact that modern Japanese life
insurance companies are now required to develop their business throughadvancements in communication technology and respond to such issues as4

climate change.
Firstly, we should note that products are being developed based on insurtech.
Life insurance companies are developing and selling health-promoting insurance
coupled with digital technology and selling Internet-exclusive insurance forwhich everything from the provision of product explanations to enrolment iscompleted online.
Secondly, sustainable business development is now a requirement. The needto incorporate ESG (environment, society, and governance) into investment
criteria has emerged as a major trend in the global investment market. In making
investments and loans, life insurance companies take into account the extent towhich investment targets address ESG issues. Life insurance companies are also
required to ensure that the way they are managed is also sustainable.
You can learn about the contents outlined above in this book. I haveendeavored to acknowledge the latest developments as much as possible while
covering the basics of the overall life insurance business. It would please me
greatly to know that this book is helping many people gain a greater
understanding of the life insurance business in Japan.

October 2022
Noboru Matsuzawa

5

Introduction
This book was written to explain the circumstances of the insurance businessconducted by life insurance companies to beginners. While there are technicalaspects to the business of life insurance, I tried to make my explanations as easyto-understand as possible for those without any knowledge of life insurance.
This book provides a broad range of explanations with a focus on mattersthat I would like to see students with an interest in the life insurance industry
and those who have just begun working for a life insurance company orelsewhere in the financial sector – rather than those who wish to enroll in a life
insurance plan – be knowledgeable about. If you are interested, I encourage you
to pick up more specialized books to delve deeper into individual topics.
This book is structured as follows:
In Chapter 1, you will learn about the basics of life insurance, including thehistory of and reasons for the existence of life insurance and the entities that are
involved in the provision of life insurance.
In Chapter 2, you will learn about life insurance products. The rules of life
insurance products as well as specific products, including individual insurance
plans and group insurance plans, are explained.
In Chapter 3, you will learn about life insurance solicitation. An outline oflife insurance solicitation as well as explanations on specific life insurance
solicitation channels and insurance solicitation rules will be provided.
In Chapter 4, you will learn about what comprises the operations of life
insurance companies. Explanations will be provided on the underwriting of life
insurance policies, insurance accounting, asset management, and other topics.
Chapter 5 addresses current environmental changes affecting life insurancecompanies and the ways life insurance companies are dealing with these changes.
I will explain how life insurance companies are responding to suchenvironmental changes as the declining birthrate and aging population andchanges in competitive conditions brought about by digitalization and other
trends.
Please begin by reading Chapter 1. I wrote this book in such a way that you
could subsequently begin reading from any other chapter and understand what
you are learning without difficulty.
Noboru Matsuzawa
February 2021
6

Profile of the author

Noboru Matsuzawa
Managing Director & Member of the Board, NLI Research Institute; parttime lecturer, Osaka University of Economics
Graduated from the Faculty of Law, University of Tokyo, in 1985;
obtained an LLM from Harvard Law School in 1989; served as an expert
member of the Financial System Council (2004-2008) and is currently
serving as a director of the Japanese Society of Insurance Science (since2020) and managing director of the Institute of Life InsuranceManagement (since 2021).

[Key books and papers]
A New Bankruptcy-Resolution System for Financial Institutions and theChallenges Faced by Insurance Companies, p 51, Journal of Insurance
Science, No. 626 (2014); Q&A Insurance Law and Families (coauthored), NIHON KAJO Publishing Co., Ltd. (2010); Examining
International Bankruptcy-Resolution Systems for Life Insurance
Companies – Based on EU and US Systems, p 99, Journal of Insurance
Science, No. 609 (2010); Insurance Law Issues and Perspectives (coauthored), Shojihomu Co., Ltd. (2009), A Study of the Ombudsman
System in the U.K. – With a Focus on the System of Disclosing Matters,
p 207, JILI Journal, No. 168 (2009); Insurance Brokers and the Rules
Governing Solicitation – Comparing Japan, the EU, and the UnitedStates, p 255, JILI Journal, No. 164 (2008), Principle-Based
Supervision in the UK and Japan, p 195, JILI Journal, No. 161 (2007),and more7

Table of contents
Introduction
Profile of the author
Chapter 1: Basic knowledge of life insurance.............................................. 25
I. What is insurance that is underwritten by life insurance companies? .......... 26
1 What do we mean by insurance? ......................................................... 26(1) To insure something..................................................................... 26(2) Risk .............................................................................................. 26(3) Risk transfer ................................................................................. 27
2 What do we mean by life insurance? ................................................... 29
3 What do we mean by third-sector insurance? ..................................... 30
4 Scale of the life insurance industry ...................................................... 32(1) Size of policies underwritten by life insurance companies .......... 32(2) Paying insurance money .............................................................. 34(3) Changes in total assets ................................................................. 35
II. The necessity of life insurance and accident and sickness insurance .......... 36
1. Why is life insurance necessary? ......................................................... 36(1) Insurance payable at death ........................................................... 36(2) Individual annuity insurance ........................................................ 37(3) Social insurance ........................................................................... 38
2 Characteristics of social insurance ....................................................... 39(1) Compulsory enrolment.................................................................. 39(2) Benefit amount ............................................................................. 39
Table of contents 9

(3) Premiums ..................................................................................... 40(4) Source of funds ............................................................................ 40
3 Public pensions .................................................................................... 40(1) National Pension Plan .................................................................. 41(2) Employees’ Pension Plan ............................................................. 42(3) Employees’ Pension Plan benefits ............................................... 42
4 Public health insurance ........................................................................ 44(1) Outline of the system ................................................................... 44(2) Premiums ..................................................................................... 44(3) Benefits ........................................................................................ 45
5 Public long-term care insurance........................................................... 46(1) Premiums ..................................................................................... 46(2) Financing ..................................................................................... 47(3) Benefits ........................................................................................ 47
6 Summary .............................................................................................. 48
III. The way insurance works ........................................................................... 49
1 The laws and principles that make it possible for life insurance to beoffered ................................................................................................. 49(1) The law of large numbers ............................................................ 49(2) The principle of equivalence between proceeds and disbursements..................................................................................................... 50(3) The individual equivalence principle ........................................... 50
2 Life insurance parties ........................................................................... 51
3 Money for life insurance policies......................................................... 52

10

IV. How insurance came to be ......................................................................... 54
1 History of life insurance in Europe ...................................................... 54
2 How modern life insurance came to be in the United Kingdom .......... 55(1) Friendly societies ......................................................................... 55(2) How insurance companies that operate as enterprises providing
assessment insurance coverage came to be .................................. 55(3) Establishing the Equitable Life Assurance Society...................... 56
3 Growth in the United States ................................................................. 57
4 History of life insurance in Japan ........................................................ 58
V. Groups and organizations related to the life insurance industry ................. 60
1 Life insurance companies .................................................................... 60
2 Insurance solicitation business ............................................................. 61
3 Financial Services Agency ................................................................... 62
4 The Life Insurance Association of Japan (LIAJ) and the Japan Instituteof Life Insurance (JILI) ....................................................................... 62
5 Life Insurance Policyholders Protection Corporation of Japan ........... 63
VI. Businesses that are peripheral to the insurance business ........................... 65
1 Mutual-aid enterprise ........................................................................... 65(1) JA Kyosai..................................................................................... 66(2) Kokumin Kyosai Coop ................................................................ 66(3) Kenmin Kyosai (Prefectural Mutual Aid) .................................... 67
2 Small-amount short-term insurance business....................................... 67(1) Mutual aid not subject to a governing law ................................... 67(2) Rules applicable to small-amount short-term insurance providers..................................................................................................... 68
Table of contents 11

3 Former Postal Life Insurance Service (Kampo)................................... 69(1) From the former Postal Life Insurance Service to Japan Post
Insurance Company ..................................................................... 69(2) Postal privatization and Japan Post Insurance (Kampo Life
Insurance) .................................................................................... 70
Chapter 2: Life insurance products ............................................................. 73
I. Life insurance products................................................................................. 74
1 Changes in life insurance products to date........................................... 74(1) Life insurance products at the outset............................................ 74(2) Life insurance products since the period of rapid economic growth..................................................................................................... 74(3) Life insurance products during the bubble era ............................. 75(4) Life insurance products since the collapse of the bubble economy..................................................................................................... 75
2 Life insurance needs ............................................................................ 76
3 Type consisting of a main policy and riders and type consisting of asingle policy ........................................................................................ 77(1) Type consisting of a main policy and riders ................................ 77(2) Type consisting of a single policy................................................ 79
4 Insurance term and premium payment period...................................... 79
5 Premium payment method and payment channels ............................... 80
6 Product development innovations ........................................................ 80(1) Discounts for persons in good health ........................................... 81(2) Low- and no-surrender value-type insurance............................... 81
7 Individual insurance and group insurance ........................................... 82
II. Life insurance policy rules .......................................................................... 84
12

1 Application of Insurance Act rules ...................................................... 84
2 Concluding an insurance policy ........................................................... 85(1) Application and acceptance ......................................................... 85(2) Duty to disclose ........................................................................... 85(3) Consent of the insured ................................................................. 87(4) Designating and changing the beneficiary ................................... 87
3 Insurance benefits ................................................................................ 88(1) Insurance claims........................................................................... 88(2) Where insurance money is not paid ............................................. 88
III. Products for individuals ............................................................................. 92
1 Products for survivors’ security ........................................................... 92(1) Term insurance............................................................................. 92(2) Whole life insurance .................................................................... 94(3) Endowment insurance .................................................................. 95(4) Interest sensitive whole life insurance (account-type insurance) . 96
(5) Income-protection insurance ........................................................ 97(6) Educational endowment insurance............................................... 97(7) Variable insurance ....................................................................... 98
2 Products for old-age protection ............................................................ 98(1) Fixed-amount individual annuity insurance ................................. 98(2) Variable individual annuity insurance ....................................... 100(3) Foreign currency-denominated individual annuity insurance .... 101
3 Third-sector products (accident and sickness insurance) ................... 102

Table of contents 13

(1) Medical insurance ...................................................................... 102(2) Cancer insurance ........................................................................ 104(3) Critical illness insurance ............................................................ 104(4) Long-term care insurance .......................................................... 105(5) Disability income insurance ....................................................... 105
IV. Group products ........................................................................................ 107
1 Group life insurance........................................................................... 108(1) Group term insurance................................................................. 108(2) Comprehensive welfare group term insurance........................... 108(3) Group credit life insurance......................................................... 108(4) Group medical insurance ........................................................... 109
2 Company pensions ............................................................................. 109(1) Defined benefit company pension.............................................. 109(2) Defined contribution company pension ..................................... 109(3) Employees’ pension fund insurance .......................................... 111
V. Taxation on life insurance ......................................................................... 112
1 Treatment of life insurance premiums ............................................... 112(1) Income tax and residents’ tax..................................................... 112(2) Tax credits for life insurance premiums that are available inconnection with income tax ....................................................... 113(3) Tax credits for life insurance premiums that are available inconnection with residents’ tax ................................................... 115
2 Treatment of life insurance money .................................................... 115(1) Death benefits ............................................................................ 116

14

(2) Maturity benefit ......................................................................... 116(3) Individual annuity ...................................................................... 117
Chapter 3: Life insurance solicitation ........................................................ 121
I. What is life insurance solicitation? ............................................................. 122
1 Definition of life insurance solicitation ............................................. 122
2 Referral agency .................................................................................. 123
3 Insurance-comparison websites ......................................................... 124
II. The process of life insurance solicitation .................................................. 126
1 Why are actions to solicit life insurance necessary? .......................... 126
2 Why life insurance solicitation needs to be regulated ........................ 127
3 Finding clients.................................................................................... 128
4 Getting clients to recognize their needs ............................................. 129
5 Proposing insurance products ............................................................ 132
6 Applying for an insurance policy ....................................................... 133
7 Formation of insurance policies and the cooling-off system ............. 135
III. Life insurance solicitation channels undergo change and diversification 136
1 Establishment of traditional channels ................................................ 136
2 Entry of foreign-affiliated life insurance companies and thediversification of channels ................................................................. 136
3 The emergence of new channels and the intensification of competition........................................................................................................... 137
4 Trends in insurance solicitation channels .......................................... 138(1) Number of registrants ................................................................ 138(2) Through what channels do policyholders take out insurance
policies? ..................................................................................... 139
Table of contents 15

(3) Information pipelines and comparisons ..................................... 140
IV. Structure of each channel through which life insurance solicitation iscarried out ...................................................................................................... 143
1 Sales agents ........................................................................................ 143(1) Organizational structure of sales agents in a life insurancecompany..................................................................................... 143(2) Sales agents’ work environment ................................................ 144
2 Agencies............................................................................................. 146
3 Large independent agencies and insurance shops .............................. 147
4 Over-the-counter sales at banks ......................................................... 148
5 Post office .......................................................................................... 149
6 Mail-order sales ................................................................................. 150
7 Internet sales ...................................................................................... 151
8 Independent financial planners .......................................................... 151
9 Insurance brokers ............................................................................... 152
V. Life insurance solicitation rules ................................................................ 153
1 Certification as a life insurance solicitor............................................ 153
2 One-company exclusive affiliation system and independence .......... 154(1) One-company exclusive affiliation system ................................ 154(2) Independence ............................................................................. 155
3 Rules governing insurance solicitation .............................................. 156(1) Obligation to ascertain the intent of the client ........................... 157(2) Obligation to provide information ............................................. 158(3) Prohibition against improper sales ............................................. 159

16

(4) Rules pertaining to comparative sales ........................................ 160
4 Rules of solicitation concerning insurance with investment
characteristics .................................................................................... 160(1) Principle of suitability ................................................................ 161(2) Issuance of documents prior to and at the time of the conclusion ofa contract.................................................................................... 161(3) Prohibition against false disclosures and other forms of improper
conduct....................................................................................... 162
5 Obligation to develop a system for insurance solicitors .................... 162(1) General discussion ..................................................................... 162(2) Contents of the obligation to develop a system ......................... 163
Chapter 4: Operations of life insurance companies .................................. 165
I. Management of a life insurance company .................................................. 166
1 Life insurance business operations that are subject to a license ........ 166
2 Applying for a license ........................................................................ 166
3 Business operations that can be carried out by a life insurance company........................................................................................................... 167
4 Management of a life insurance company ......................................... 168
5 Election of officers............................................................................. 170
II. Insurance company group ......................................................................... 173
1 Major shareholder regulations ........................................................... 173
2 Insurance holding companies ............................................................. 174
3 Subsidiaries ........................................................................................ 176
III. Ensuring financial soundness ................................................................... 178
1 General discussion ............................................................................. 178
Table of contents 17

2 Natural premiums and level premiums .............................................. 179
3 Net and additional premiums ............................................................. 180
4 Accumulating a policy reserve........................................................... 181(1) Accumulation method ................................................................ 182(2) Basic computation rate ............................................................... 183
5 Solvency margin ratio ........................................................................ 186
6 Actuary............................................................................................... 187
7 ERM ................................................................................................... 188
IV. Underwriting operations .......................................................................... 190
1 Planning and designing insurance ...................................................... 190(1) Law and principles underlying the design of insurance products................................................................................................... 190(2) Statement of the calculation of the basic computation rate,insurance premium, and policy reserve...................................... 190(3) Poicy provisions ......................................................................... 191(4) Statement of business procedures .............................................. 191(5) Summary of the planning and development of insurance .......... 192
2 New insurance underwriting operations ............................................ 193(1) Risk selection ............................................................................. 193(2) Disclosure of information .......................................................... 194(3) Risk assessments ........................................................................ 194(4) Underwriting decision................................................................ 194
3 Operations of an insurance company while a policy is in effect ........ 196(1) Management of the collection of premium amounts.................. 196

18

(2) Policyholder loans...................................................................... 197(3) Policy verification activities ...................................................... 197(4) Policy cancelation ...................................................................... 198
4 Paying claims ..................................................................................... 199(1) Handling claims ......................................................................... 199(2) Payment deadline ....................................................................... 199
V. Asset management system ........................................................................ 201
1 Why are asset-management operations necessary?............................ 201
2 An insurance company’s stance on investment ................................. 201
3 Investment management system ........................................................ 202
4 Investment review system .................................................................. 204
5 General accounts and special accounts .............................................. 204
VI. Investment assets ..................................................................................... 206
1 Total assets......................................................................................... 206
2 Negotiable securities .......................................................................... 207(1) Public and company bonds ........................................................ 207(2) Shares ......................................................................................... 210(3) Foreign securities ....................................................................... 213
Chapter 5: Latest developments in the life insurance business................ 215
I. Changes in the environment surrounding the life insurance industry ......... 216
1 The law and regulations ..................................................................... 216
2 Economic environment ...................................................................... 217(1) Formation of the bubble economy ............................................. 217

Table of contents 19

(2) Collapse of the bubble economy and the lost decade................. 218(3) Deterioration in the state of the management of financial
institutions.................................................................................. 219(4) The failure and rehabilitation of financial institutions ............... 219(5) Recovery from financial turmoil ................................................ 220
3 Demographic changes ........................................................................ 221(1) Population changes by age bracket ............................................ 221(2) A dwindling birthrate and aging population .............................. 222(3) Aging of the elderly ................................................................... 223
4 Impact of a dwindling birthrate and aging population on the life
insurance industry.............................................................................. 224
II. New approach to business administration at life insurance companies ..... 226
1 Sustainable development goals (SDGs) ............................................. 226(1) Societal contributions of companies .......................................... 226(2) Aims of SDGs ............................................................................ 227(3) Life insurance companies and SDGs ......................................... 228
2 ESG investments ................................................................................ 230(1) What is an ESG investment?...................................................... 230(2) Negative screening and positive screening ................................ 231(3) ESG investments and fiduciary duty .......................................... 232(4) ESG investments in Japan .......................................................... 232
III. New regulatory orientation for the insurance industry............................. 234
1 Overview............................................................................................ 234(1) Clarifying financial supervisory rules ........................................ 234

20

(2) Limitations of rules-based supervision ...................................... 235(3) Adopting principles-based supervision ...................................... 235(4) Evolution of supervisory policies .............................................. 236
2 Client-oriented principle .................................................................... 237(1) Introducing the client-oriented principle.................................... 237(2) Client-oriented principle and fiduciary duty .............................. 239(3) Appropriate management of conflicts of interests ..................... 239
3 Best-interest regulations..................................................................... 241(1) Sales and recommendations going beyond mere sales............... 241(2) Disclosing the client segment on which the product development
process is based.......................................................................... 242
4 Brief explanatory documents (important information sheets)............ 245
5 Coping with a super-aging society ..................................................... 247(1) Flexibility in financial institutions ............................................. 248(2) Fortifying links between financial institutions and welfare-relatedorganizations .............................................................................. 248(3) Consolidating and reducing best practices ................................. 248
IV. Life insurance companies adapting to a digital society (insurtech) ......... 250
1 General remarks ................................................................................. 250
2 Online life insurance company .......................................................... 251
3 Information innovations in the solicitation of insurance.................... 252
4 Insurtech products .............................................................................. 252
5 The brokering of financial services.................................................... 253
6 ICT for administrative services .......................................................... 254

Table of contents 21

V. Moves by life insurance companies during COVID-19 ............................ 256
1 Special treatment with respect to payments of insurance money andbenefits .............................................................................................. 256
2 Extending the premium payment grace period .................................. 256
3 Resuming face-to-face sales .............................................................. 257
Column Index
Column 1 Business conflicts between the life and non-life insurance industry......................................................................................................................... 31
Column 2 The problem of retirement funding ................................................ 37
Column 3 Governance of mutual companies .................................................. 61
Column 4 Alternative dispute resolution (ADR) system ................................ 63
Column 5 Mandating a question-and-answer format for disclosing matters .. 86
Column 6 Eased underwriting standards (limited disclosure) and non-selective
insurance .......................................................................................................... 86
Column 7 Increasing term insurance............................................................... 93
Column 8 Accidental death rider .................................................................... 93
Column 9 Problems with variable insurance .................................................. 98
Column 10 Tontine annuities ......................................................................... 100
Column 11 Advanced medical procedures insurance (rider) ......................... 103
Column 12 Reviewing your coverage ............................................................ 105
Column 13 iDeCo (individual defined contribution pension) ........................ 110
Column 14 Information gap ........................................................................... 128
Column 15 Financial planning to provide security for survivors................... 130
Column 16 Financial planning for retirement funding................................... 131
22

Column 17 Primary risk selection .................................................................. 134
Column 18 Prohibition against re-commissioning solicitation ...................... 156
Column 19 Obligation to ascertain the intent of the client and the principle ofsuitability ....................................................................................................... 157
Column 20 Company with a board of auditors, company with a nominating
committee, and company with an audit committee ........................................ 169
Column 21 Outside directors and independent outside directors ................... 171
Column 22 Planned basic rate of premiums and planned basic rate of policy
reserves .......................................................................................................... 184
Column 23 Basic profits and dividends ......................................................... 185
Column 24 Actuaries ..................................................................................... 188
Column 25 Basic documents.......................................................................... 191
Column 26 Handling genetic information...................................................... 193
Column 27 Automatic transfer loan ............................................................... 196
Column 28 Payment problems ....................................................................... 198
Column 29 Asset/liability management (ALM) ............................................ 203
Column 30 Corporate Governance Code and Stewardship Code (principles
applicable to “responsible institutional investors”) ........................................ 210
Column 31 Dementia insurance and long-term care insurance...................... 224
Column 32 Health-promoting insurance ........................................................ 229
Column 33 Best-interest rule in the United States ......................................... 243
Column 34 Form CRS in the United States ................................................... 247
Column 35 AI technology .............................................................................. 250

Table of contents 23

Chapter 1: Basic knowledge of life insurance

Let me begin by defining the terms I will be using in this book. We
may speak of selling or offering life insurance, but this concept has
two aspects if we are being precise. First, insurance underwriting is
the term that describes what happens when a life insurance company
concludes an insurance agreement with a client. By underwriting an
insurance policy, a life insurance company becomes responsible forcovering a client and will be obligated to pay insurance money in theevent of death or other contingency. On the other hand, an insurancecompany employee or agency will mediate between the insurancecompany and the client to get the insurance company to a point
where it can underwrite a policy; this is referred to as insurance
solicitation. In this book, I will in principle be using the terms
insurance underwriting and insurance solicitation. I may, however,still describe the process in terms of the selling of insurance fromtime to time for the sake of clarity in a given context.
In Chapter 1, you will learn about the basics of life insurance. While
this book is focused on life insurance, I will also touch on medical
insurance and other forms of insurance that can be underwritten bylife insurance companies at appropriate junctures.
In this chapter, I will first provide some basic knowledge by
explaining what life insurance is and why you might need it. I would
also like to examine social insurance, which exists in acomplementary relationship with private life insurance. I will then lay
out the history of the process by which life insurance came to be. We
can then review who the players are in the life insurance industry andthe organizations that oversee them. Finally, I will talk about theindustries that operate adjacent to the insurance industry.

Chapter 1 25

I. What is insurance that is underwritten by life insurancecompanies?
In this section, you will learn about the basics of life insurance. In addition
to life insurance, insurance consists of non-life insurance and other forms of
insurance known as third-sector insurance, such as medical insurance. I will
explain what these types of insurance are and the extent to which life insurance
plays a role in Japanese society.

1 What do we mean by insurance?
(1) To insure something“Let’s go camping this Sunday. But let’s go bowling instead if it rains.” Thisaction is known as “coming up with a back-up plan” in everyday conversation.
In other words, if there is bad weather unsuitable for camping, we should prepare
an alternative course of action for having fun in advance.
Insurance as we generally think of the term is also regarded as a mechanism
by which we prepare other options in case problematic circumstances arise toprevent us from having to be adversely affected. For example, a primary featureof life insurance is the death protection. If a husband and wife are both working
and raising children, we can assume that the death of either parent will make it
difficult to secure funds to cover the costs of educating the children and generalliving costs. To prepare for the possible occurrence of an accident involving
death (we will assume here that an accident refers to death irrespective ofwhether the death is due to an illness or injury), you might enroll in a death
insurance policy, which is designed to provide an option in the form of a death
benefit to offset the lost income that would have been earned by the deceased
husband or wife had he or she not met with an unfortunate end.
(2) Risk
The person in our household who works and earns a living may die and nolonger have an income. This is what we refer to as risk. The word “may” meansthat we do not know if such an event will occur. In other words, it is uncertain
whether an accident will occur. Risk is what describes our uncertainty as towhether a certain thing will happen and, if such a thing were to take place, thetiming and manner in which the thing will happen.
Risk is, fundamentally speaking, not something that refers only to adverse26

outcomes. It may be somewhat difficult to wrap your mind around this notion
but risk is the variability of the actual outcome compared with the outcome thatwas initially expected. For example, let us look at investments. Any difference
between the actual return and the expected return on an investment vehicle isreferred to as risk. The increase in return above what was expected is includedin the meaning of risk in a positive sense. To illustrate, imagine that you
purchased an investment vehicle with an expected return of 2%. The risk in sucha scenario can refer to a return that ends up being 3% or -1% (Figure 1).
Figure 1

Risks associated with and returns on investment instruments
Variability of return= riskHigh

ReturnAverage value of return(expected outcome)
Low

Low

Risk

High

On the other hand, if we limit our focus to insuring something in terms of theprovision of coverage, there is no need to prepare for anything good that might
happen. In this connection, I would like to proceed, for Chapter 1 only, with anunderstanding that risk simply means “the possibility of the occurrence of anevent (accident) that would give rise to a need for money”.

(3) Risk transfer
There are several methods of dealing with risks. To avoid the risk of getting
into an automobile accident, you could simply quit driving altogether. However,risks are an inescapable part of leading an everyday life. Instead, you could try
transferring risks through an insurance policy by paying insurance premiums(Figure 2 on the following page).
By transferring risk, the insurance company will take the place of theindividual in question and satisfy the individual’s need for money in the eventthat an uncertain event itself occurs. It should be noted, however, that insurance
works not by having individual A’s risk assumed by individual B but rather by
Chapter 1 27

promoting mutual aid whereby a group of people who may have a similar need
(as a group) come together to assist one another. The ability to calculate need inmonetary terms is also an element of insurance.
Figure 2

Insurance serves to transfer risks
Insurancecompany

Individualin question
Risks
Risk is transferred through an insurance policy

The essence of insurance is that it allows the individual in question to lead alife with peace of mind by shifting risk to others.
While it may be a bit complicated, let us take a look at the Insurance Act,
which is a statute related to insurance policies, in order to help us arrive at adefinition of insurance. Figure 3 sets forth what is provided for in item (i) of
Article 2 of the statute.
Figure 3
Risk

Definition of insurance under the Insurance Act
Insurancecompany

Individualin question(i) Property benefits at the time a risk occurs(ii) Payment of insurance premiums inproportion to the extent of occurrence(iii) Commitment to provide (i) and (ii)

In simple terms, that provision stipulates that an insurance policy, regardlessof its name, (i) is set up to have the insurance company pay money in the eventof the occurrence of a risk, (ii) is set up to have insurance premiums that havebeen calculated in proportion to the extent of the occurrence of a specified risk
paid by the individual in question, and (iii) represents a commitment by andbetween the insurance company and the individual in question to carry out (i)and (ii) above. Under the law, risks are referred to as perils.
28

This definition is just a legal rephrasing of what I have discussed up to thispoint in this book. While (i) and (iii) go without saying, I would like to focus at
this time on the payment of insurance premiums “in proportion to the extent of
the occurrence of a risk” as stated in (ii) hereof. This is a necessary componentof insurance techniques and will be explained in more detail in III-1 of thischapter. For now, you should know that the life insurance premiums of a personwith a high level of risk are greater than those of a person with a low level ofrisk.

2 What do we mean by life insurance?
There are two types of insurance: life insurance and non-life insurance. Thereis also a type of insurance known as third-sector insurance, such as medical
insurance. While this book primarily focuses on life insurance and third-sector
insurance options that can be underwritten by life insurance companies, I will
begin by examining non-life insurance. Non-life insurance is insurance that“compensates for damage that arises from certain unintended incidents”. Simply
put, non-life insurance works by “compensating for the actual loss” that issustained when an incident occurs. To illustrate, non-life insurance would
compensate you for any damage you or someone else sustains up to the amountof the actual loss for which you are liable in the event that a fire destroys yourhome and you suffer damage or you are involved in an automobile accident inwhich an injury for which you are liable is caused to a pedestrian.
In contrast, life insurance “provides certain insurance benefits in connection
with the survival or death of a person”. Typical examples of life insurance
consist of term insurance, which provides coverage in the event of a person’s
death, and annuity insurance, which provides coverage with a focus on thesurvival of a person.
In this way, life insurance pays out for the “survival or death of a person”. It
is for this reason that life insurance is sometimes known as insurance of human
lives. As you can attach no price to human life, however, the survival or deathof a person per se does not constitute damage. In other words, life insurance is
not designed to compensate for damage.
Nonetheless, the death of a person will result in the drying up of funds tocover the living expenses of his or her dependents. Living a long life may be acause for celebration but will also incur more living expenses. “Certain
insurance benefits” – in other words, a predetermined fixed amount of payment
Chapter 1 29

– will be issued to cover the monetary needs that arise in such an event. Life
insurance is sometimes referred to as “fixed payment” insurance since it pays afixed amount in this way.
Whereas life insurance is insurance whose elements pertain to “the life ordeath of a person” and “fixed-amount payments”, non-life insurance is insurance
whose elements pertain to “damage caused to property (things)” and“compensation for actual loss” (Figure 4).
Figure 4

Elements of life insurance and non-life insurance
Reasons for payment

Life insurance
Non-life insuranceStandards forcalculating benefits

Survival and death of a person

Fixed amount

Damage to property(tangible things)

Actual damage sustainedThis is important due to the existence of a type of insurance known as thirdsector insurance, as explained in the following section.

3 What do we mean by third-sector insurance?
The Insurance Business Act, a statute that regulates the insurance business,stipulates that a life insurance company may underwrite third-sector insurance
policies while engaging in the life insurance business.
The first sector refers to life insurance while the second sector refers to nonlife insurance. Third-sector insurance encompasses such types of insurance as
the aforementioned medical insurance and cancer insurance, and is designed to
pay for hospitalization, surgery, and enduring disabilities due to an injury orillness. These products will henceforth be referred to as accident and sickness
insurance.
First, while accident and sickness insurance is “insurance for people”, it is
not insurance related to the life or death of a person, which means that it cannot
really be referred to as a life insurance product. On the other hand, thehospitalization benefit or surgical benefit paid by an accident and sickness
insurance plan is often a fixed amount – such as 10,000 yen per day –irrespectiveof the actual amount that is incurred. As accident and sickness insurance istherefore not designed to compensate for actual loss, it cannot really be referred
to as non-life insurance either.
30

Given that accident and sickness insurance effectively possesses thecharacteristics of both life insurance and non-life insurance, both life insurancecompanies and non-life insurance companies are allowed to underwrite it(Figure 5).
Figure 5

Illustration of third-sector insurance (Insurance Business Act)Life insurance
First sector

Accident andsickness insurance
Third sector

Non-life insurance
Second sector

Incidentally, some accident and sickness insurance policies pay out
prescribed amounts, such as 10,000 yen per day for hospitalization and 200,000
yen for surgery. These products are known as fixed-amount accident andsickness insurance.
On the other hand, there is also a type of accident and sickness insurance thatis designed to compensate for actual losses. Such an insurance policy might pay
a fixed percentage of medical costs actually paid by an enrollee to the hospital.
Under the public health insurance scheme in Japan, one normally pays thirty
percent of medical costs that are actually incurred. Such an insurance policy is a
product that would cover the thirty percent of medical costs that would otherwise
be paid out of pocket by the patient and is known as insurance against loss froman accident or sickness.
Business conflicts between the lifeand non-life insurance industry

Column 1

The Insurance Business Act that is mentioned in this book regulates life and nonlife insurance companies. Before it was amended in 1995, this statute stipulated
nothing at all in regard to third-sector insurance (accident and sickness insurance).
For this reason, the regulatory authorities allowed life insurance companies and nonlife insurance companies to underwrite products by imposing restrictions on product
Chapter 1 31

characteristics and how they could be sold. When the statute was subsequently
amended in 1995, a system to enable both life insurance companies and non-life
insurance companies to underwrite third-sector insurance without restrictions basedon product characteristics was developed. Major life insurance companies were notallowed to underwrite cancer insurance until 2001 due to the impact of Japan-U.S.
insurance talks.
The Insurance Act, which sets forth the contents of insurance policies, wasenacted in 2008, at which time policies with fixed benefit amounts were positioned
as fixed-amount accident and sickness insurance, a type of policy different from life
insurance policies and non-life insurance policies. On the other hand, insurance
policies against loss from an accident or sickness, which are designed to provide
benefit amounts that compensate for actual losses incurred, were positioned as a
type of non-life insurance. While the Insurance Business Act allows insurance against
loss from an accident or sickness to be underwritten by both life insurancecompanies and non-life insurance companies, insurance policies against loss from an
accident or sickness are handled differently as a type of non-life insurance policy
under the Insurance Act.

4 Scale of the life insurance industry
I would now like to present several numbers to give you an idea of the scaleof the life insurance industry.
(1) Size of policies underwritten by life insurance companies
A life insurance company underwrites both insurance for individuals andinsurance for groups, but I am only going to explore insurance for individuals inthis section. Insurance policies for individuals consist of individual insurance
and individual annuities.
(i) Individual insurance
Figure 6 is a table outlining the number of new and in-force individual
insurance policies, the amount of these policies, and the annualized premiums
for these policies. Of these, the amount of individual insurance policies is thesum of the death benefit and other main insurance amounts as provided for inthese insurance policies.
The amount of annualized insurance premiums is the sum of insurance
premiums paid by the policyholder in a one-year period.

32

Figure 6

Amount of individual insurance policies in force in fiscal year 2019

Number of individual insurance policies

Amount of individual insurance policies(insurance amount)

New policies

New policies

Policies in force

49,717.2 billion yen

829,900.3 billion yen

Policies in force

20.8 million policies 187.48 million policies
Annualized insurance premiums for individual
insurance
New policies

Policies in force

1,545.7 billion yen

22,040.4 billion yen

Source : Excerpted from “2020 Life Insurance Trends”, The Life Insurance Association of Japan

While insurance premiums for a year simply need to be added up for amonthly-paid insurance policy, the handling of products for which insurance
premiums are paid in a lump sum when the policyholder takes out the policy,
such as a single-premium product, can be challenging. In such a case, the amountis considered to be the annual premium on the assumption that payments havebeen made in equal instalments over the course of the insurance term.
Conversions are carried out in this way because simply adding up the insurance
premiums for the current fiscal year will make the performance look too big inyears when many single-premium products are sold and too small in years whensuch products are not sold at all.
Historically, performance in the life insurance industry was thought to be
primarily based on the extent to which the amount of policies increased or
decreased. However, insurance products offering low insurance payments(benefits), such as medical insurance, came to be sold in large numbers, suchthat it is now believed that the amount of policies alone is insufficient formeasuring changes in performance. Thus, annualized insurance premiums,
which represent the earnings of life insurance companies, are aggregated toconstitute a measure of performance.
If we look at the number of individual insurance policies in force in thiscountry, we see that, with a population of approximately 126.5 million people inJapan, there are approximately 1.5 individual insurance policies that have beentaken out per capita. In addition, it may be difficult to understand what it means
to say that the amount of individual insurance policies totals 829 trillion yen. By
way of comparison, this amount is approximately 1.5 times the size of Japan’s
nominal GDP, which is equal to approximately 552 trillion yen (2019).
Chapter 1 33

(ii) Individual annuities
Next, various figures corresponding to the number of new and in-force
individual annuities, policy amounts, and annualized premiums are shown in
Figure 7.
Figure 7

Amount of individual annuities in force in fiscal year 2019

Number of individual annuity policies
New policies
920,000 policies

Policies in force
21.23 million policies

Amount of individual annuity policies (pension
resource)
New policies
5,253.4 billion yen

Policies in force
102,509.3 billion yen

Annualized insurance premiums for individual
annuities
New policies

Policies in force

392.8 billion yen

6,195.8 billion yen

Source: Same as for Figure 6.

When it comes to the policy amounts for individual annuities, it should be
noted that the annuity premiums that are paid in for a monthly-payment
individual annuity policy accumulate monthly. The amount that will have been
accumulated as of the time annuity payments commence is called the pension
resource. The sum of pension resources equals the amount of an individual
annuity plan.
There are 21.23 million individual annuity policies in force, the aggregate
amount of which totals 102 trillion yen. It is believed that about one in six
individuals is enrolled in an individual annuity plan. Given that Japan’s regularbudget is approximately 100 trillion yen in size, it can be said that the total
amount of policies is comparable to the size of this country’s national finances.

(2) Paying insurance money
Figure 8 on the following page indicates the amount of insurance money paidout by life insurance companies. In addition to what is outlined in this figure, theamount paid out by life insurance companies includes surrender values andannuities. This figure lists primary payments consisting of death and maturity
benefits as well as benefits for hospitalization and surgical procedures.
Slightly less than 6 trillion yen in death and maturity benefits are paid out
each year.
34

Figure 8

Insurance money paid out in fiscal year 2019
Death benefits

Number of payments

Maturity benefits
Amount1.18 million

3,200.8 billion yen

Number of payments
1.22 million

Hospitalization benefits
Number of payments

Amount7.57 million

733.0 billion yen

Amount
2,682.9 billion yen

Surgical benefits
Number of payments

Amount4.71 million

468.3 billion yen

Source: Same as for Figure 6.

In addition, the high number of times benefits for hospitalization and surgicalprocedures are paid out should be noted. Both benefits are also often paid
together for hospitalization and surgical procedures on the same occasion. Bothof these benefits together account for approximately 12 million payments madeper year.

(3) Changes in total assets
Figure 9 outlines changes in total assets by fiscal year. Total assets for theentire industry exceed 390 trillion yen.
To convey a sense of just how big the industry is, allow me to compare thiswith the banking industry. According to materials issued by the Japanese
Bankers Association, total deposits held by the five big city banks (mega-banks)
equal 411 trillion yen and total deposits held by regional banks (excluding
second regional banks) equal 291 trillion yen. Assets managed by life insurancecompanies are comparable in size to those managed by the banking industry.
Figure 9

Trends in total assets by fiscal year (all companies)

FY 2015367,167.8 billion yen

FY 2018

387,794.5 billion yen

FY 2016

375,505.1 billion yen

FY 2019392,735.0 billion yen

FY 2017381,275.1 billion yen

Source: Same as for Figure 6.

Chapter 1 35

II. The necessity of life insurance and accident and sickness
insurance
In this section, I will explain the necessity of life insurance and accident andsickness insurance (third-sector insurance). In thinking about the necessity ofthese types of insurance, it is of course important to ascertain how much money
will actually be needed when one dies or is hospitalized. I will also talk aboutsocial insurance in this section since private insurance is arguably necessary
where social insurance is insufficient to fully address needs.

1. Why is life insurance necessary?
(1) Insurance payable at deathFirst, I would like to think about insurance that is payable at death. With suchinsurance, insurance money is paid out when a given person dies. As mentioned
in the example given earlier, financial difficulties would ensue if, in a situation
involving a young couple with a small child, one of the adults were to die.
To begin with, as they are a young couple, they would likely not have thatmuch savings accumulated. They are probably at the stage of their lives when
they are thinking about saving money for the future. In this connection, life
insurance is needed. There is a saying that applies here: “Savings form a triangle
and insurance is a square” (Figure 10).
Figure 10“Savings form a triangle and insurance is a square”

Savings

Insurance

Amount accumulated monthly + interest

Insurance amount paid in full

30 million yen

In other words, with savings, the 10,000 yen you deposit into your account
this month will only be worth 10,000 yen. With insurance, however, if you wereenrolled in an insurance plan that would pay out 30 million yen at death with apremium of 10,000 yen, the 10,000 yen you pay this month would yield 30
36

million yen in benefits in the unfortunate event that you, as the insured, were todie.

(2) Individual annuity insurance
What about insurance for survival, which is another type of life insurance?
Individual annuity insurance is an example of an insurance product that focuseson coverage for survival. This type of insurance is intended to guarantee
retirement funds for the insured. You could also rely on savings and a retirement
allowance to fund your retirement. There are also public pensions as statedbelow, including the Employees’ Pension Plan and the National Pension Plan.
However, whether the amount of benefits that will be paid out by a public
pension is sufficient depends on the individual. According to the Ministry of
Health, Labour and Welfare, the average amount of benefits paid out by public
pension plans to a model household consisting of a husband who had beenenrolled in the Employees’ Pension Plan and a wife who was a full-time
homemaker is approximately 230,000 yen per month. What do you think of thisamount?

The problem of retirement funding

Column 2

A report issued by a deliberative council of the government that indicated thatup to 20 million yen is required by each individual to fund his or her own retirement
gave rise to a hot topic. In just looking at the media reporting, it feels as if the twoissues at hand were discussed without much in the way of an effort to distinguish
one from the other. There is the issue as to whether the government can continue
to maintain the public pension system and the issue as to whether the public pension
benefits to be paid to each individual out of this scheme are sufficient to fund that
individual’s retirement.
The public pension system has introduced tax-financed public funds to a certain
extent and is also designed to prevent a collapse of its finances by controlling theamount of pensions and raising the amount of insurance premiums paid by enrollees.
It is for this reason that the public pension system is believed to be financially sound.
On the other hand, there are surely some people for whom the public pension
amount is insufficient to fund their retirement. In the example given earlier, theamount of public pension benefits paid out to a model household is approximately
230,000 yen. According to a questionnaire-based survey conducted in fiscal year
2019 by the Japan Institute of Life Insurance (JILI), however, the minimum average

Chapter 1 37

amount of daily living expenses for a retired couple is approximately 221,000 yen.
Yet, when asked how much is necessary to cover living expenses for a comfortable
retirement, respondents indicated an average total of 361,000 yen, including theminimum amount of daily living expenses noted above. It is believed that the extent
to which one should prepare funds beyond that which can be provided for by the
public pension system depends on the lifestyle one is willing to adopt in retirement.
This report was produced by a subcommittee operating under the purview of the
Financial System Council but was ultimately not discussed at a general assembly ofthis council. However, as it did manage to generate significant media coverage, theneed to prepare funds for retirement became better known to the public.

(3) Social insurance
In thinking about the necessity of life insurance and accident and sickness
insurance, I will now look at the state of the public insurance scheme, sinceprivate insurance options consisting of life insurance and accident and sickness
insurance would not be needed if coverage under the public scheme wassufficient. In addition, the fact that social insurance benefits exist means thatsocial insurance addresses problems that are universally faced. By looking intosocial insurance, we can thus see where the need for private insurance lies
(Figure 11).
In Japan, public security is administered through a social insurance system.
There are two conceivable means of providing social security: a tax system anda social insurance system.
Figure 11

Relationship between social insurance and its supplementary
private insuranceSocial insurance
Old-age employees’ pension,
old-age national pension

Private insurance
Individualannuity,group pension

Insurance payableat death

Survivors’ welfare pension,
basic survivors’ pension

Insurance payable at death

Disability

Disability welfare pension,
basic disability pension

Severe disability insurance(insurance payable at death)

MedicalPublic health insurance

Medical insuranceLong-term careLong-term care insuranceLong-term care insurance,
dementia insurance

PensionFor example, the National Health Service (NHS), a public health insurance
38

scheme operated in the United Kingdom, is funded by taxes and utilizes a tax
system. Under a tax system, the funds for benefits are collected through taxation.
In a tax system, taxes are not collected from persons whose income is below acertain minimum taxable threshold (distinct from consumption tax), but security
benefits are still provided to such citizens.
Under a social insurance system, an individual who fails to contributepremiums will not be entitled to receive benefits even if he or she has paid alltaxes owing. However, certain considerations are made, as can be seen in asystem for exempting those without an income from paying premiums.
In Japan, the national health insurance scheme is a social insurance system,
but some municipalities collect premiums for this scheme by nominally referringto them as an insurance tax.

2 Characteristics of social insurance(1) Compulsory enrolment
Those who satisfy certain criteria are subject to compulsory social insurance
enrolment, but enrolment has never been refused by the social insurance system.
This is because this system is a means by which the government provides aminimum guarantee of a healthy and cultural life and because excluding sickpeople from the health insurance scheme would be inconsistent with the aims of
the system.
Private insurance enrolment is voluntary for policyholders. The insurancecompany is also free to decide whether or not to conclude an agreement. As will
be explained in Chapter 4, life insurance and medical insurance plans are typical
products for which a risk selection process takes place. Those who are sick or
who otherwise fail to meet the criteria set by an insurance company may beunable to take out such insurance.
(2) Benefit amount
While some social security benefits, including parts of the public pension
system, vary according to the premiums that have been paid in, most benefits arepaid out based on need. In the case of health insurance, need refers to medical
expenses incurred for the treatment of an injury or sickness.
With private and especially life insurance policies, a certain amount as
contractually determined in advance is paid. It does not matter whether thisamount is sufficient to cover the expenses that are actually incurred.
Chapter 1 39

(3) Premiums
Social insurance premiums are collected based not on the benefit principle,
whereby costs are shouldered in proportion to the benefits gained by the enrollee,
but on the ability to pay, which is based on the extent to which an enrollee iscapable of shouldering the premiums. In addition, premiums are collectedirrespective of the risks to which the enrollee is exposed.
With private insurance, premiums are determined according to the amount of
insurance benefits to be paid. In other words, the benefit principle applies.
Furthermore, premiums are determined according to the risks to which theenrollee is exposed.
(4) Source of funds
With social insurance, a scheme is fundamentally financed by premiums. In
many cases, however, a social insurance scheme is financed by public funds
based on taxes. In addition, a scheme that is expected to have a deficit will besupported financially by a different scheme. While actual numbers vary fromscheme to scheme, it is estimated that premiums account for 60% of social
insurance schemes overall and taxes account for the remaining 40%.
A private insurance scheme is financed with just premiums.
3 Public pensions
I will hereby describe the public pension system first as a social insurance
system. One normally enrolls in a public pension system for the purpose ofobtaining an old-age pension after retirement. Old-age pensions correspond toindividual and group pension insurance policies among the products provided
by life insurance companies.
In addition, public pensions have the same function as insurance payable atdeath in that they both provide certain survivor pension benefits on the death ofa spouse.
In addition, they have the same function as the severe disability insurance
benefit paid under life insurance payable at death and disability income
insurance (see Chapter 2-III-3 (5)) in the sense that a disability pension benefit
is provided in the event that an enrollee becomes disabled (see Figure 11 above).
Figure 12 on the following page is a conceptual diagram outlining the public
pension system. Persons between the ages of 20 years and less than 60 years
40residing in Japan must be enrolled in the National Pension Plan. Moreover,
employees and civil servants working at establishments where the Employees’
Pension Plan is in effect (see (2) below) shall be enrolled in such a plan.
Figure 12

Structure of Japan’s public pension system

Employees’ Pension Plan

National Pension Plan (basic pension)
Category 1 insured
persons

Category 2 insured persons(self-employed(company employees)
persons and others)(civil servantsand others)

Category 3 insured
persons
dependent spouses ofcategory 2 insured
persons(1) National Pension Plan
Anyone between the ages of 20 and 60 years who resides in Japan and who
is not enrolled in the Employees’ Pension Plan is a category 1 or category 3
insured person. Category 1 insured persons include students, self-employedpersons, agricultural workers, and others who are not enrolled in the Employees’
Pension Plan.
Anyone who is dependent on a person insured by the Employees’ Pension
Plan and who makes less than 1.3 million yen a year in income (who resides inJapan and is between the ages of 20 and less than 60 years) is a category 3 insured
person.
Even if a person’s annual income is less than 1.3 million yen, he or she would
be insured by the Employees’ Pension Plan (as a category 2 insured person) if
he or she makes at least 1.06 million yen a year at a part-time job or side job andsatisfies certain conditions.
The premium for a category 1 insured person is 16,540 yen per month (fiscal
year 2020). The premium for a category 3 insured person is included in and isdeemed to be paid as part of the premium for the Employees’ Pension Plan of
the person on whom he or she depends.
The fixed-amount component for insured persons under the Employees’
Pension Plan is shared in common with the National Pension Plan (and is
Chapter 1 41

referred to as a basic pension; see (2) below).

(2) Employees’ Pension Plan
The offices of joint-stock companies and other juridical persons and officesof sole proprietorships with five or more full-time employees fall under the
category of “applicable offices”. Anyone who works in an applicable office andwho satisfies the following requirements is obligated to enroll in the Employees’
Pension Plan.
First, a full-time employee under the age of 70 is obligated to enroll in the
Employees’ Pension Plan. Someone who is not a full-time employee but who is
working for shorter periods of time is also obligated to enroll if he or she isengaged in work that minimally satisfies prescribed standards. Someone who isunder the age of 20 years is still obligated to enroll in the Employees’ Pension
Plan if he or she is employed at an applicable office.
Premiums for the Employees’ Pension Plan shall be paid by multiplying theinsured person’s salary (standard monthly remuneration amount) and bonus(standard bonus amount) by a certain percentage for each (18.3%). The premiumis split between the enrollee and the employer. This percentage has been raisedover time but is not expected to increase again in the future.
The Employees’ Pension Plan consists of a fixed-amount component (see (1)above) and a remuneration-proportional component. The fixed-amountcomponent is shared in common with the National Pension Plan as mentionedin (1) above and is referred to as a basic pension. A person enrolled in the
Employees’ Pension Insurance Plan is referred to as a category 2 insured person.
The pension amount for the remuneration-proportional component of the
Employees’ Pension Insurance Plan is calculated and paid on the basis of thestandard monthly remuneration amount or the sum of the standard monthly
remuneration amount and standard bonus amount. As the formula is complicated,
it will not be presented here. Anyone who is interested in delving further into
this topic should visit the website of the Japan Pension Service.
(3) Public Pension Plan benefits
Public pension benefits, such as the old-age national pension and old-age
employees’ pension, are primarily used to provide security for the aged. The
amount of the old-age national pension payable to someone who has paid thefull amount of the National Pension Plan for the entire period of enrolment
42

(category 1 or 3 insured person) is a uniform annual amount equal to 781,700
yen (fiscal year 2020). This amount is reduced if there were any periods during
which premiums were unpaid or exemption periods.
As the amount of the old-age employees’ pension varies according to income,it is not possible to indicate what the full amount is. That said, however, theaverage old-age pension amount for recipients of Employees’ Pension Planbenefits is 144,000 yen per month as of fiscal year 2018 (“Overview of the
Employees’ Pension Insurance and National Pension Plan”, Ministry of Health,Labour and Welfare). Even if a married couple were both working and had paidpremiums in full for the Employees’ Pension Plan, they would be entitled toreceive benefits amounting to approximately 290,000 yen. The model household
described earlier (1(1)) would as mentioned above receive around 230,000 yen.
These are unavoidable levels given the fact that we are living in a super-aging
society and the fact that the old-age pension is a life pension. As indicated inColumn 2 above, those who believe that this amount is insufficient for their own
needs might want to consider enrolling in an individual annuity insurance plan.
It is often overlooked when it comes to an examination of public pensions
but disability pensions and survivors’ benefits are surprisingly important matters.
Disability pensions consist of the basic disability pension that is provided by
the National Pension Plan and the disability employees’ pension that is paid out
to persons insured by their Employees’ Pension Plan. These pensions are paidout to persons who fulfill certain conditions, such as by having paid or been
exempted from paying premiums for at least a certain period of time and by nothaving failed to pay premiums in the last 12 months, and who come to suffer aprescribed disability. The basic disability pension is paid as a fixed amount while
the disability welfare pension is paid as an amount calculated based on the periodof enrollment and standard remuneration amount. According to the Ministry of
Health, Labour and Welfare, the average monthly amount of disability pensions
paid is 102,855 yen (fiscal year 2018).
In addition, a survivors’ pension is, in principle, paid to a spouse with a childunder the age of 18 years in the event that a person insured by the National
Pension Plan dies. In the event that a person insured by the Employees’ Pension
Insurance Plan dies, a survivors’ welfare pension is paid to the wife if the wife
has a child under the age of 18 years. Moreover, there is also a system that allows
for widows of a certain age (between 45 and 65 years of age) to receive
additional pension. According to the Ministry of Health, Labour and Welfare,
Chapter 1 43

the average monthly survivors’ pension amount is 83,704 yen (fiscal year 2018).
Some SNS posts suggest that you cannot rely on public pensions and should
instead enroll in an individual annuity plan offered by a private insurancecompany and refrain from paying public pension premiums. In light of the factthat public pensions provide lifetime benefits as well as disability and survivors’
pensions, the nonpayment of social insurance premiums is a non-starter. It is
important to consider how you can combine social security with life insurance
and disability income insurance to best prepare yourself.

4 Public health insurance(1) Outline of the system
In Japan, a universal national health insurance system has been adopted. The
public health insurance system is generally administered for the following
categories:(i) The employees of private-sector companies enroll in a health insurance
association set up by the company or the Japan Health Insurance Association(Kyokai Kenpo).
(ii) Public servants and faculty members at private universities enroll in different
mutual aid associations.
(iii) Persons not belonging to the foregoing categories enroll in the National Health
Insurance Plan as administered by municipalities.
(iv) All persons aged 75 years or over enroll in the latter-stage elderly healthcare
scheme.

A separate health insurance scheme is provided to seafarers.

(2) Premiums
Premiums are paid monthly for as long as the person being covered is insured.
The amount of premiums is as follows. There are two types: the one that isdeducted from your monthly salary and the one that is deducted from your bonus.
Monthly premium= salary of insured person (standard monthly remuneration amount)x premium rate (common insurance premium rate + long-term careinsurance premium rate (long-term care insurance premium ispayable only for those 40 years of age or over))44Premium payable at bonus time

= bonus of insured person (standard bonus amount)x premium rate (common insurance premium rate + long-term careinsurance premium rate (long-term care insurance premium ispayable only for those 40 years of age or over))The common insurance premium rate applicable to premiums for medicalcare differs from scheme to scheme.
In this section, I will discuss only the premiums for health insurance
associations.
The premium for a health insurance association equals the standard monthly
remuneration amount (each month) and standard bonus amount (at bonus time)
multiplied by a certain premium rate, which varies depending on the association.
As the standard premium rate for the Japan Health Insurance Association(Kyokai Kenpo), in which the employees of companies lacking a healthinsurance association are enrolled, is 10%, there are many health insurance
associations that offer a lower rate. Premiums are borne by the employer andemployee. The contribution rates of each can be voluntarily set by an association.

(3) Benefits
Benefits in kind are generally provided by public health insurance systems.
In other words, an insured person does not pay the full actual costs on an out-ofpocket basis whenever he or she visits a doctor or is hospitalized. Rather, thehealth insurance association will basically pay the medical institution. The
provision of medical services per se constitutes the insurance benefit in question.
However, a certain percentage of medical costs incurred must be paid on an
out-of-pocket basis at the medical institution where the treatment was provided.
Copayment rates are as follows:(i) Before starting compulsory education: 20%(ii) From compulsory school age to under 70 years of age: 30%(iii) From 70 years of age to under 75 years of age: 20%(30% if the individual is earning an income on par with the working-age
population)

Chapter 1 45

(iv) From 75 years of age: 10%(30% if the individual is earning an income on par with the working-age
population)

Since a certain percentage of medical costs are borne by the insured person
as a copayment amount, there is the risk that a person will be forced to assume
an excessive burden if he or she becomes seriously ill. In this connection, there
is a system that provides for a portion of costs exceeding a certain amount(maximum out-of-pocket amount) to be reimbursed later in the event that the
copayment amount corresponding to medical costs incurred in a calendar month(from the first to the last day of the calendar month) becomes too high.
This is known as the reimbursement system for high-cost medical care.
Costs incurred when you are hospitalized consist not just of treatment costs
but also the costs of upgrading your hospital room and the costs of transporting
family members. The Japan Institute of Life Insurance (JILI) conducted a survey
on life security in fiscal year 2019 to determine the extent to which costs are
incurred during hospitalization. This survey revealed that costs average 23,300
yen per day. Thus, it would be a good idea to consider enrolling in a private
medical insurance plan.

5 Public long-term care insuranceLong-term care insurance is a social insurance system for people who are 65
years of age or over and people who are between the ages of 40 and 64 years
who are enrolled in a health insurance or other public medical scheme.
Someone aged 65 years or over is entitled to receive long-term care services
if he or she is certified as requiring long-term care or support as a category 1
insured person. Someone aged between 40 and 64 years is entitled to receive
long-term care services if he or she requires long-term care or support due to oneof certain illnesses caused by aging as a category 2 insured person.
Municipalities are the entities administering long-term care insurance.
(1) Premiums
Premiums for category 2 insured persons are collected together with publichealth insurance premiums. The premium is a fixed percentage of the standard
monthly remuneration amount and standard bonus amount. The Japan Health
Insurance Association (Kyokai Kenpo) has set this rate at 1.79% (beginning at
the end of March 2020).
46

Premiums for category 1 insured persons are collected by public pension
deductions. The premium rate is divided into six standard levels according to theinsured person’s income. According to materials provided by the Ministry of
Health, Labour and Welfare, the average premium nationwide is a little under
5,000 yen per month.

(2) Financing
Fifty percent of the funding for long-term care insurance is derived frompublic sources of financing, which is broken down as follows: national
government (25%), prefectural governments (12.5%), and municipal
governments (12.5%). The remaining 50% consists of premiums collected frominsured persons, which in turn is broken down as follows: 23% from thepremiums paid by category 1 insured persons and 27% from the premiums paidby category 2 insured persons. Premiums paid by category 2 insured persons are
not directly allocated to the municipalities where these persons reside. Rather,
they are pooled nationally before being distributed according to the fiscal
situation in each municipality.
(3) Benefits
The benefits provided by long-term care insurance consist of benefits in kindand include the following:(i) Home-based services: Home-visit care, ambulatory care, and more(ii) Community-based services: Regular routine-visiting and as-needed home-visit
care and nursing care, communal care fordementia, and more(iii) Facility-based services: Welfare facilities for the elderly, geriatric healthcare
facilities, and more

In order to receive benefits, the insured person first needs to be certified as
requiring long-term care by his or her municipality. Once an individual iscertified as requiring long-term care or support, a care plan will be drafted.
Generally speaking, a care plan will be produced by a care manager belonging
to a private home-care support agency where an individual is certified as
requiring long-term care and by a care manager working for a community
comprehensive support center where an individual is certified as requiringsupport.
Chapter 1 47

Long-term care services or long-term care preventive services are provided
in line with this care plan. In using such services, the user will in principle pay
10% of the costs but may be required to assume 20% or 30% of the costs if hisor her income is high.
Given that we no longer live in a time when two or three generations live
together and support one another and that elderly persons aged 75 years or overnumbered approximately 18.72 million (approximately 15% of the population)in 2020, the existence of long-term care insurance is important in Japan.
However, long-term care insurance – aside from certain facility-based
services – does not entail round-the-clock care for people who need to receive
long-term care. Thus, a burden will be placed on family. Such issues as that ofcaregivers quitting their jobs to care for their own parents are becoming aproblem for society.
According to the Japan Institute of Life Insurance (JILI)’s 2018 national
survey on life insurance, the average period of long-term care is four years andseven months, during which time average monthly long-term care costs of
78,000 yen, which includes copayments for public long-term care insurance
services, are incurred. Given the implication of these sorts of figures, it can besaid that advance preparation is required as a way for people to help themselves.

6 Summary
You may have heard about social insurance in fragments but might not have
had a real opportunity to properly learn about it. There is a full array of ways inwhich social insurance provides coverage, such as by way of pensions andcoverage for accidents and death, medical care, and long-term care. Amid adeclining birthrate and aging population in Japan, however, the number ofpeople paying premiums is declining and the number of people receiving
benefits is increasing. Since these trends are a function of changes in the
demographic composition of this country, we cannot expect to see these trends
significantly change anytime soon.
In addition, there are aspects of social insurance that an examination of thesesystems and schemes reveals are not sufficient for everyone.
Products offered by life insurance companies help to complement thecoverage provided by social insurance. It is important that you consider enrollingin a life insurance plan in order to prepare for death or an injury as well as forthe golden years that are sure to come in time.
48

III. The way insurance works
In this section, I will explain the way it is possible for life insurance to beoffered, the parties involved in life insurance, and the basic terminology andprinciples that you should be familiar with to learn about life insurance moneyand other aspects of life insurance. This section will form the foundation forreading the rest of this book.

1 The laws and principles that make it possible for life insurance to beoffered(1) The law of large numbers
As noted in I above, insurance is a system of mutual aid for people dealing
with the same risks. The life insurance business is one that is based on the lawof large numbers. The law of large numbers can be explained by talking about
dice. A die features six sides numbered from one to six, each of which isunderstood to have an equal probability of being rolled. Thus, you cannot saythat you will definitely produce a one once if you roll a die six times. The more
you roll a die, however, the closer you will get to a one-in-six chance of coming
up with any given side (Figure 13).
Figure 13

Law of large numbers

When it comes to insurance payable at death, mortality rates by age for men
and women are extensively researched. For example, we do not know whether
Mr. A, a specific 30-year-old male individual, will die. What we do know,
however, is the probability of a 30-year-old male individual dying.
Thus, once you bring together a large number of 30-year-old male individuals,
you can figure out with a certain probability how many of them will die in the
Chapter 1 49

same way that probability works when you roll a die many times.
Once you know the probability of the occurrence of an event in this way, you
can estimate the amount of insurance money you may be eventually required to
pay out. Once the amount of estimated payments is known, you can divide thisamount by the number of enrollees to come up with the amount of premiums to
be collected in advance.

(2) The principle of equivalence between proceeds and disbursements
Next is the principle of equivalence between proceeds and disbursements.
This principle states that you should set premiums so that the total premiumincome equals the total payments of insurance money for claims (Figure 14).
Figure 14

Principle of equivalence between proceeds and disbursements
Insurancecompany

Premium
100 yen x 10,000 persons

Death benefit
1 million yen x 1 person

Total amounts match

For example, let us say that one in 10,000 30-year-old male individuals dies
each year. This probability figure is obtained from the application of theaforementioned law of large numbers. If the amount of the death benefit is set at
1 million yen, then the annual premium to be paid when 10,000 30-year-old maleindividuals sign on as enrollees (to be paid at the beginning of the term) would
be as follows:
Annual premium (payable at the beginning of the term)= 1 million yen x 1 person ÷ 10,000 persons = 100 yen(3) The individual equivalence principle
While this principle can be conflated with the principle of equivalence
between proceeds and disbursements, it differs in that it is a principle that50

focuses on the individual.
It is a principle by which an individual taking out a life insurance policy
should pay premiums according to the probability of his or her own death (Figure
15).
Figure 15

30 years old

60 years old

The individual equivalence principle

Low risk

High risk

Low premiumsHighpremiums

Fairness is achieved bycollecting premiums according
to riskIn other words, premiums are high for someone at higher risk and low forsomeone at lower risk. By varying the premium level in this way, fairness among
enrollees is achieved.
To illustrate, we see that the probability of death for a 60-year-old man ishigher than it is for a 30-year-old man. Therefore, even if both individuals wish
to purchase the same insurance product, the premiums to be paid by the 60-yearold man will be higher than the premiums to be paid by the 30-year-old man.

2 Life insurance parties
With life insurance, the life insurance company underwrites insurance
policies as the insurer. The person who enters into a life insurance contract witha life insurance company is called the policyholder. The policyholder applies fora policy with the insurance company and pays premiums.
The person whose life is insured is known as the insured. In other words, theperson for whom insurance money is paid out upon his or her death or upon his
or her survival to a certain age is the insured. The policyholder and insured canbe the same person or different people.
Furthermore, the person who receives insurance money in the event theinsured person dies or an event triggering the payout of an insurance benefit
occurs is known as the beneficiary (Figure 16 on the following page).

Chapter 1 51

Figure 16

The policyholder, the insured, and the beneficiary

Policyholder

Insured
Consent of theinsuredApplication for
insurance coverage

Payment of premiums

Beneficiary

Insurancecompany

Payment of insurance money

There are three concerned parties other than the life insurance company: thepolicyholder, the insured, and the beneficiary. In many cases, the policyholder
and the insured are the same person.
For example, let us imagine that there is a couple. The husband concludes acontract for life insurance in which he designates himself as the insured, whichmeans that the policyholder and the insured are the same person. By designating
the wife as the beneficiary in this case, the policy is effective as a means ofproviding security for surviving family members in the event of the death of thehusband.
If the policyholder and the insured are different people, the insured will needto consent to the conclusion of a life insurance contract at the time of its
conclusion. The beneficiary shall be designated by the policyholder.
The acquisition of the consent of the insured and the designation of thebeneficiary shall be dealt with as described in Chapter 2-II-2(3) and (4).

3 Money for life insurance policies
After concluding a contract for life insurance, the policyholder needs to pay
premiums. It would be correct to suggest that the payment of premiums is moreor less the only obligation of the policyholder after the conclusion of a life
insurance contract.
In contrast, in the event of the death of the insured or the occurrence
otherwise of a reason for paying insurance money (known as an insured event),52

the life insurance company shall be obligated to pay insurance money to thebeneficiary. This insurance money consists of a death benefit payable upon thedeath of the insured and maturity insurance money to be paid at the end of thepromised term of the policy. Incidentally, money paid by a life insurancecompany under a medical insurance plan is referred to not as insurance money
but as a benefit.
Premiums are money paid by the policyholder to the life insurance company
while insurance money and benefits are paid by the life insurance company.
Another important item is the surrender value, which is the money that thelife insurance company will pay upon the cancelation of a life insurance contractby the policyholder prior to the expiration of the insurance term.
These points are explained in greater detail in Chapter 4-IV.

Chapter 1 53

IV. How insurance came to be
In this section, you will learn about the history of life insurance. It has been
about 260 years since the emergence of modern life insurance and around 140
years since the introduction of modern life insurance in Japan.
Modern life insurance products are essentially based on techniques
established two or three centuries ago. Life insurance has evolved against the
backdrop of socioeconomic conditions, and I will hereby provide explanations
with this point in mind.

1 History of life insurance in Europe
The origins of life insurance are murky and not very clear. Nevertheless,there are several examples in history of what can be regarded as the earliest
forms of life insurance.
It is said that a prototype of life insurance can be found in the collegia ofancient roman society. Collegia that served as burial societies could be joinedby paying a subscription fee; upon the death of a member, his or her funeral costs
were paid.
In Europe, trade associations of commercial or industrial proprietors, known
as guilds, sprung up beginning in the latter half of the tenth century in concert
with the development of commerce and industry. Guilds featured a mechanism
for providing mutual assistance in the event of the death of a member.
The Age of Exploration that began in the fifteenth century saw the emergenceof adventure loans (or maritime loans) whereby merchants would cover the costsof voyages for traders and, if a voyage turned out to be successful, obtain
massive profits by receiving repayment with substantial interest. If a voyage
failed, the prepaid expenses did not have to be reimbursed. Similar arrangements
were made with respect to the lives of those involved in maritime shipping andtravelers at this time. Adventure loans were suppressed for a time as an act
designed to earn unreasonably high amounts of interest.
In this connection, the following type of agreement would have beenconcluded. First, money would be nominally loaned by a trader to a merchant.
If the trade ended up being successful, the agreement would be cancelled. On
the other hand, if the voyage failed, the agreement would not be canceled andthe money that was supposedly loaned by the trader to the merchant would be54

reimbursed to the trader. The amount would then be applied by the trader tovessels and goods lost at sea as part of the failed voyage. For such an agreement,
it appears that a part of the amount would have been paid by the trader to themerchant in advance. Such an arrangement formed the prototype of insurance as
we know it today.
In this way, that which effectively constitutes insurance was originallyprovided in the form of monetary loans. Agreements that were squarely drawn
up as insurance agreements were concluded in Italian city states in the latter halfof the fourteenth century.

2 How modern life insurance came to be in the United Kingdom(1) Friendly societies
The working class was subsequently established upon the occurrence of theIndustrial Revolution in the latter half of the eighteenth century.
Labor movements came to occur frequently, and labor unions were formedin response to harsh working conditions. Formed at the same time as these labor
unions were friendly societies in the United Kingdom, which served to provide
mutual assistance, such as death benefits, to their members. Friendly societies
adopted a system of premiums that were levied uniformly on all members
regardless of age. For levy-based premiums, the full sum of insurance money tobe paid out in a given year is collected from members in the same year.
Friendly societies were initially banned due to their deep connection to labor
disputes and the fact that the French Revolution was then underway. Theirsignificance as a means of providing mutual assistance among the working classlater came to be recognized, whereupon they were then legalized by the Rose
Act of 1793. As friendly societies adopted a system of premiums that were levied
uniformly on all members, their finances tended to worsen over time as theirmembers became older, such that more than a few such societies went bankrupt.
Nonetheless, friendly societies in the United Kingdom have continued to operate
to the present day.
(2) How insurance companies that operate as enterprises providing
assessment insurance came to be
In the United Kingdom, various insurance companies were established asenterprises that adopted a levy system, such as the Mercers’ Company in 1698
and the Amicable Society in 1706. While the Mercers’ Company went bankrupt
shortly after its inception, the Amicable Society went with a system by which
Chapter 1 55

the company fixed contributions, accumulated a certain percentage of total
contributions, and paid out the rest as death benefit payments. Thus, the death
benefit was subject to fluctuations, such that a higher number of deaths would
mean a smaller death benefit amount would be paid to each beneficiary. The
Amicable Society continues to exist today even as it has gone through mergers
in the past.
The problem with the levy system is that the contribution amount is the same
regardless of whether a member is old or young. While this is great for an older
person, it means that younger people will be paying too much in contributions.
If this is not addressed, fewer young people will enroll with the passage oftime after an insurance business is set up. Eventually, the policyholder base willconsist of nobody but older people, which would usher in a worsening of thefinancial situation.

(3) Establishing the Equitable Life Assurance SocietyWith the founding of the Equitable Life Assurance Society in 1762, the basisof modern life insurance was formed. A life table was produced by EdmondHalley, the astronomer of comet fame, who then recommended that life
insurance products should be priced according to age. A life table (or mortality
table) is a table outlining the results of a statistical survey of mortality rates bysex and by age.
In line with this recommendation, mathematician James Dotson and otherscame up with a plan to establish the Equitable Life. The 1760s were a decadethat coincided with the earliest years of the Industrial Revolution; it was during
these years that the Equitable Life was established and the London Underground(metro) was opened (1763).
The Equitable Life adopted a system of level premiums that were meant tostay constant throughout the period of enrolment by using expected mortality
rates based on life tables and setting premiums according to the age of theindividual at the time of the individual’s enrolment (Figure 17 on the followingpage). The Equitable Life stayed in business until 2000 when it stopped selling
new policies due to operational difficulties.

56

Figure 17

The Equitable‘s innovations in the life insurance business
Item

Description

Level premiums by age

Premium amounts as determined by age at enrolment willcontinue.

Sales of whole life insurance

Coverage is provided for life.

Surrender value and dividends
Actuarial appointments
Medical examinations

Policyholder’s equity is recognized and refunded on cancelation;
surplus is distributed.
Professionals are appointed to carry out actuarial calculations ofpremiums and policy reserves.
Health-related risks are measured.

A series of short-lived insurance companies came and went in the years after
the Equitable Life was founded. The Life Assurance Companies Act of 1870,
however, put in place the foundations of modern insurance oversight.
The Life Assurance Companies Act introduced a system of insurance
oversight that remains in place today, the components of which includes theestablishment of a policy reserve, capital adequacy regulations, and theappointment of actuaries. Details concerning insurance oversight are dealt within Chapter 4.

3 Growth in the United States
The modern life insurance industry that was established in the United
Kingdom also developed in the United States. With the Declaration of
Independence being adopted in 1776 in that country, the domestic market
became a single national market to facilitate economic development and growth.
However, there was political wariness concerning the idea of a strong central
government, such that there remains substantial debate over the distribution of
power between the federal and state governments. The insurance industry is stilllargely governed by the states.
In the United States, the Pennsylvania Company for Insurance on Lives andGranting Annuities, which was established in 1812, engaged in proactive efforts
to expand its operations through the use of agencies.
In 1861, Massachusetts insurance regulator and actuary Eliza Wright enacted
the Non-Forfeiture Act, which mandated that a surrender value be paid whenevera life insurance policy is canceled. At the time, life insurance policies did not
pay refunds when they were canceled even if funds had been accumulating overtime; this way of treating the cancelation of a policy was then banned. In 1867,
Yukichi Fukuzawa traveled to the United States to investigate the state ofChapter 1 57

insurance in that country at the time, as discussed below.
There have also been cases in the United States as well in which short-lived
life insurance companies came and went and in which top managers treated theircompanies as easy sources of cash.
At the turn of the twentieth century, the Armstrong Investigation surveyed
the life insurance industry in 1905 and came up with a number ofrecommendations. In the wake of the findings of this investigation, the insurance
law in New York State was revised. Specifically, the powers of the directors oflife insurance companies were curtailed and investments in their shares wereprohibited. Furthermore, the revised law prohibited deferred dividends andimposed restrictions on new business aquisition cost.

4 History of life insurance in Japan
In Japan, mutual assistance was given by associations for the provision ofmutual assistance or loans during the Edo Period (1603– 1868). In 1867, the yearof the restoration of imperial rule, Yukichi Fukuzawa introduced Western-style
life insurance in his Conditions in the West (travel guide on the West), which
would shortly help to usher in modern life insurance to Japan.
At first, agencies working for overseas insurance companies began offering
insurance for the Japanese market. In 1880, the Kyosai-gohyakumeisha
company was established. While it was established as a company that charged
levy-based premiums, it could eventually no longer sustain its own operations
and underwent a developmental dissolution. This episode was the starting point
for the subsequent emergence of the Yasuda Life Insurance Company (now the
Meiji Yasuda Life Insurance Company).
The first to start a modern insurance business was Meiji Life Insurance (nowthe Meiji Yasuda Life Insurance Company), which was founded in 1881 by aprotégé of Yukichi Fukuzawa. The company used British mortality tables and,in response to disclosures, sold whole-life insurance policies and other products.
Teikoku Life Insurance (which is now the Asahi Mutual Life Insurance
Company) and the Nippon Life Insurance Company were founded in 1888 and
1889, respectively. Thereafter, the industry coalesced around three major
players: Meiji, Teikoku, and Nippon. As many short-lived insurance companies
were also established at this time, laws and regulations were enacted in 1889 and
1890. As part of this process, insurance companies were allowed to form mutualcompanies; the Dai-ichi Life Insurance Company began its operations as a58

mutual company in 1902.
The need for insurance payable at death came to be understood and life
insurance grew in popularity in the wake of the Sino-Japanese War in 1894 andthe Russo-Japanese War in 1904. The economic boom brought about by the FirstWorld War in 1914 led to the growth of life insurance companies.
On the other hand, the worldwide spread of the Spanish flu that began in1918 claimed nearly 400,000 victims in Japan alone. More than 100,000 people
died or went missing when the Great Kanto Earthquake of 1923 struck. These
were just some of the notable events that increased the level of interest in theconcept of life insurance.
With the arrival of the Second World War, life insurance came to be used aspart of a national policy to finance the country’s military. With the strife that
attended the end of the war, life insurance companies faced operationaldifficulties due to the loss of foreign assets, an increase in payment of death
benefits, and higher business costs owing to inflation. Amid these circumstances,
joint-stock life insurance companies converted to mutual companies in an
attempt to enable operations to continue.
In the postwar years, life insurance companies hired huge numbers of female
sales agents to strengthen their sales force and worked to greatly expand theirbusiness during the period of rapid economic growth in the country.
In Chapter 5, I will provide an overview of trends in the life insurance
industry since the Heisei Period. See Chapter 2 for a history of life insurance
products and Chapter 3 for trends in solicitation channels.

Chapter 1 59

V. Groups and organizations related to the life insurance
industry
In this section, I will be looking at groups and organizations with aconnection to the life insurance industry. Since the life insurance industry is one
that is subject to special regulations, there are supervisory authorities as well as
special organizations that have come into being with the involvement of theindustry.

1 Life insurance companies
The entities that operate a life insurance business are life insurancecompanies, the types of which include joint-stock companies and mutualcompanies.
With a joint-stock company, the rights that are vested in owners of thecompany are distributed and issued in the form of shares. The shareholders who
own shares are owners of the company. A joint-stock company is a for-profit
corporation in the sense that profits are distributed to shareholders.
A mutual company is a type of company that is unique to the insurance
industry. In a mutual company, policyholders are ‘employees’, not in the sensethat they are part of the workforce but in the sense that each policyholder is anowner. Thus, taking out insurance as offered by a mutual company means thatyou become an owner of the mutual company. Mutual companies are not forprofit entities, but neither are they public-interest corporations. For this reason,
they are known as intermediary corporations.
While large and medium-sized insurance companies used to include many
mutual companies, fewer companies consist of mutual companies these days
either because they transferred their policies to a joint-stock company and shut
down operations due to increasingly difficult management circumstances or
because they converted themselves into joint-stock companies in order to takeadvantage of greater flexibility in developing their business operations.
There are now forty-two life insurance companies in Japan (as of February2021).

60

Governance of mutual companies

Column 3

Since policyholders are ‘employees’ in a mutual company, the highest body inthe company is the general meeting of ‘employees’, which is equivalent to thegeneral meeting of shareholders in a joint-stock company. Since a life insurancecompany has a huge number of ‘employees’, however, delegates are normallyelected to represent ‘employees’ and meetings are held with the participation ofthese delegates. These meetings are known as meetings of delegates.
As the mutual company itself is effectively involved in the election of delegates,
efforts are made to ensure that those who are unbiased towards management are
selected. First, someone who can act at arm’s length from the mutual company isappointed the head of the committee for selecting delegates. Delegate nominees
selected by the committee for selecting delegates are put to an ‘employee’ vote.
Policyholders, who are ‘employees’, can vote no-confidence with respect to any
delegate nominee they believe is unsuitable. A delegate nominee shall not be elected
if at least ten (10) percent of votes comprise votes of no-confidence.
In addition, round-table conferences that are open to all policyholders are heldin various regions. Opinions put forth at these conferences are reported to meetingsof delegates. A discussion committee may organize a meeting to obtain advice onmanagement matters; opinions put forth at these meetings are reported at meetingsof delegates.
Mutual companies are characterized by the fact that, where a surplus isgenerated by the insurance business, it is distributed only to policyholders(‘employees’). At a joint-stock company, a surplus would be distributed topolicyholders and shareholders (in the case of a dividend-paying insurance policy).

2 Insurance solicitation businessIn the life insurance business, individuals and groups that sell life insurance
policies are exceedingly important.
I will explain matters in greater detail in Chapter 3, but it should be noted
here that the solicitation of insurance is carried out by sales agents andsolicitation agencies. In some cases, direct solicitation is also carried out by
insurance companies through call centers. With life insurance, sales agents andsolicitation agencies act only as intermediaries for life insurance policies. To put
it another way, they only act to bring the life insurance company and thepolicyholder together.
On this point, an agency might sometimes have the authority to conclude a
Chapter 1 61

contract for non-life insurance coverage. For example, if someone came to a
non-life insurance agency for automobile insurance, a contract could beconcluded with the acceptance of the agency. When it comes to life insurance,
only the life insurance company has the authority to conclude a contract, whichmeans that no agency can conclude a contract.

3 Financial Services Agency
The Financial Services Agency is a government agency operating under thepurview of the Cabinet Office. A life insurance company needs to obtain alicense from and be subject to oversight by the Prime Minister, but it is the
Financial Services Agency that engages in actual supervisory functions.
The Financial Services Agency supervises on both an on-site and off-sitebasis. For on-site supervision, it visits life insurance companies to conduct
inspections. Off-site supervision is carried out by requesting reports frominsurance companies or by examining and approving basic documents preparedby life insurance companies, including articles of association and the provisionsof policies.
Where the operations, affairs, or systems of a life insurance company arefound to be inadequate, the Financial Services Agency shall undertake
administrative measures by issuing a business improvement order or businesssuspension order.
4 The Life Insurance Association of Japan (LIAJ) and the Japan Institute ofLife Insurance (JILI)The Life Insurance Association of Japan (LIAJ) is an association whose
membership consists of life insurance companies. It fulfills very important roles.
First, it mediates complaints submitted by life insurance policyholders. It also
has a system by which an adjudication board responds if a response provided bya life insurance company to a matter does not satisfy a policyholder; under thissystem, a dispute resolution service is provided to the consumer as an alternative
to litigation (see Column 4).
In addition, a system is operated to allow a life insurance company todetermine whether excessive amounts of insurance money are being committed
upon the enrollment of someone in a life insurance policy. Another system thatenables information to be exchanged among life insurance companies todetermine whether there are any fraudulent claims for payment is also operated.
62

The Life Insurance Association of Japan also produces various guidelines topromote proper operations on the part of life insurance companies and sets forth
standards for business operations undertaken by each company.
The role of the Japan Institute of Life Insurance (JILI) is to disseminate
knowledge on life insurance. In addition to carrying out surveys and research, it
undertakes awareness-raising activities for consumers.

Alternative dispute resolution (ADR) system

Column 4

A designated dispute resolution organization (alternative dispute resolution;
ADR) refers to an organization whose business is to resolve disputes without relying
on the courts. The ADR system in Japan is modeled on the ombudsman system inplace in the United Kingdom. Where a policyholder or beneficiary is not paid
insurance money or is otherwise dissatisfied with the handling undertaken by aninsurance company, matters are first discussed with the insurance company inquestion. There are nevertheless cases in which a resolution cannot be reacheddespite such efforts. In such a case, litigation is a possibility but would be costly andtime-consuming.
In this connection, the ADR system was established with the aim of reaching a
resolution by way of allowing policyholders to obtain decisions from a party
operating independently of the insurance company. ADR in the life insurance
industry consists of an adjudication board established within the Life Insurance
Association of Japan. Insurance companies conclude an agreement with thisadjudication board, which is a dispute resolution organization designated by law. In
the event that a policyholder requests that dispute resolution procedures be
undertaken, the insurance company is compelled to participate in these procedures.
The adjudication board endeavors to propose a settlement between theinsurance company and the policyholder. Where a settlement is accepted by thepolicyholder, the insurance company must accept the terms of the settlement unless
it chooses to pursue litigation.
The costs incurred by the adjudication board are borne by the insurance industry.
For this reason, no monetary burden is imposed on policyholders.

5 Life Insurance Policyholders Protection Corporation of JapanThe bankruptcy of a life insurance company due to financial difficulties does
not imply that life insurance policies underwritten by the company cease to exist.
The Insurance Business Act has provisions to enable life insurance policies to
Chapter 1 63

remain in force by allowing some of the reserves accumulated by the life
insurance company for policies to be cut and the provisions of policies to bereviewed. If necessary, contributions made by life insurance companies and set
aside with the Life Insurance Policyholders Protection Corporation of Japan
shall be furnished to any insurance company that bails out a failing insurancecompany.
The Life Insurance Policyholders Protection Corporation of Japan fulfills arole in protecting life insurance policyholders, such as by furnishing such funds
and getting involved in procedures for the restructuring of failed life insurancecompanies.

64VI. Businesses that are peripheral to the insurance business
In Chapter 1, you learned about the life insurance industry. Incidentally, there
exist other industries that provide products similar to life insurance. For example,
the mutual aid industry provides life mutual aid. In this section, I will describe
these other industries.

1 Mutual-aid enterprise
Although it falls outside the scope of the definition of insurance businessunder the Insurance Business Act, the mutual aid business exists as a businessthat provides products similar or identical to insurance products provided byinsurance companies. The mutual aid business is large; according to the Japan
Cooperative Insurance Association, there are approximately 77 million members,
approximately 135 million policies, and approximately 845 trillion yen in mutualaid (Figure 18).
Figure 18

Business outline of mutual aid members of the Japan Cooperative
Insurance Association
FY 2018

Membership (x 10,000)
Number of policies*1(x 10,000)
Mutual aid amount*2(x 100 million yen)
Mutual aid contributions received(x 100 million yen)
Mutual aid money paid out(x 100 million yen)
Total assets(x 100 million yen)

FY 2019

Year-on-year change (%)

7,667

7,731

100.8

13,711

13,54398.8

8,587,034

8,450,606

98.4

74,84965,09387.0

55,72751,255

92.0

665,678

657,518

98.9*1: The number of policies, mutual aid amount, and mutual aid contributions received correspond to
the actual policies in force.
*2: The mutual aid amount does not include actual results corresponding to automobile mutual aid andmutual aid for compulsory automobile liability insurance.
Source: “Overview of the Mutual Aid Business”, Japan Cooperative Insurance Association

Like the insurance business, the mutual aid business provides coverageagainst death, injury and sickness, fires, automobile accidents, and othercontingencies through mutual aid policies. The structure of a mutual aid policy
Chapter 1 65

is more or less the same as that of insurance and the Insurance Act likewiseapplies as it does to insurance policies. However, the mutual aid business differsfrom the insurance business in that, in principle, mutual aid can only be provided
to those with certain qualifications, which are met by, for example, living in acertain region or by working in a certain profession. In addition, unique features
set mutual aid providers apart from insurance companies in that the provision ofmutual assistance by a mutual aid business is strongly emphasized. The laws on
which business is based include the Consumer Cooperatives Act.
Nevertheless, some organizations permit enrolment in a mutual aid policy
even by people without the requisite qualification if such actions fall withincertain limits or allow enrolment in a mutual aid policy by anyone upon thepayment of several hundred yen to qualify for the privilege. For these reasons, it
is believed that mutual aid providers are becoming more like ordinary insurancecompanies in terms of their attributes.
Leading enterprises include JA Kyosai, Kokumin Kyosai Coop, and Kenmin
Kyosai (Prefectural Mutual Aid).

(1) JA Kyosai
JA Kyosai is a program carried out by Zenkyoren (National Mutual Insurance
Federation of Agricultural Cooperatives) and JA (Japan Agricultural
Cooperatives). Mutual aid policies are sold to those engaged in farming basedon the Agricultural Cooperatives Act. In addition to life mutual aid and medical
mutual aid, JA Kyosai offers such products as automobile mutual aid andhousing mutual aid. In comparing JA Kyosai to an insurance company, we could
say that JA Kyosai is characterized by the fact that it underwrites both life andnon-life insurance policies.
JA solicitation channels consist of persons in charge of selling JA policies ineach region. During intensive months, however, the JA workforce works
together on solicitation activities.
(2) Kokumin Kyosai Coop
Kokumin Kyosai Coop used to operate under the name Zenrosai (National
Federation of Workers and Consumers Insurance Cooperatives). The
implementing entity is the National Federation of Workers and Consumers
Kyosai Cooperatives. The Consumer Cooperatives Act is the statute governing
Kokumin Kyosai Coop. In the beginning, it was a mutual aid scheme for labor66

union members. These days, however, it offers mutual aid policies to membersof the general public after contributions are made.
In addition to life mutual aid and medical mutual aid, Kokumin Kyosai Coopsells such products as automobile mutual aid and property mutual aid. Kokumin
Kyosai Coop also underwrites the equivalent of both life and non-life insurance
policies.
Solicitation activities are carried out by the Kokumin Kyosai Coop program
through labor unions, by local promoters, and by way of direct marketing basedon the placement of ads in newspapers and elsewhere.

(3) Kenmin Kyosai (Prefectural Mutual Aid)
Through the Kenmin Kyosai program, the National Consumers’ Cooperative
Union and thirty-nine prefectural member consumers’ cooperatives offer suchproducts as mutual aid for citizens of Tokyo, mutual aid for citizens of Hokkaido,
and mutual aid for citizens of other prefectures. The governing statute is theConsumer Cooperatives Law. The Kenmin Kyosai program also underwrites theequivalent of both life and non-life insurance policies but does not sell
automobile mutual aid, which is something that distinguishes it from the JA
Kyosai and Kokumin Kyosai Coop programs.
Solicitation activities are carried out by the Kenmin Kyosai program throughthe use of newspaper inserts and direct marketing facilitated by the placement ofbrochures at financial institutions.
2 Small-amount short-term insurance business(1) Mutual aid not subject to a governing law
Before it was amended in 2005, the Insurance Business Act consideredentities that underwrote insurance for “unspecified large numbers of persons” tobe operating an insurance business. This meant that an entity that underwrote
insurance for “specific persons” was not subject to the regulation of theinsurance business.
Beginning in the latter half of the 1990s, enterprises offering “mutual aid not
subject to a governing law” in the form of products similar to insurance to those
who become members or purchase specific products grew in scale. While theaforementioned JA Kyosai and others engage in operations while governed bysuch statutes as the Agricultural Cooperatives Act, there were enterprises that
operated programs without such a basis in law, which were known as enterprises
Chapter 1 67

that offered mutual aid not subject to a governing law.
Some enterprises offering mutual aid not subject to a governing law emerged
as operators that could not be seen as sound insurance businesses, including
those that promoted pyramid schemes developed together with network
businesses.
In this connection, the amendment of the Insurance Business Act in 2005
brought about two significant changes related to mutual aid not subject to agoverning law. First, the definition of insurance business was changed and therequirement of an “unspecified large numbers of persons” was eliminated.
Consequently, the Insurance Business Law came to apply to insurance
businesses that catered to specific persons and that were not previously subject
to a governing law. Second, the Insurance Business Law came to permit
operations on the part of small-amount, short-term insurers. Small-amount shortterm insurers can now be recognized as a form of business under the Insurance
Business Act by having mutual aid not subject to a governing law properly
registered.

(2) Rules applicable to small-amount short-term insurance providers
Small-amount short-term insurance providers are subject to more relaxed
regulations than insurance companies, but are limited in terms of the productsthat can be underwritten and the scale of their business. This is to prevent
policyholders from becoming seriously affected in the unlikely event of the
failure of a small-amount short-term insurance provider.
Whereas insurance companies are licensed, small-amount short-term
insurance providers are registered. It is also easier for small-amount short-term
insurance providers to enter the market given that the minimum capitalrequirement is 10 million yen unlike the minimum capital requirement of 1
billion yen for insurance companies. However, the insurance term can be nolonger than 1 year for life insurance and medical insurance and 2 years for nonlife insurance policies; monetary limits also apply, such as an upper limit of 3
million yen for sickness and death insurance and 800 thousand yen for
hospitalization and other benefits.
Asset management is limited to safe assets, such as deposits and national
government bonds. There is also no safety net in the event of the collapse of asmall-amount short-term insurance provider that corresponds to the Life
Insurance Policyholders Protection Corporation of Japan.
68As of February 2021, there were 108 small-amount, short-term insurance
providers. While business was initially developed in areas not traditionallyserved by insurance companies, such as pet insurance, completely new types of
insurance products falling within the framework of small-amount short-term
insurance providers are now being offered (see Chapter 5-IV).
Small mutual aid providers or intra-company mutual aid schemes with nomore than 1,000 enrollees and low-value mutual aid plans with an insurance
value of no more than 100,000 yen are not regulated by the Insurance BusinessAct. This is to exclude internal get-togethers and other such events throughwhich nominal amounts are offered to employees.
To solicit products offered by small-amount short-term insurance providers,
one must be certified as a small-amount, short-term insurance solicitor.

3 Former Postal Life Insurance Service (Kampo)(1) From the former Postal Life Insurance Service to Japan Post
Insurance Company
In materials released by the Life Insurance Association of Japan are writtensuch expressions as “including Kampo” and “excluding Kampo”. While Japan
Post Insurance Company, Ltd., is a life insurance company that has been granted
a license by the Financial Services Agency, its predecessor was a life insurance
scheme run by the government.
This scheme was originally launched in 1916 as a low-cost, monthly
insurance scheme for the general public for which no medical examination wasnecessary to enroll. It was the era of Taisho democracy, when awareness of theneed to implement universal suffrage and otherwise promote equality among thepeople was growing. This scheme was begun as a government-run insurance
scheme for the general public despite assertions voiced by private life insurancecompanies to the effect that the private sector was being squeezed. Postal life
insurance proved to be highly popular as a government monopoly. While thestate monopoly over postal life insurance was abolished after World War II, thescheme continued to enjoy an edge over private insurance in that the payment of
insurance money was guaranteed by the state and there was no need to pay
corporate taxes. The belief on the part of critics that the private sector was being
squeezed was persistently held. For this reason, bloat-prevention measures weretaken, such as by establishing marketability benchmarks and enrolment limits.
In 2001, the Ministry of Posts and Telecommunications, which had overseen
Chapter 1 69

postal life insurance, and the Ministry of Internal Affairs and Communications
were merged to give rise to the new Ministry of Public Management, Home
Affairs, Posts and Telecommunications. At that time, the Postal Savings and Life
Insurance Bureau of the Ministry of Posts and Telecommunications was also
eliminated. The Postal Services Agency, which operates postal services andsavings services, was established as an auxiliary body of the Ministry of Public
Management, Home Affairs, Posts and Telecommunications.
In 2003, the Postal Services Agency was transformed into a public
corporation named Japan Post.
The privatization of the three postal services of the time subsequently becamea major political issue. In 2005, then Prime Minister Junichiro Koizumi decided
to break up the postal system and proceeded to secure a major victory in a lower
house election. Consequently, a bill to privatize the postal system was passed
and enacted, whereupon postal privatization was achieved in October 2007. It
was then that the insurance operations of the post office became independent and
the Japan Post Insurance Company, Ltd., was accordingly founded.

(2) Postal privatization and Japan Post Insurance (Kampo Life
Insurance)
In privatizing the postal system, Japan Post Holdings Co., Ltd., came to be
structured as a holding company under which Japan Post Insurance, Japan Post
Bank, and companies in charge of post offices and postal operations (which at
the time of privatization consisted of Japan Post Network Co., Ltd., and Japan
Post Service, Limited; these companies later merged to become Japan Post Co.,
Ltd.) operate.
Under the privatization plan, it was expected that the government’s share ofJapan Post Holdings Co., Ltd., would be reduced to a little more than one-third
and that the government would sell off all of its shares in Japan Post Insurance
and the Japan Post Bank. When Japan Post Insurance came into being, the aim
was to make it a fully privatized life insurance company. It became a member ofthe Life Insurance Association of Japan as well as a company that came within
the scope of coverage extended by the Life Insurance Policyholders Protection
Corporation of Japan.
Since then, however, there have been changes in the political climate, among
which was a change of government from the Liberal Democratic Party to the
Democratic Party of Japan, as a result of which approximately two-thirds of the70

shares of Japan Post Insurance remains held by Japan Post Holdings Co., Ltd. A
majority of the shares of Japan Post Holdings Co., Ltd., approximately 56.9
percent, are held by the national and local governments. For this reason, it
remains difficult to assert that the company has been fully privatized.
Predominant features of Japan Post Insurance include the following:(i) It is indirectly owned by the government through Japan Post Holdings Co., Ltd.
(ii) The company’s size per se is large, as it is contracted to manage assets andpolicies tied to the former Postal Life Insurance Service.
(iii) On the other hand, the company is not performing well in terms of new policies,
such that it cannot be considered a major life insurance company in terms of new
business.

Given this background and these circumstances, the company mightsometimes be listed separately from ordinary private life insurance providers
under various categories of statistics.
While Japan Post Insurance also markets its own products, these products areprimarily sold at post offices. The composition of the Japan Post Group andJapan Post Insurance is as shown in Figure 19 hereof.
Figure 19

Japan Post Group and Japan Post Insurance

Government
Shareholding obligation (more than one-third)[Postal Services Privatization Act]

Shareholding ratio: approx. 56.9%

Japan Post Holdings Co., Ltd.
Shareholding operations (100%)[Postal Services Privatization
Act]

Japan Post
Mail and logistics business
International logistics business

Postal counter operations

Aim to dispose of all shares as soon as possible while taking into
account the business conditions surrounding the two financial
companies in question and the impact on the bank of its universal
service responsibilities [Postal Services Privatization Act].
First, sell in stages until the shareholding ratio reaches about 50%.

Shareholding ratio:
approx. 89%

Shareholding ratio:
approx. 64%

Japan Post Bank
Outsourcing
Bank teller services

Japan Post Insurance
Outsourcing
Insurance contact services

Source: Produced based on an integrated report by Japan Post Insurance Company, Ltd.
Chapter 1 71

Chapter 2: Life insurance products

In Chapter 2, you will learn about life insurance products.
First, I will provide an overview of, among other matters, changes
in life insurance products over time and the forms these products
take.
Next, I will explain the rules that apply to life insurance policies.
In the column, I will touch on the mandating of a question-andanswer format for disclosing matters and on insurance products witha narrower range of matters to be disclosed.
I will then survey specific products corresponding to products forindividuals and products for groups.
Finally, I will take a brief look at taxation matters as they pertain tolife insurance.

Chapter 3 73

I. Life insurance products
In this section, you will learn about life insurance products. I will begin by
exploring the changes in key products in the earliest years of life insurance
during the Meiji Period (1868-1912). I will then explain the need for life
insurance products, insurance terms and premiums, and various productinnovations.

1 Changes in life insurance products to date(1) Life insurance products at the outset
During the earliest years of life insurance in Japan during the Meiji Period,
life insurance was sold as whole life insurance where the coverage period wasfor a lifetime and only a death benefit was paid. By the end of the Meiji Period,
the focus shifted to endowment insurance for which the amount of insurancemoney payable upon the death of the insured and the amount of maturity
insurance money were the same. With endowment insurance, maturity insurancemoney is paid upon the expiration of the insurance term. Whole life insurance
too has a substantial savings component, and it can be argued that life insurance
policies that are not non refeundable, such that they provide some sort ofmaturity refund, have come to be preferred.
With non refundable insurance, the payment of premiums entitles you toreceive insurance coverage for unlikely contingencies. Since insurance moneyis paid out in the unlikely event that a contingency occurs, this function allows
you, in essence, to purchase peace of mind. This can be described as theinsurance company becoming contractually obligated to shoulder a given risk.
(2) Life insurance products since the period of rapid economic growth
During the period of rapid economic growth, the population migrated fromrural areas to the cities and there was a shift towards the nuclearization offamilies in line with economic growth, which led to a rise in demand for deathcoverage. Under these conditions, products for which term insurance was added
as a rider to the main endowment insurance policy to increase the death coverage
for a certain period of time became a bestseller beginning in the 1960s. It
addressed the demand for expanded death coverage that existed even as people
had an aversion to term policies. Initially, products had a low multiplier. For74example, with a triple policy, an endowment insurance policy of 1 million yen
might be supplemented with a term insurance rider of 2 million yen for a total
death benefit payout of 3 million yen. The multiplier is a term that indicates theextent to which the amount of the death benefit is greater than the maturity valueof the main savings endowment insurance policy. The amount of the death
benefit increased in the form of a larger term insurance rider in line with greater
demand for death coverage (to provide, for example, a multiplier of 15).
Around this time, the increased popularity of automobile use amonghouseholds in a way that outstripped the pace at which roads were being
developed led to a rash of vehicular accidents and the emergence of the phrase“traffic wars”. An accidental death rider that would pay out insurance money inthe event of a death or any of certain types of severe disability caused by a traffic
accident or otherwise unforeseen accident was developed in response.
In the 1970s, a sickness rider to cover the costs of illness came to be added.

(3) Life insurance products during the bubble era
Later, beginning in around 1980, whole life insurance with a term insurance
rider became the main product in the years leading up to the bubble era.
Endowment insurance with a term insurance rider, which had previously been abestselling product, was disadvantageous in that the life insurance policy would
become extinguished upon the maturation of the main endowment insurance
policy. There would be no such disadvantage if the main policy were made toconsist of whole life insurance. Furthermore, by having the main policy consistof whole life insurance with a smaller savings component than endowment
insurance, greater coverage could be obtained for the same premium amount.
In addition, a high volume of single-premium endowment insurance policies
based on the use of high interest rates in the market were sold during the periodleading up to the bubble. Variable insurance policies under which the amount of
insurance received varied according to investment performance were also
introduced.
(4) Life insurance products since the collapse of the bubble economy
With the subsequent bursting of the bubble economy in 1991, sales of life
insurance products temporarily declined, in part due to a decrease in the numberof new insurance policies sold.
Following the amendment of the Insurance Business Act in 1995 and the
Chapter 3 75

spearheading of the Financial Big Bang by the Ryutaro Hashimoto Cabinet in
1998, numerous life insurance subsidiaries of non-life insurers and foreignaffiliated life insurance companies entered the life insurance industry to offer
new products.
As the number of dual-income households increased, there was a growing
need for medical insurance, personal annuity insurance, and other forms of
insurance for clients themselves to go along with coverage in case of death.
Most recently, we have seen products that address an aging society, such as
long-term care insurance and dementia insurance, as well as IT-based products
come to be offered. These recent developments are covered in Chapter 5.
Incidentally, interest rate levels these days are low, especially domestically,and have even dipped into negative territory from time to time. This makes it
hard to stably manage the savings component of savings products, as a result of
which it has become more challenging to plan and sell savings products.
For these reasons, products that utilize high foreign interest rates, such as
foreign currency denominated annuity insurance plans, have come to beprovided. However, general interest rate levels have generally fallen in foreigncountries as well, thereby making it all the more difficult to plan and offer
products to clients.

2 Life insurance needs
The Japan Institute of Life Insurance (JILI) conducts a survey of life
insurance-related needs once every three years. Figure 1 on the following page
presents the results of a survey that was conducted in fiscal year 2018. Heads ofhouseholds and their spouses were asked multiple-response questions throughwhich they could indicate what kind of coverage they wanted to have if they
were inclined to enroll in a new plan or add to a current plan.
This survey reveals that the three big needs are conceivably medical coverage,
security for survivors, and old-age coverage. In recent years, it has also come tobe recognized that there is a certain level of need for long-term care coverage.
Between household heads and their spouses, there is a slightly higher needfor security for survivors among household heads and a substantial need for
medical insurance among spouses.
Figure 2 on the following page shows, by policy numbers, what kinds of
insurance products for individuals have been sold and what kinds of insurance
products for individuals continue to be sold.
76

Types of insurance that are being sold these days include medical insurance,
term insurance, and whole life insurance. At the same time, whole-life insurance,
medical insurance, cancer insurance, and term insurance are quite popular interms of policies in force.
Desired coverage if inclined to enroll in a new plan or add to a
current plan
(Multiple responses) (Unit: %)Figure 1

Household head

SpouseCoverage for treatment or hospitalization in the event of an
illness or injury

52.0

56.9

Policy that focuses on coverage required in the event of an
illness, disaster, or accident

50.7

44.5

Policy that focuses on preparing a fund for retirement living

45.0

39.9

Policy that offers a combination of coverage and savings

35.8

29.3

Policy that focuses on preparing for long-term care costs

35.2

26.5

Policy that focuses on savings

15.3

12.3

Policy that focuses on setting aside a fund to pay for the costs ofa child’s education or wedding

13.5

7.9

Other or unknown

3.0

3.2

Source: Excerpted from “National Survey on Life Insurance” (2018), Japan Institute of Life Insurance (JILI)

Figure 2

Number of policies by policy type (2019) / (Unit: x 10,000)
New policies

Other, 364
Whole-life
insurance withterm-limited
coverage, 0Endowment
insurance, 61
Cancerinsurance,
183

Policies in force

MedicalOther, 3775
insurance,
Whole-life350
insurance withterm-limited
coverage, 740
Term
insurance, Endowment
220
insurance,
1227
Whole-life
Cancerinsurance,
insurance,
1193
2535

Medicalinsurance,
4048

Term insurance,
2662
Whole-life
insurance,
3761

Source: Excerpted from “2020 Life Insurance Trends”, The Life Insurance Association of Japan

3 Type consisting of a main policy and riders and type consisting of a single
policy(1) Type consisting of a main policy and riders
Traditionally, major life insurance companies in particular have tried to
Chapter 3 77

provide comprehensive coverage for the various needs of their client base. Thiswas carried out through an approach that entailed the use of main policies andriders. With this approach, clients are meant to feel peace of mind by way of
their enrolment in a single product. Such a product is also known as a package
product.
Figure 3

Approach based on the use of a main policy and riders

Term
insurancerider(renewal)
Term insurance
rider

Whole life insurance
Medical rider (surgical and hospitalization benefits)
Premium payment waiver rider

Figure 3 is an example of a main policy consisting of whole life insurancewith term insurance or medical insurance added as riders. If this approach istaken, death coverage can continue to be in force for life and can be used to pay
for funeral costs and prepare funds for inheritance tax payments upon the deathof the insured.
In addition, term insurance can be bolstered while a child of the insured is a
student to enhance coverage at a lower cost than increasing the amount of whole
life insurance coverage. With many policies, it is possible to renew term
insurance riders. If you wish to renew at the same amount, however, premiums
will normally rise since you will be older than at the time of your initialenrolment. Some television commercials will claim that your premiums willremain the same for the rest of your life but such commercials are not talking
about policies that involve this sort of renewal mechanism for term insurance.
In this example, a premium payment waiver rider has been added. A premium
payment waiver rider is a rider that makes it unnecessary for the insured tocontinue paying premiums from the time he or she becomes afflicted with acertain condition caused by a predetermined illness, such as cancer or a stroke.
Coverage remains in force even if premiums are no longer being paid. Recently,
some companies have moved away from the approach that is based on the use
78

of main policies and riders and are instead offering products through which every
kind of coverage can be combined under a single main policy on a relatively
flexible basis.

(2) Type consisting of a single policy
In contrast to the use of main policies and riders by major life insurancecompanies, foreign-affiliated life insurance companies and life insurancecompanies that primarily sell via mail order or online channels have come toemphasize the offering of products on a single-item basis for ease ofunderstanding. These companies sell medical insurance and term insurance as
single items. Since consumers read explanations published in newspaper ads orposted on the Internet when enrolling in such policies, they can enroll with peaceof mind if the product is one that is easy to grasp.
Costs can be reduced by simplifying the disclosure and application processes
required to enroll in an insurance policy; these cost savings can go towards
lowering premiums, which would also appeal to potential clients. However,policies that provide medical coverage sometime provide only hospitalizationand surgical benefits and no other types of coverage, which means that it isimportant that you verify what you are getting before enrolling in a policy interms of coverage with the understanding that not all products are the same.
In addition, since not everyone can receive advice on their own coverageneeds, there are probably clients who would like to consult with someone todetermine whether a given policy offers enough coverage. It is in this sense thatthe existence of a face-to-face life insurance solicitation channel can bemeaningful (see Chapter 3).
4 Insurance term and premium payment period
An insurance term during which a death benefit and other benefits are to be
paid is set forth in a life insurance policy. An insurance term can either be fixedor for life. In terms of insurance policies that only pay a death benefit, those witha fixed term are known as term insurance and those that are in force for life are
known as whole life insurance (as explained later in 1(2) of III).
For a fixed-term policy, the insurance term – such as five or ten years – isspecified at the time of application. Once the insurance term expires, the policy
comes to an end.
The period during which premiums are paid and the insurance term during
Chapter 3 79

which coverage continues to be provided are not always the same.
For example, there is a type of whole-life insurance known as a short-term
payment type for which premiums are paid until the insured turns 60 or 65 yearsof age, when income is still being earned. There is another type known as thewhole-life payment type, for which premiums are paid throughout the insurance
term. Premiums for the former type, for which the premium payment period isshortened, are higher than they are for the latter.

5 Premium payment method and payment channels
Policies for which premiums were paid once a year used to be common in
the past. However, premiums for most policies these days are paid monthly. In
some cases, a premium is paid on a single-premium basis at the beginning of theinsurance term. The single-premium basis is often used with savings-type
products.
These days, premiums are paid mostly by way of automatic bank transfersfrom deposit accounts and the use of credit cards. Other payment channels
include an occupational system whereby amounts are deducted from paychecks
by the employer of the insured, who then pays the premiums to the insurancecompany on behalf of the insured.
In the Showa Period (early postwar years), payments were made primarily
through the door-to-door collection of premiums by an insurance sales agent incharge of a given area. Since clients would be seen face-to-face each month withthis approach, it was advantageous in that it facilitated flexibility in responding
to changing needs.
However, this approach is almost entirely non-existent today as it carries arisk of loss while handling cash and a risk that amounts cannot be reconciled by
the agent upon his or her return to the office and as too much time and effort
would be spent on this task.
6 Product development innovations
Life insurance is not so simple that one can assert that the policy with lower
premiums is always going to be better. When it comes to dividend-paying
insurance, costs are determined only after dividends and benefits are paid. In
designing a product, you can also lower premium amounts by cutting coverageor reducing benefit amounts.
However, this certainly does not mean that companies do not need to make80

an effort; indeed, a life insurance company is required to offer coverage at areasonable price that does not adversely affect its health. In this section, I will
introduce a number of innovations that can be used to lower premiums.

(1) Discounts for persons in good healthFirst, premiums can conceivably be lowered for those with lower levels of
risk. The basic mechanism for setting premiums as a function of risk wasincorporated into life insurance products from the outset. As discussed in moredetail in Chapter 4-IV-2(3), some insurance products set a standard premium
rate for healthy people and a high premium rate for persons with a certain levelof risk. This is slightly different from the notion of giving a discount to persons
in good health.
A non-smoker discount is a type of discount for persons in good health,which is a system of proactively discounting premium rates charged to healthypeople. The premium rates of non-smokers are discounted under this system.
This discount is not widely used, however, since it is rather difficult to verify
whether one has smoked or not and since it is not clear how much smoking
contributes to the risk of death.
These days, premium rates are discounted for some products when a person
undergoes a medical checkup or performs certain exercises. See Chapter 5 formore information on such products.
(2) Low- and no-surrender value-type insurance(i) Low-surrender value-type insurance
A surrender value is normally paid upon the cancelation of a life insurance
policy with the exception of non refundable insurance such as term insurance
policies and medical insurance policies. A life insurance company accumulates
funds from the premiums paid by policyholders in order to pay future claims(see Chapter 4-III for details). When a policyholder cancels a policy before theexpiration of the policy term, the portion accumulated for that person’s policy(reserve fund) is refunded. However, this amount will be reduced to a certain
extent (surrender charge) if a policy is canceled within a certain period after thepolicy is concluded.
This reserve fund is built up and managed together within a group of
insurance policies whose premiums are calculated in the same way (called aninsurance cohort). If the surrender value is kept low or not paid at all, it can be
Chapter 3 81

used to fund payments of claims corresponding to other insurance policies. Thus,by keeping the surrender value low, you can lower premiums in totality. Low
surrender value-type policies are sold for life insurance with a large savings
component, such as whole life insurance.

(ii) No-surrender value-type insurance
Many medical insurance policies these days have no surrender value are also
common.
With medical insurance, the insurance policy does not come to an end once
benefits are paid; instead, benefits are paid over and over again. This means thatsome policies that have paid out more in benefits than premiums paid by the
insured to date will continue to remain in force.
If a surrender value is to be paid to the insured upon the cancelation of apolicy that has paid out more in benefits than premiums paid by the insured todate, then an amount over and above the premium amounts must be collected inadvance to enable the payment of a surrender value. Thus, companies decide notto pay surrender values.
On the other hand, there are also agreements that provide congratulatory
payments or dividends on policies that have not paid out medical insurance
benefits for a certain period of time. For such products, premiums arecorrespondingly higher.
7 Individual insurance and group insuranceLife insurance where the policyholder is an individual is called individual
insurance and life insurance where the policyholder is a company ororganization and the employees or members thereof are the insured is calledgroup insurance. Different products are sold for each; special policies areoffered to groups.
A form of insurance whereby a company’s employees are the policyholders
and premiums are deducted from paychecks issued by the company is sometimes
referred to as group coverage and can also be referred to as occupational
coverage and professional group coverage in Japan. This form of insurance
constitutes individual insurance for which premiums are simply paid through a
company or other employer.
In addition, insurance for which a company may be the policyholder but thepresident as an individual or each board member as an individual is the insured
82

through the use of a type of product geared towards individuals is categorized as
individual insurance.
Both insurance for individuals and insurance for groups can offer robust
protection and savings features (Figure 4).
Figure 4

Individual insurance and group insurance
Individual is thepolicyholder

Group is the policyholder andmembers are the insured

Purpose: Coverage

Individual insuranceGroup insurance

Purpose: Pension benefit

Individual annuity

Group pension

Chapter 3 83

II. Life insurance policy rules
The Insurance Act was touched on briefly in Chapter 1. This statute defines
insurance, defines life insurance, defines non-life insurance, and defines
accident and sickness insurance. It also sets forth basic rules governing insurance
policies.
In this section, I will focus primarily on matters set forth by the Insurance
Act that do not relate to definitions.

1 Application of Insurance Act rules
The legal rules governing general contracts that are applicable to sales
contracts and lease contracts are set forth by the Civil Code and the Consumer
Contract Act (limited to cases involving a contract between a business and a
consumer). The Civil Code and other such statutes stipulate how contracts are to
be formed and other pertinent matters.
The Insurance Act applies as a set of rules that directly govern the types ofcontract that are used to provided insurance coverage. It is positioned as a set of
special provisions of the Civil Code.
Detailed arrangements for insurance policies are set forth in the policy
provisions as drafted by each insurance company.
As for the relationship among these three sets of rules, the Insurance Act
prevails over the Civil Code and the policy provisions prevail over the Insurance
Act with respect to voluntary provisions, in other words, matters concerningwhich commitments separate from matters mandated by law can be made. On
the other hand, the Insurance Act prevails over the policy provisions and the
Civil Code prevails over the Insurance Act with respect to mandatory provisions
for which anything other than statutory provisions cannot be regarded as valid.
Many mandatory provisions are set forth in the Insurance Act (Figure 5 on thefollowing page).

84

Figure 5

Voluntary provisions and mandatory provisions

Voluntary
provisions

Mandatory
provisions

Priority applied in order of precedence from the top
Priority policy provisions

Subordinate

Insurance Act
Subordinate

Civil Code and the Consumer Contract Act

Priority

Priority applied in order of precedence from the bottom

Below, I will primarily explain life insurance and add any explanations of theway matters are handled differently with fixed-amount accident and sickness
insurance where applicable. In this section, I will not provide an explanation of
insurance against loss from an accident or sickness, which is classified as nonlife insurance.

2 Concluding an insurance policy(1) Application and acceptanceAn insurance policy is concluded when an application is made by aprospective insurance policyholder and accepted by the life insurance company
as the insurer. An agreement concluded with just the agreement of both parties
is known as a consensual agreement; an insurance agreement (policy) is aconsensual agreement. While an insurance certificate is normally issued, suchan action is not a necessary condition for concluding an agreement.
However, an insurance certificate is an important document in that it is often
sent as a notice of acceptance of the insurance policy by the insurance company,
and in that many life insurance companies will require the presentation of an
insurance certificate to facilitate various procedures at a later date. Information
to be included in an insurance certificate are set forth in the Insurance Act.
Since life insurance companies determine whether they will issue an
insurance certificate, some companies no longer issue an insurance certificate inthis paperless age. In such cases, a written document will be sent to inform theinsured that the insurance policy has been accepted but the insured will not be
asked to present this document whenever an insurance claim is made.
(2) Duty to disclose
Chapter 3 85

In applying for a life insurance policy, the policyholder and the insured must
answer important questions posted by the life insurance company, which relate
to, for example, the current state of health of the insured, the history of visits
made by the insured to and treatment received by the insured from medical
doctors, and the insured’s occupation. Normally, the insured will complete a
disclosure form prepared by the life insurance company for this purpose orprovide answers to a company physician working for or a physician
commissioned by the life insurance company.
Mandating a question-and-answer format
for disclosing matters

Column 5

Under the Insurance Act, a question-and-answer format has been mandated fordisclosing matters. Under the previous law (old Commercial Code), the duty todisclose matters was regarded as an obligation to make a voluntary declaration,
which ostensibly meant that the insured had to voluntarily inform the life insurancecompany of any illness, physical condition, or other such important matters. Thus,
the insured had to declare any important physical anomalies even if he or she was
not specifically asked about such matters in the disclosure form.
However, in practice, an insured would only respond to questions asked in thedisclosure form; this approach was replaced with a mandated question-and-answer
format under which the insured only has to answer questions asked in the disclosureform. Since the insured only needs to answer questions asked by the life insurancecompany, the life insurance company needs to make sure that the disclosure form isboth concise and easy for anyone to understand.

Eased underwriting standards (limited disclosure)and non-selective insurance

Column 6

Some life insurance policies consist of products for which there is a narrower
range of matters to be disclosed. Such products are sold on the basis that they canbe taken out even if the insured has a pre-existing medical condition. Such products
are called eased underwriting standards-type insurance or limited disclosure-typeinsurance. There are also life insurance products for which no disclosure is required
and for which no risk selection process is undertaken at all.
There are two points that you should be aware of when taking out suchinsurance. The first is that it is possible that no death benefit will be paid or that thedeath benefit will be reduced if the insured dies within a certain period – for86example, two years – after the date on which the policy is concluded. The second isthat premiums for insurance for which no risk selection process is undertaken tend
to be higher than they are for common insurance policies since this type of insurance
tends to be taken out by higher-risk individuals. There are cases in which healthy
persons would be better off enrolling in a ordinary life insurance plan since such acourse of action would result in lower premiums.
In addition, some whole life insurance policies underwritten by companies thatclaim that premiums will remain constant for the rest of your life will lower payout
amounts after the insured reaches a certain age. In any case, you need to carefully
read the ads and brochures that pertain to a product and inquire with the call centeror agent if you have any questions.

As mentioned below, a life insurance policy may be canceled or death
benefits may not be paid if matters have not been properly disclosed (breach of
the duty to disclose). Provisions pertaining to cancelation due to a breach of the
duty to disclose are also set forth in the Insurance Act.

(3) Consent of the insured
As outlined in Chapter 1, the consent of the insured is needed for an insurance
policy that pays out a death benefit if the policyholder and insured are different
persons. There are several reasons why the consent of the insured is required,
one of which is to prevent more risks. An example of a moral risk is the intent,in the back of the policyholder’s mind, to cause an insured accident. In an
extreme case, a policyholder might even take out a life insurance policy onsomeone in hopes of obtaining death benefits by deliberately causing that
person’s death. In order to prevent such actions, the consent of the insured isrequired.
These days, there is a strong belief in the importance of the consent of theinsured in terms of respecting the personal rights of the insured.
When it comes to fixed-amount accident and sickness insurance, the consent
of the insured is not needed if the beneficiary and the insured are the same person
unless the policy pays out a benefit only in the event of a death from an accident
or sickness. This is due to the fact that it would be unrealistic to require theconsent of, for example, everyone participating in a sports event to whom
accident insurance is being provided.
(4) Designating and changing the beneficiary
Chapter 3 87

With life insurance policies, it is often the case that the insured under thepolicy is different from the beneficiary. In concluding a life insurance policy,
the beneficiary is not required to give consent like the insured and is not involvedin procedures for taking out the policy.
The policyholder can designate and change the beneficiary. At the time of
the conclusion of an insurance policy, the insured will consent based on anunderstanding of who the beneficiary is. When the policyholder wishes tochange the beneficiary, the consent of the insured will again be required.
To have a change of the beneficiary take effect, the policyholder only needs
to unilaterally inform the life insurance company. In addition, if a policyholder(who is also the insured) dies after having left a will in which he or she indicateda desire to change the beneficiary from current beneficiary A to new beneficiaryB, the change of the beneficiary will also take effect when the will is notified to
the life insurance company by a bereaved family member after the death of theinsured. In such a case, payment of the death benefit by the life insurancecompany to original beneficiary A due to a failure to notify the life insurancecompany of the will shall be considered effective. In other words, the life
insurance company will not be required to make a duplicate payment to new
beneficiary B.

3 Insurance benefits(1) Insurance claims
When it becomes known that an event for which a death benefit can beclaimed (death of the insured) has occurred, the beneficiary must immediately
notify the life insurance company.
While a delay in providing this notification does not immediately mean thatthe insurance money will not be paid, the right to claim insurance money can
become extinct by prescription. If a claim for insurance money is not madewithin three years, the right to make a claim will be extinguished. However,whether the life insurance company will insist on extinguishing this right byprescription is up to the life insurance company. Many life insurance companies
will still pay if certain unavoidable circumstances were in play, such as where
the insurance certificate could not be found right after death and only showed upmuch later.
(2) Where insurance money is not paid
88

There are three main scenarios in which no death benefit is paid:(i) Disclaimers
The first is disclaimers as set forth by the life insurance company.
Disclaimers include the following statements:
Disclaimers as set forth by the life insurance companya) Suicide as carried out by the insuredb) The policyholder intentionally causes the death of the insuredc) The beneficiary intentionally causes the death of the insuredd) The insured dies due to a war or other situation involving strife and bloodshed

With disclaimers a) through c), the life insurance company will be deemed
to be not liable for paying insurance money in light of the fact that the death of
the insured in such cases will have been intentionally caused.
The insurance money is not paid since there was a moral risk in play.
With a), it would be problematic if the policyholder (as the insured) were toenroll in a life insurance plan for the purpose of having a death benefit obtained
before he or she proceeded to commit suicide. This is because not only is the useof life insurance in this manner inappropriate, but life insurance could end up
encouraging more people to commit suicide. However, if there was no intent tocommit suicide at the time of enrolment and the insured later committed suicide
because he or she ran into financial difficulties, some might argue that insurancemoney should be paid out to surviving family members. On this point, whereas
the Insurance Act allows for nonpayment on an indefinite basis, the provisions
stipulated in more recent policies sometimes allow for the payment of a death
benefit even in the event of a suicide committed at least three years after
enrolment (or one or two years under some older policies).

(ii) Breach of the duty to disclose
The second is the cancelation of a policy due to a breach of the duty todisclose. I explained above that the policyholder and insured have a duty todisclose. Nevertheless, the life insurance company is entitled to cancel aninsurance policy due either to an intentional failure to disclose or to a failure todisclose something that the insured should have known had to be disclosed if aminimal degree of care had been exercised. In addition, no death benefit will be
paid if the reason for the failure to properly disclose is related to the cause ofdeath. On the other hand, a death benefit will be paid in a case in which the
Chapter 3 89

insured dies in an automobile accident even if the insured failed to inform thelife insurance company that he or she was told by a doctor that he or she needed
to undergo re-examination for cancer since there is no real connection between
cancer and automobile accidents.
Under the Insurance Act, a policy cannot be canceled more than five years
after the conclusion of a life insurance policy or more than one month after thelife insurance company finds out about the existence of grounds for cancelation.
This five-year period after the conclusion of a life insurance policy is normallyreduced to two years in the provisions of a policy. Thus, a life insurancecompany cannot cancel an agreement even if it becomes aware of a breach of
the duty to disclose more than two years after the conclusion of a policy.
Furthermore, the life insurance company cannot cancel a policy if it knew
about the matters to be disclosed or if the insurance solicitor working for the life
insurance company had encouraged the policyholder to refrain from disclosing
the matters to be disclosed. This is because the fault would lie with the life
insurance company in these cases.

(iii) Serious reasons
The third is the cancelation of a policy due to a serious reason. A serious
reason refers to an act of bad faith on the part of the policyholder that makes it
difficult to maintain the policy in question. When such an act of bad faith iscarried out, the life insurance company is entitled to cancel the insurance policy.
Specifically, a policy can be canceled in any of the following cases:
Cancelation due to a serious eventa) The policyholder or beneficiary intentionally caused or attempted to cause thedeath of the insuredb) The beneficiary committed or attempted to commit fraud with respect to a claim
for insurance money under a life insurance policyc) In addition to the above, any other serious event that undermines the trust of
the insurer and makes it difficult to enable the life insurance policy to remain
in force

While a) is similar to the first disclaimer listed above (intentional on the partof the policyholder), it has the effect of allowing the life insurance company tocancel a policy before an event to trigger a claim occurs; in other words, even if
the policyholder fails to intentionally cause the insured to die (in other words, anattempt is made). An example of b) would be where, even though the insured is90not dead, a claim for a death benefit payment is made with a completely
fraudulent death certificate. An example of c) would be where a moral risk ishighly suspected of being in play, such as where the insured is covered by adeath insurance policy of an unnecessarily high amount or by an unnecessarily
high number of death insurance policies.
These are handled in almost the exact same way for fixed-amount accident
and sickness insurance. However, there are some differences. With an accident
and sickness insurance policy, the insurer is exempt from liability if the insured
deliberately or by gross negligence causes an accident rather than commits
suicide. When it comes to cancelation due to a serious event, the policy is subject
to cancelation even if the insured him or herself caused a benefit payouttriggering event. Since the disability or illness of the insured, rather than thedeath of the insured, is the benefit payout-triggering event in an accident andsickness insurance policy, the insured getting himself or herself deliberately
injured is grounds for exempting the insurer from liability and for allowing theinsurer to cancel the policy.
With a personal accident insurance policy that covers only injuries, theinsurer is exempt from liability when an accident is caused by drunk driving,
driving without a license, or a criminal act.

Chapter 3 91

III. Products for individuals
In this section, I will specifically look at products for individuals in thefollowing order: products for survivors’ security, products for old-age protection,and third-sector products.

1 Products for survivors’ security(1) Term insurance
Term insurance consists of products that provide death coverage for only afixed period of, for example, ten or twenty years.
When the insured dies, only a death benefit is paid out; no maturity benefit
would be received. For this reason, there is usually pretty much no savings
component in a term insurance policy. Since there is almost no amount that isrefunded if the policy is canceled prior to its expiration, this type of insurance is
known in Japanese as “pay and discard” insurance. Their advantage is that you
can obtain a high amount of coverage at low premiums (Figure 6).
Figure 6

Illustration of term insurance

Death benefit

Savings component

Maturity

Commencement
Premium payment period

What you should be aware of is that coverage comes to an end upon the
expiration of the insurance term. Incidentally, if the insured dies during theinsurance term, insurance money will still be paid out even if a claim for its
payment is made after the end of the insurance term. Term insurance is often
added as a rider to endowment insurance or whole life insurance policies.
Term insurance can be taken out as a stand-alone policy from an insurancecompany that sells policies through a mail-order or online channel. As
mentioned above, it is also often added as a rider in packages consisting of a92

main policy and riders as offered by major life insurance companies.

Increasing term insurance

Column 7

Term insurance where the amount of insurance money to be paid out increases
in the second half of the insurance term is known as increasing term insurance. This
type of insurance only pays out a death benefit but is designed to pay out a larger
death benefit amount in the second half of the insurance term than would be paidout in the first half. Unlike typical term insurance, a certain amount of savings isaccumulated in preparation for the payment of a higher death benefit amount in thesecond half of the insurance term. For this reason, cancelation of the policy prior toits expiration will result in the payment of a surrender value.
An increasing term insurance policy would be purchased by a company with an
executive as the insured in order to apply the death benefit paid out in the event of
the death of the executive to the death severance pay that would be owing. The
policy can also be canceled to allow the surrender value to be applied to the service
bonus to be paid to the executive when the executive resigns from his or her post at
the end of his or her term of office.
While the premiums for this type of insurance are treated as a financial loss fora term insurance policy, it became questionable as to whether it was appropriate totreat even products that give rise to a substantial savings component as a loss undertaxation laws. Consequently, treatment under taxation laws changed to allow only
products where the amount of insurance money to be paid out increases by up to acertain extent to be treated as a loss.

Accidental death rider

Column 8

Adding a disaster term insurance rider (accidental death rider) is one way toenhance death coverage. This rider pays out insurance money in the event of a deathcaused by an unforeseen accident, such as one involving a motor vehicle crash. As
coverage does not extend to death by illness, coverage can be enhanced for a lower
premium amount. However, as this rider constitutes accidental term insurance, noinsurance money will be paid out unless conditions for finding that the accident inquestion was unforeseen – in other words, sudden, accidental, and external – aremet.
The life insurance business is essentially a type of business that operates bypaying out insurance money immediately without needing to conduct a very
Chapter 3 93

thorough investigation upon the death of the insured. For this reason, theunderwriting of an accidental death rider is a bit complicated. This is because theinsurance company, when paying out insurance money, needs to investigate todetermine whether or not the cause of death was an unforeseen accident.
For example, if an elderly person with a pre-existing condition were to die bydrowning in his or her bathtub, the insurance company would need to investigate todetermine whether or not this death was accidental. There are some who believethat insurance money should be paid if the direct cause of the death in this example
was drowning even if the individual had collapsed due to a brain hemorrhage. In
addition, it is also difficult to simply investigate to determine what the direct causeof death was in the first place.

(2) Whole life insurance
Whole life insurance is a product that only pays out a death benefit. Whatdistinguishes this product from term insurance is that the policy remains in force
until the insured dies. If the insured were to live to 100 years of age, the insurance
term would extend up to that point in time.
Only a death benefit is paid out and no maturity benefit is received (Figure
7).
Figure 7

Illustration of whole life insurance

Savings component
Death benefit
Insurance term is life

Commencement

Expiration of payments
Premium payment period(Lifetime payments in some cases)

The advantage of whole life insurance is that the premium amount does notchange throughout the premium payment period, such that, if you were to takeout a whole insurance policy at a young age, the coverage amount at the time ofenrolment would be maintained at the same premium amount that was initiallycharged.
Since the insurance term does not expire as it does with term insurance, adeath benefit will definitely be paid out unless the policy were canceled by the94policyholder. For this reason, a substantial savings component needs to be set up
in preparation for the payment of claims in the future. Thus, premiums are higher
than they are for term insurance policies.
A whole life insurance policy is not like a simple term insurance policy inthat a certain amount of surrender value will be returned upon its cancelation.
By focusing on this point and paying what is owed in a single premium payment,
you can obtain coverage while securing a certain amount of savings. Thisapproach to sales is especially prevalent in over-the-counter sales at banks (seeChapter 3 IV-4).

(3) Endowment insurance
Endowment insurance is term insurance where the death benefit during theinsurance term and the maturity benefit upon the expiration of the insurance term
are the same. With a 10-year, 3 million yen endowment insurance policy, 3
million yen will be paid out whether the insured dies during the insurance termor survives to maturity. The premium is higher from a coverage standpoint inorder to increase the savings component enough to pay for the maturity benefit
upon the expiration of the insurance term (Figure 8).
Figure 8

Illustration of endowment insurance

Death benefit

Maturity benefit

Maturity

Commencement

Premium payment period

Payment is made in the form of a single payment in order to further enhance
the savings nature of this type of insurance. During the bubble era, high-yieldsingle-premium endowment insurance policies were sold in high numbers. This
led to the separate taxation at source of insurance money from single-premium
endowment insurance policies of five years or less, as is the case with otherfinancial products. Taxation matters are explained in more detail in V below.

Chapter 3 95

(4) Interest sensitive whole life insurance (account-type insurance)
This type of product is known as account-type insurance. It is a product thatwas modeled after universal life insurance, a major product sold in the UnitedStates.
The insurance component of this product, which corresponds to the main
policy with a function for accumulating funds, is called the account and isconstituted by a variable-rate savings-type whole life insurance policy. The main
policy can be supplemented by insurance providing various coverage functions
as riders or by being combined with stand-alone insurance policies.
This type of insurance is based on whole life insurance with a function foraccumulating funds through the regular payment of premiums into the accountor the payment of a lump-sum amount. Applicable to the account is an interest
rate that is set at the time of enrolment and that fluctuates in line with market
interest rates. From the account are applied funds to pay premiums for riders thatare freely designed and added, including riders providing death coverage andriders providing medical coverage (Figure 9).
Figure 9

Illustration of account-type insurance

Death coverage, medical coverage, and moreFunds are applied to premiums from the accountWithdraw wedding funds

Withdraw housing funds

Account

Payment ofpremiums

Transition to whole life
insurance/pension

Expiration of payments
Payment of
Injection of bonus
retirement benefits
amount

The policyholder can also be given partial refunds whenever funds areneeded.
By utilizing savings in the account, coverage can be flexibly revised or thepremium to be paid can be adjusted in accordance with any change incircumstances after the policy is concluded.
When the premium payment period comes to an end, the account component
will be transitioned into a simple whole life insurance policy or annuity.
96

(5) Income-protection insuranceWith term insurance and whole life insurance policies, a death benefit is paid
as a lump-sum payment. An income-protection insurance policy is a policy thatpays out an annuity when the insured dies. If the insured dies during the policy
term, an annuity will be paid until a minimum number of years of receipt as
initially promised have passed or until the expiration of the policy term,
whichever is later. Since the death benefit is paid as an annuity, it is as if theincome of the deceased individual is being supplemented annually.
If the insured dies at the beginning of the insurance term, insurance money
will be received annually for many years but the total amount of the death benefit
will decrease over time (Figure 10).
Figure 10

Illustration of income-protection insurance

Pension is paid until the expirationof the term even after the minimum
number of years of receipt
Accident resulting in death occurs

Death (severe disability) coverage
Commencement

Accident resulting in death occurs
Premium payment period

Expiration

Annuity is paid for a minimum
number of years of receipt evenafter the expiration of the term(6) Educational endowment insuranceThis type of insurance is also known as “children’s insurance”. The
policyholder is the father or mother of a child and the child is the insured. It was
originally a type of insurance designed for the purpose of savings by which funds
could be accumulated in order to pay benefit amounts when the child turns either
18 or 22 years of age. Some examples pay out a congratulatory benefit when thechild turns 12 or 15 years of age prior to the expiration of the insurance term.
If the father or mother as the policyholder dies, subsequent premium
payments are waived. With some products, a scholarship annuity is paid upon
the death of the policyholder. This is a unique type of product in that payments
are also made on the death of the policyholder.
If the child as the insured dies, a death benefit is paid but the amount that is
Chapter 3 97

paid usually equals the aggregate amount of premiums paid plus investment
income earned to date.

(7) Variable insurance
Variable insurance was introduced in 1986. There are two types of variableinsurance: Variable fixed-term insurance and variable whole life insurance.
While variable fixed-term insurance is structurally the same as endowment
insurance and variable whole life insurance is structurally the same as whole life
insurance, variable insurance has a savings component that is invested, theresults of which are reflected in the surrender value and maturity benefit.
In either case, the death benefit amount is guaranteed but the maturity benefit(in the case of variable fixed-term insurance) and surrender value are subject tochange according to investment performance.

Problems with variable insurance

Column 9

While it is stated in the text that variable insurance was introduced in 1986, itshould be noted that this was three years before the bubble economy reached its
peak in 1989; stock prices were soaring at that time. Stock prices in Japan reachedtheir zenith at the end of 1989 before beginning to decline. Right after 1990, stock
prices embarked on a long-term drop even as some observers felt that this was justa temporary situation.
For this reason, the surrender value corresponding to variable insurance policies
fell substantially short of initial projections and the amount of paid premiums.
At the time variable insurance was being sold, few people anticipated that shareprices would drop so significantly and the sales method that was employed wasinadequate as a method for selling risky products by today’s standards given thatpolicies were effectively being sold bundled together with bank loans. It wasquestionable as to whether policyholders were properly informed of the risks
involved and lawsuits consequently ensued.

2 Products for old-age protection(1) Fixed-amount individual annuity insurance
When it comes to individual annuity insurance policies, when premiums arepaid and the policyholder reaches a prescribed age – such as sixty-five, the funds
that have been paid in and invested up to that point in time constitute the pension
98

resource. Annuity payments are made based on this pension resource. If theinsured dies during the premium payment period, the premiums that have been
paid up to that point in time (or a slightly higher amount) will be paid as a death
benefit.
There are several ways that an annuity can be paid, including the following:
defined payments, fixed-term payments, fixed-term payments with a guaranteed
period, and whole life payments. If defined payments are to be made for five
years, then they will be made for five years after the start of annuity payments
regardless of whether the insured is dead or alive. With fixed-term payments, if
the insured dies during – for example – the ten-year annuity payment period,
annuity payments will be terminated upon the death of the insured even if ten
years have not elapsed. Since the policyholder suffers a loss if the insured dies
early with this approach to making annuity payments, some policies set forth aguaranteed period within the fixed-term period. For example, a policy might
have a fixed term for payment of ten years with a guaranteed period of five years.
This way, even if the insured dies three years after the start of annuity payments,
five years’ worth of annuity payments will still be issued.
With whole life payments, an annuity will be paid until the insured dies.
Since it is not possible to know the age up to which any given individual willsurvive, premiums are higher. Figure 11 sets forth an example of whole life
annuity payments with a guaranteed period of ten years.
Figure 11

Illustration of whole life annuity payments with a 10-year
guaranteed period

Guaranteed period(10 years)
Death benefit

Paid for life
Annuity

Commencement

Annuity payments begin

Premium payment period

Chapter 3 99

Tontine annuities

Column 10

In a world with ultra-low interest rates, it has become difficult to obtain sufficientyields on annuities and other savings-type products. Developed in response to thisstate of affairs were tontine annuities. With this product, a portion of the savings ofan enrollee is left in place in the event of an early cancelation or death and utilized
to provide annuity benefits to others. Under this scheme, the older a member gets,the greater the annuity amount he or she will be entitled to receive. This scheme wasdevised by Italian Lorenzo de Tonti and is known as a tontine.
Tontine annuities specifically sold in Japan include those that increase theannuity benefit amount at the expense of a reduction in the surrender value.

(2) Variable individual annuity insurance
Given the ultra-low interest rates of recent years, it is not possible to obtainsufficient interest earnings on national government and company bonds that
constitute investment vehicles for fixed-amount annuity insurance funds.
Variable individual annuity insurance was developed in response. With this typeof product, paid premiums are invested in stocks and other financial instruments.
If favorable investment performance is achieved, the pension resource will growand make it possible to increase annuity amounts.
Many policies of this type of product were sold over the counter at banks.
For a time, single-premium variable individual annuity insurance policies werevery popular.
Incidentally, financial instruments that serve as investment targets forvariable individual annuity insurance policies generate losses from time to time.
In such a case, the annuity amount may decrease. However, many insurancecompanies guarantee the payment amount to ensure that the pension resource or
total amount to be paid out as an annuity does not fall below the amount of
single-payment premiums that have been paid (Figure 12 on the following page).
If the insured dies during the investment period, the amount that was paid ona single-premium basis will be paid out as a death benefit (benefit amount). Even
if this sort of minimum guaranteed amount is attached to a policy, no minimum
guarantee will apply to the surrender value prior to the expiration of theinsurance term. You will need to enroll in such a policy after you come to a fullunderstanding of the distinct nature of such a pension as an investment product.

100

Figure 12

Accumulated amountincreases or decreases
according to the stateof investments

Death benefit
Accumulation(savings) period

Pension resource

Single-payment
premiumWhenpolicy is
taken
out

Illustration of variable, single-premium individual annuity
insurance

Many companies guarantee aminimum pension resource
amount or minimum amountof total annuity payments to
be madeAnnuity payments
Annuity payment
period(3) Foreign currency-denominated individual annuity insurance
The structure of a foreign currency-denominated individual annuity
insurance policy is more or less the same as that of a fixed-amount individual
annuity insurance policy. As a foreign currency-denominated individual annuity
insurance policy allows for investments in foreign national government bonds
and other bonds with higher interest rates than Japanese national government
bonds, this kind of insurance is advantageous in that a higher yield can be
expected.
However, a foreign currency-denominated individual annuity insurance
policy entails the payment of premiums after converting yen into the applicableforeign currency. In addition, since annuity payments are received in a foreign
currency, payments need to be converted from the foreign currency into yen
before they can be used as funds for living. If the yen appreciates between thetime the policy is taken out and the time annuity payments are received, theannuity payment amounts that you will receive will be reduced in yen terms.
You can select from among the different options for foreign currency as set by
the insurance company, such as US dollars, euros, or Australian dollars.
Figure 13 on the following page outlines a scenario in which the exchange
rate was 1 dollar = 100 yen at the time the policy was taken out but then became
1 dollar = 80 yen at the time annuity payments began. If we assume aninvestment yield of zero, this means that you will have sustained a loss of 20 yen
on the dollar, such that you will have lost 200,000 yen if 1 million yen inpremiums had been paid to date. Thus, even if your policy has earned a slight
Chapter 3 101

investment yield over time, an appreciation of the yen against the foreign
currency you selected from the outset may incur a loss.
Since knowledge of currencies is required, this type of product should bepurchased by someone with a certain level of financial knowledge or someone
who has received a careful explanation from an insurance solicitor.
Figure 13

Currency risks

When policy is taken out

Pension payments commence

1 USD=
100 JPY
1 million JPY exchanged for 10,000 USD

1 USD=
80 JPY
10,000 USD exchanged for 800,000 JPY⇒200,000 JPY loss

3 Third-sector products (accident and sickness insurance)(1) Medical insurance
There are various types of medical insurance available. Obvious options will
pay out benefits for hospitalization or surgeries due to an injury or illness. Many
policies pay out a fixed amount, such as 10,000 yen, per day for hospitalization.
With some policies, the surgical benefit is set at ten or twenty times the daily
hospitalization benefit depending on the type of surgery in question. For
example, with a product that pays out 10,000 yen per day of hospitalization, abenefit of 100,000 yen or 200,000 yen will be paid for a surgical procedure.
While the types of surgery for which a surgical benefit is payable used to belimited, a surgical benefit is paid out these days for all surgical procedures
covered by public medical insurance.
Other policies pay out a benefit for post-hospitalization outpatient visits or abenefit upon being discharged from the hospital.
As mentioned in Chapter 1, enrolment in the public health insurance schemein Japan is compulsory but one normally needs to pay thirty percent of the
medical costs incurred. There are also costs that lie outside the scope of
insurance that must be borne by the individual, such as the cost to upgrade ahospital room.
102

Medical insurance differs from life insurance in that a life insurance policy
will be extinguished upon the payment of a benefit, such as a death benefit or
maturity benefit. Even if a hospitalization benefit or surgical benefit is paid
under a medical insurance policy, the policy is not extinguished. Benefits willcontinue to be paid to an insured each time he or she is hospitalized or undergoes
a surgical procedure, subject to certain restrictions.
While medical insurance has been around for a long time, products haveundergone significant changes over the years. Older products were designed toprovide coverage for longer-term hospitalizations, such that they might not have
paid a hospitalization benefit for a certain period after the date of hospitalization(such as five days). These days, as more and more people find themselves being
discharged after a short period of time in the hospital, newer products pay a
hospitalization benefit from day one or a lump-sum payment at the time of
hospitalization, such as 300,000 yen.

Advanced medical procedures insurance (rider)

Column 11

Under the public health insurance scheme, medical procedures for which
insurance benefits are paid are defined. Advanced medical procedures consist of
medical procedures that utilize advanced technology and that have been approvedby the Minister of Health, Labour and Welfare. Advanced medical procedures can bereceived as treatment at a designated hospital. However, they are not covered bypublic health insurance.
Typical examples of advanced medical procedures are proton therapy and heavy
particle beam therapy, which are used to combat cancer.
What must be kept in mind is that, in receiving an advanced medical procedure,
it is not just the costs incurred for the advanced medical procedure itself that are notcovered by insurance; medical examinations, tests, and medication associated withthe advanced medical procedure are also not covered.
Some procedures can be very expensive and are not covered by the
reimbursement system for high-cost medical care that is provided if treatment costs
exceed a certain amount per month. Advanced medical procedures insurance (rider)
was developed to cover such costs.
When a treatment method for an advanced medical procedure becomes
commonplace, it can sometimes come to be covered by public health insurance. In
addition, you should note that new treatment methods are sometimes developed
and change with each revision of the public health insurance system.

Chapter 3 103

(2) Cancer insurance
Cancer insurance is normally designed to provide coverage if you develop
cancer. Once a diagnosis of cancer is confirmed, you will be given a one-time
payment or benefit payments like a hospitalization benefit, surgical benefits, or
hospital visit benefits. Some policies pay out a death benefit while others do not.
More recently, policies that pay out a death benefit appear to be less common
than before.
A feature of cancer insurance is that there is typically an exclusion period of
90 days. Regardless of what facts were disclosed by the insured from the outset,
a confirmation of a diagnosis of cancer within 90 days of the day on which a
policy is taken out will mean that the cancer insurance policy will be treated ashaving been null and void from the beginning. In such a case, no cancer
insurance benefit will be paid out by the policy. However, as the policy is also
null and void, all premium payments that have been made will be refunded.
When it comes to cancer insurance, you need to pay attention to whether or
not coverage extends to epithelial cancer. As this type of cancer rarely
metastasizes, it is not covered by some cancer insurance policies.
Sometimes, a doctor will declare that a patient has cancer but, in a way thatis perhaps difficult to understand, no benefit payment is made by the cancer
insurance policy that was taken out by the patient. In light of this point, there
appear to be more and more products these days that offer benefit payments tocover epithelial cancer.
(3) Critical illness insurance
A typical example of critical illness insurance is known as three-majordisease insurance. Such a policy pays out a lump-sum amount when the insured
comes to suffer from a certain condition as a result of becoming affected by oneof three illnesses – cancer, cerebral stroke, or acute myocardial infarction. This
type of insurance pays out far more in benefits than the hospitalization benefit
or surgical benefit that is offered by a typical medical insurance policy.
This type of insurance is offered to address the fact that these illnesses incur
substantial costs for medical treatment and post-discharge recuperation.

104

(4) Long-term care insurance
A long-term care insurance policy pays out a certain amount of benefits when
the insured comes to need a prescribed level of long-term care. As mentioned in
Chapter 1, a public long-term care insurance scheme exists in Japan, but
individuals and families sometimes want to receive more extensive services,such as four day-service visits a week instead of just two. At such times, benefits
offered by a private long-term care insurance policy can be used. See Chapter
5-I for more information on long-term care insurance policies as well as
dementia insurance, for which a number of new policies have been introduced
in recent years.
(5) Disability income insuranceThis type of insurance pays out a lump-sum payment or annuity if the insured
is hospitalized for a long period of time and is certified as having a certain
disabling condition. It is intended to cover the loss of income that results frombecoming no longer able to engage in work. The coverage period is normally afixed term.
This type of product has been garnering significant attention in recent years
as insurance that is designed to help the insured by way of coverage that serves
as an alternative to death coverage.

Reviewing your coverage

Column 12

Insurance products evolve from year to year. Products that were not available
when a policyholder first took out his or her policy are constantly emerging, such as
by way of the development of long-term care insurance and dementia insurance andthe upgrading of medical insurance coverage. In addition, the needs of a client oftenchange over time. For example, a client may have taken out a life insurance policy
with substantial death coverage in the beginning but, given that his or her children
have left the nest, he or she would now like to pivot away from death coverage andinstead enhance his or her medical coverage.
Policy conversion schemes exist to address such changing client needs. Simply
put, the savings component of an insurance policy still in force is used to pay someof the premiums of a new insurance policy. This process is also known as an insurance
trade-in. While this process can only be carried out within the same insurancecompany, you should note that it cannot be applied in some cases depending on the
products in question. This process is advantageous in that premiums are lower than
Chapter 3 105they would be if you were to cancel your current policy and enroll in a new one.
If you simply want to bolster your coverage amount, you can either increase theamount of insurance money under your current policy or take out a new stand-alone
policy. Consult with an insurance solicitor to figure out which approach is better for
you.

106

IV. Group products
In this section, I will discuss group insurance. With group insurance, acompany or organization is the policyholder and a contract for insurance isconcluded with the group of people to be covered, such as the employees ormembers thereof.
Group insurance can be broadly divided into group life insurance andcompany pensions. Group life insurance plans primarily provide a death benefit,
but some also cover medical costs (Figure 14).
On the other hand, company pensions include defined benefit company
pension plans, defined contribution company pension plans, and employees’
pension fund insurance plans (Figure 15).
Figure 14

Group life insurance

Name

Policyholder

Premiums paid byGroup term insurance

Company ororganization

Employee

Low-premium death coveragefor employees

Comprehensive welfare
group term insurance

Company ororganization

Company ororganization

Allocated to death retirement
bonus payments and condolencemoney payable by the company
or organization

Group credit insurance

Bank orfinancial
institution

Borrower

Repayment of loan in the eventof the death of a borrower

Medical coverage insurance(group type)Company ororganization

Company ororganization or
employee

Low-premium medical coveragefor employees

Figure 15

PurposeCompany pension plans

NameContribution

Defined benefit
pension plan

Reviewed at regularintervals

Pension amountComment

Fixed

Company assumes investment
risks (decreasing trend)

Defined contribution
Fixedpension plan

Depends on
investment
performance

Employees assume investment
risks

Employees’ pension
fund plan

Fixed

Scheme that functions in placeof the welfare and pension
system in part

Reviewed at regularintervals

Chapter 3 107

1 Group life insurance(1) Group term insuranceGroup term insurance provides death coverage to employees. This type ofgroup insurance is voluntary in that, while the company or organization is thepolicyholder, the employee or member, as the insured, can choose whether or
not to enroll and how much he or she wishes to contribute. Premiums are also
deducted from the employee’s pay and paid to the life insurance company.
Death benefits are paid out not to the company but to the employee’s
surviving family members.
(2) Comprehensive welfare group term insurance
Contracts for comprehensive welfare group term insurance are concluded
with life insurance companies for the purpose of providing funds to a company
to pay its own death retirement bonuses and condolence money. The consent of
the insured is collectively obtained from employees. While this type of productis predicated on enrollment by all employees, individual employees are entitled
to refuse to provide the consent of the insured (in other words, refuse to become
enrolled).
While the death benefit is paid to the company or organization, this money
is to be allocated to the death retirement bonus and condolence money and will
ultimately be paid to surviving family members.
If a company takes out a policy for a death benefit amount that exceeds whatis stipulated in provisions governing its death retirement bonus, it must take out
a human value rider and obtain the consent of individual employees. The humanvalue rider is added where substantial funds will be needed to recruit and train
someone to replace an employee upon his or her death.
(3) Group credit life insuranceGroup credit life insurance is insurance that covers against the death of theinsured and for which a bank or other financial institution is the policyholder.
The insured is a mortgagor or otherwise a borrower of money lent to theborrower by the financial institution. The amount of the death benefit isequivalent to the outstanding balance of the loan. The amount of the benefit
declines as the loan is repaid and the outstanding balance of the loan decreases.
If the insured dies, an amount equivalent to the outstanding balance of the loan
is paid and allocated in full against the outstanding balance of the loan.
This type of insurance is designed to ensure that, in the event that the108borrower of a loan dies, his or her surviving family members will not beburdened by any residual debt tied to the loan in question.

(4) Group medical insuranceThis is the medical version of group term insurance. A company ororganization is the policyholder and employees or members are the insured. It isa voluntary enrolment scheme whereby each employee or member can decide
whether or not to enroll and the extent to which he or she wishes to be covered.
Medical insurance can be obtained at lower premiums than would be charged
with enrolment by an individual in a medical insurance plan.
2 Company pensions(1) Defined benefit company pension
A defined benefit company pension scheme is a scheme that sets forth apredetermined future amount of company pension benefits for retired persons(called “defined benefit” since the amount of the benefit is fixed). Contributions
needed to cover the amount of the defined benefit are calculated according toactuarial calculations based on assumed interest rates, average life expectancy,and other pertinent variables and contributed by the company to the insurancecompany or trust bank.
The management of pension assets is outsourced by the company to the life
insurance company or trust bank. If there are insufficient funds to pay forbenefits as defined by the company pension scheme, the company will be
required to make up the shortfall with an additional contribution. A company
pension scheme’s finances are also regularly subject to re-calculation in order toadjust the contribution amount. Since the burden on a company can increasedepending on economic conditions and other factors given that it is tasked withguaranteeing pension benefits to be paid to retired persons, there is an ongoingshift to defined contribution company pension schemes as described below.
Company pensions provide benefits to supplement public pensions as a thirdtier component of the pension system. Companies introduce this scheme as partof the benefit package they offer to employees. Figure 16 on the following pageshows the relationship between public pensions and company pensions.
(2) Defined contribution company pension
A defined contribution company pension scheme is a scheme under which
the contribution amount (premium) is predetermined, and future benefit amounts
Chapter 3 109

are determined according to the amount of contributions made and theinvestment performance corresponding to this amount (called “defined
contribution” since the amount of contributions is fixed). Pension assets areinvested by the enrollees (employees) themselves by selecting the investment
products and investment ratio from among financial instruments set up by anasset-managing institution. Since the investment results belong to the employees,
the investment risk is shouldered by the employees.
Figure 16

Public pension system and company pensions

Definedbenefitcompany
pensionThird tierSecond tier

National
PensionFundFirst tierCategory 1 insured
persons(self-employed andothers)Component substituting for
Employees’ Pension(component proportional toremuneration)

Definedcontribution Employees’ pensioncompany
fundpensioninsurance

Employees’ Pension Insurance Plan
National Pension Plan (basic pension)
Category 2 insured persons(company employees)(public
servants)

Category 3 insured
persons(dependent spouse ofa category 2 insured
person)This type of scheme was introduced in 2001 with the enactment of theDefined Contribution Pension Act. It has also been referred to as a 401k pension
as provided for by provisions of the US tax code that authorize defined
contribution pension schemes.
While investments that perform well will enable large pensions to be received,
those that go south will yield less.
In other words, future benefit amounts vary as a function of investment
performance. The pension that an employee can receive is not defined. A defined
contribution pension scheme also constitutes a third-stage component of thepension system.

iDeCo (individual defined contribution pension)

Column 13

A defined contribution company pension as mentioned in this text is a scheme
set up by a company for enrolment by employees. Such a pension scheme set up for
individuals is known as an iDeCo (individual defined contribution pension) scheme.
110

An iDeCo scheme is an asset-building scheme that anyone between the ages of
20 and under 60 years can join. Contributions are paid in until one turns 60 years ofage, whereupon money can be received thereafter as a lump-sum amount or
pension. There is a ceiling to the contribution amount; for example, the maximum
monthly amount that can be contributed by a company employee working for acompany with no defined contribution company pension scheme is 23,000 yen.
Certain tax benefits can be obtained when paying in contributions and when
receiving pension payments.
Company pension rules need to stipulate that an individual enrolled in a defined
contribution company pension scheme can also enroll in an iDeCo scheme. The upper
contribution limit also varies depending on what kind of scheme the company has
adopted.

(3) Employees’ pension fund insurance
An employees’ pension fund scheme is a scheme that provides pension
benefits by substituting for and augmenting some of the benefits provided by thestate-run Employees’ Pension (proportional to remuneration). Large companies
set up and run a fund on their own while small to medium-sized companies dothe same depending on the sector to which they belong. A fund will outsource
the management of contributions to a life insurance company or other suchenterprise and the product for which this outsourcing occurs is an employees’
pension fund insurance plan.
An employees’ pension fund substitutes for part of the second-tiercomponent and provides the third-tier component of the public pension system(see Figure 16).
During the period of high economic growth, management performance wasgood, which meant that employees’ pension funds could provide benefits toemployees that added substantially to the amount that the state was required toprovide. Since the collapse of the bubble economy, however, investment
performance has not been very good and many employees’ pension funds havegone under due to the difficulties in managing the benefits that are supposed to
substitute for what the state provides.
The dissolution of an employees’ pension fund and the cessation of efforts tosubstitute for the state’s Employees’ Pension is known as the return of thesubstituted component. In April 2002, the system was revised to allow for the
return of the substituted component and a transition thereof to a regular defined
benefit company pension scheme.
Chapter 3 111

V. Taxation on life insuranceLife insurance is a product designed to facilitate efforts on the part ofpolicyholders to help themselves prepare for life risks. For this reason, life
insurance premiums and life insurance money are subject to special treatment
for tax purposes. Since life insurance can be seen in terms of an exchange ofcurrent premiums for future insurance money, we cannot think of life insurance
without the impact of tax on the money concerned. In this connection, I will
explain taxation matters with respect to premiums and benefits in this section.

1 Treatment of life insurance premiums
The way life insurance premiums are subject to income tax treatment waschanged in 2011.
The treatment of policies prior to 2011 (referred to as “old policies”) underthe Income Tax Act differs from the treatment of policies after 2011 (referred toas “new policies”). In addition, the calculation of income tax for an individualwith both an old policy and a new policy is set forth.
Since this book is meant to serve as an introductory guide, I will be looking
only at tax on new policies to avoid getting into a complicated discussion.
Incidentally, as I will explain below, there are three types of tax credits tied
to life insurance: tax credits for common life insurance premiums, tax credits forlong-term care and medical insurance premiums, and tax credits for individual
annuity premiums. In this section, I will collectively refer to these tax credits as
tax credits for life insurance premiums except when I refer to them as individual
tax credits.
(1) Income tax and residents’ tax
Before I explain the way tax credits for life insurance premiums are treated,
I will briefly go over income tax and residents’ tax in this section for the sake ofunderstanding. What is important to note is that tax is not imposed on theindividual’s income per se when it comes to either income tax or residents’ tax.
Rather, tax is imposed on income net of prescribed tax credits (taxable income).
Take a look at Figure 17 on the following page.

112

Figure 17

How income tax is calculated

Annualincome fromsalary andother sources

Varioustypes of tax
credits
Amount of
taxableincomeTax credits for salary income, basic
exemption, tax credits for spouseTax credits for life insurance
premiums
Income amount x tax rate
= income tax* Tax rates are progressive.
* Certain tax credits are available.

The amount of income tax owing is determined by subtracting tax credits forsalary income, the basic personal exemption, tax credits for the individual’s
spouse, and other income tax credits from the individual’s annual salary income(nominal rather than take-home pay) and then multiplying the resulting net
income amount by the tax rate. Tax credits for life insurance premiums are an
example of an income tax credit and can be subtracted from annual income.
In addition, tax rates are structured in such a way that it progressively
increases as taxable income goes up (known as progressive tax rates).
Residents’ tax is collected as a combination of prefectural and municipal
taxes. It comprises an income-based levy and a per-capita levy; the former iscalculated similarly to the aforementioned income tax.
Tax credits for life insurance premiums are permitted as a type of income tax
credit to be deducted from income in calculating taxation on an income basis.

(2) Tax credits for life insurance premiums that are available inconnection with income tax
As mentioned above, there are three types of life insurance tax credits:(i) Tax credits for common life insurance premiums(ii) Tax credits for long-term care and medical insurance premiums(iii) Tax credits for individual annuity premiums(i) Tax credits for common life insurance premiums
Tax credits for common life insurance premiums apply to premiums
corresponding to insurance policies that pay out a certain amount of insurancemoney based on the survival or death of the insured. Life insurance policies
Chapter 3 113

offering a death benefit and/or a maturity benefit are eligible.
The following amounts are allowed as income tax deductions as described in(1) above.
・Annual premiums of up to 20,000 yen: Full amount of paid premiums
・Annual premiums exceeding 20,000 yen but not exceeding 40,000 yen:
Paid premiums x 1/2 + 10,000 yen
・Annual premiums exceeding 40,000 yen but not exceeding 80,000 yen:
Paid premiums x 1/4 + 20,000 yen
・Annual premiums exceeding 80,000 yen: 40,000 yen(ii) Tax credits for long-term care and medical insurance premiums
Policies that are subject to tax credits for long-term care and medical
insurance premiums are insurance policies that pay out insurance money for an
illness or physical injury that corresponds to a reason for the payment of medical
expenses. In other words, medical insurance and long-term care insurance are
eligible. However, beneficiaries of insurance money in all cases must be theperson who pays the premiums for such a policy or his or her spouse or otherrelatives. Since the policyholder is the one who typically receives benefits witha medical insurance policy, this requirement is probably met with most suchproducts.
Tax credits for long-term care and medical insurance premiums arecalculated the same way as they are for common life insurance premiums.
(iii) Tax credits for individual annuity premiums
Policies eligible for a tax credit for individual annuity premiums are thosethat satisfy the following requirements:
・The beneficiary of the annuity is the person who pays the premiums or his or her
spouse.
・The policy is one for which premiums are regularly paid over a period of at leastten years until such time that annuity payments are received.
・Annuity payments are to be made for a fixed term of at least ten years or theremainder of the annuity beneficiary’s life with annuity payments to begin once
the annuity beneficiary turns, in principle, at least sixty years of age.

Eligible for a tax credit for individual annuity premiums is any policy for anindividual annuity or any annuity benefit rider attached to a life insurance policy.
Tax credits for individual annuity premiums are calculated the same way as they114

are for common life insurance premiums.
These three types of tax credits for life insurance premiums can all be usedin full. Thus, if you have paid premiums of at least 80,000 yen each, you would
be entitled to receive an income tax credit of 40,000 yen each for a total of
120,000 yen.

(3) Tax credits for life insurance premiums that are available inconnection with residents’ tax
As in the case of income tax, there are three types of income tax credits thatare available in connection with residents’ tax: tax credits for common life
insurance premiums, tax credits for long-term care and medical insurance
premiums, and tax credits for individual annuity premiums. The requirements
for applying tax credits for each policy are also the same as they are for income
tax.
However, the way tax credit amounts are calculated and the way we should
think about the total amount of tax credits differ.
These tax credits are calculated as follows:・Annual premiums of up to 12,000 yen: Full amount of paid premiums
・Annual premiums exceeding 12,000 yen but not exceeding 32,000 yen:
Paid premiums x 1/2 + 6,000 yen
・Annual premiums exceeding 32,000 yen but not exceeding 56,000 yen:
Paid premiums x 1/4 + 14,000 yen
・Annual premiums exceeding 56,000 yen: 28,000 yen

If you were to make full use of all three tax credits for life insurance
premiums that are available in connection with residents’ tax, you could use
28,000 yen in tax credits each for a total of 84,000 yen. However, the amount oftax credits for all three of these tax credits for life insurance premiums that canbe used is capped at 70,000 yen.

2 Treatment of life insurance money
The taxation of life insurance money is a complex matter. In this section, I
will discuss this topic with a primary focus on typical examples involving death
benefits, maturity benefits, and individual annuities.

Chapter 3 115

(1) Death benefits
A typical example of a case involving a death benefit is probably one inwhich the policyholder takes out a life insurance policy with himself or herself
as the insured and with his or her spouse as the intended beneficiary of the death
benefit. In such a case, the death benefit will be subject to inheritance tax.
A death benefit will, aggregated together with other inherited assets, be
subject to inheritance tax; a certain amount, however, is exempt. The aggregatedamount is as follows:
Death benefit (taxable) = death benefit amount ― (the number of successors
x 5 million yen each)

For example, let us say that the successors consist of a spouse and twochildren for a total of three successors. In this case, up to 15 million yen (3persons x 5 million yen each) is tax exempt. Other taxation matters related todeath benefits are as outlined in Figure 18. Taxation varies depending on therelationships among the policyholder, insured, and beneficiary. In Figure 18, it
is assumed that the policyholder is the one who pays the premiums.
Figure 18

Taxation of death benefits

Policyholder

InsuredGiven
individual

Given
individual

SpouseBenefit ― (number of successors x
Inheritance 5 million yen)tax
⇒ Subject to inheritance tax
together with other inherited taxes

Given
individual

SpouseGiven
individual[(Benefit ― paid-in premiums)
Income tax – 500,000 yen] x 1/2⇒ Subject to income tax together
with salary and other income

Given
individual

SpouseChild

Gift tax

BeneficiaryTax

Calculation method

Benefit ― 1.10 million yen⇒ Subject to gift tax together withother gifted assets(2) Maturity benefit
The taxation of maturity benefits is determined by the relationship between
the policyholder and beneficiary. In a typical example, the policyholder
designates himself or herself the beneficiary and receives the maturity benefit at116

the end of the day. In such a case, the following amount, as temporary income,is aggregated with salary and other income and subject to taxation.
Maturity benefit (taxable) = (maturity benefit amount ― paid-in premiums ―500,000 yen) x 1/2

The maturity benefit constitutes a one-time source of income because it is
not taxed at the time interest is accrued each year as is the case with interest on
deposits; instead, it is received in a lump-sum payment as insurance money atmaturity.
The pattern of taxation applicable to maturity benefits is as show in Figure
19.
Figure 19

Taxation of maturity benefits

Policyholder

InsuredBeneficiaryTax

Calculation method

Given
individual

－

Given
individual[(Benefit ― paid-in
premiums) ― 500,000 yen] x
Income tax (one1/2 ⇒ Subject to income tax
time income)together with salary and otherincomeGiven
individual－

SpouseGift tax

Benefit ― 1.1 million yen⇒ Subject to gift tax together
with other gifted assets

For single-premium endowment insurance policies with an insurance term of
no more than five years or single-premium endowment insurance policies that
may have an insurance term of more than five years but that are canceled within
five years, tax is withheld at source on gains and tax payment processing iscompleted internally by the life insurance company. The tax rate at present is20.315%. Originally, the rate on tax withheld at source was 20%, which
represents the sum of income tax (15%) and residents’ tax (5%), but 0.315% willremain tacked on as a special income tax for reconstruction in response to theGreat East Japan Earthquake until 2037.

(3) Individual annuity
According to the typical pattern for an individual annuity, the policyholder
designates himself or herself as the annuity beneficiary with himself or herself
Chapter 3 117

as the insured. We can also assume that the policyholder is the person paying thepremiums in such a case. The taxation of annuities also depends on therelationship between the policyholder and beneficiary.
Where an annuity is paid in the event that the policyholder and thebeneficiary are the same person, income tax is levied each year on the annuity
as miscellaneous income. The amount of the miscellaneous income is as follows:
Miscellaneous income (taxable)= annuity amount received in the given year ― the paid-in premium amountcorresponding thereto

The paid-in premium amount corresponding to the annuity amount received
in the given year is, in an example involving a ten-year defined annuity, the total
premium amount paid divided by ten. For a whole-life insurance policy, theamount is calculated by dividing the total premium amount paid by the average
number of years of remaining life expectancy as of the start of the annuity.
However, if the annual amount of an annuity less the premium amount for
the given year is 250,000 yen or more, income tax and the special income tax
for reconstruction is withheld at source in advance when the annuity is paid. The
amount withheld at source is calculated as follows:
Amount withheld at source= (Annuity amount － premium or contribution amount corresponding to theannuity amount) x 10.21%

Figure 20 on the following page outlines the taxation of individual annuities.
If the policyholder (= person paying premium amounts) differs from thebeneficiary, a gift tax is levied at the time the annuity commences and income
tax is thereafter levied each year that annuity benefits are received.

118

Figure 20

Taxation of individual annuities

Policyholder

InsuredGiven
individual

Given
individual－－

BeneficiaryTax

Calculation method

Given
individual

Income tax(miscellaneous
income)Annuity amount ― paid-in
premium amountcorresponding to the annuity
amount ⇒ Subject to income
tax together with salary andother income

SpouseGift tax +income tax(miscellaneous
income)Gift tax is levied when theright to receive the annuity
arises and tax on
miscellaneous income islevied when annuity benefits
are paid

Chapter 3 119

Chapter 3: Life insurance solicitation

Life insurance solicitation is one of the major pillars of the life
insurance industry. Life insurance companies and agencies compete
on the basis of life insurance product offerings and seek to figure out
ways to gain access to clients and sell life insurance policies to them.
In Chapter 3, you will learn about the definition of life insurance
solicitation and the process by which life insurance solicitation isundertaken.
Next, I will touch on the evolution and diversification of solicitation
channels before shedding light on the specific forms of the different
types of solicitation channels in existence.
I will then discuss rules governing insurance solicitation.

Chapter 3 121

I. What is life insurance solicitation?
What is life insurance solicitation? There are all sorts of possible examples,
including abstract forms such as television commercials and Internet ads, as well
as specific proposals made by insurance solicitors. What we exactly mean when
we talk about life insurance solicitation is what I will be explaining in this section.

1 Definition of life insurance solicitation
I mentioned in Chapter 1 that solicitation is the act of mediating between alife insurance company and the person who will apply for an insurance policy.
To engage in insurance solicitation, you are required to be certified as aninsurance solicitor (as explained in more detail in V-1 below). Incidentally, you
might have seen newspaper ads and television commercials placed by newspaper
companies and television networks. These actions constitute advertising rather
than solicitation, which means that they can even be carried out by parties thatare not certified as a solicitor.
While solicitation and advertising are both acts that aim to promote theselling of insurance, what is the definitive difference between the two?
First, someone who engages in life insurance solicitation is acting as an agent
or intermediary in order to have life insurance policies concluded. Specifically,
his or her duties will include attempting to sell insurance, explaining the contents
of insurance products, and receiving applications for insurance policies. In otherwords, solicitation encompasses a wide range of actions beginning with actions
undertaken to specifically urge someone to take out an insurance product andending with the acceptance of an application (Figure 1 on the following page).
In contrast, examples of actions that do not fall within the scope of insurance
solicitation include the simple distribution of an insurance company’s fliers or
promotional tissue packs, the provisions of administrative information by a callcenter operator, a brief introduction of the structure of an insurance product at asession held to explain financial instruments, and the placement of ads in a
newspaper or magazine. This is because such actions do not involve any action
to specifically recommend an insurance product or accept an application for an
insurance policy.

122

Figure 1

Solicitation actions of an insurance solicitor
Insurance company

Client A
Insurance application
Accept application
Insurance solicitor
Solicit andexplain products

Commission solicitation

2 Referral agency
The scope of solicitation actions became an issue in this way because of theexistence of referral agencies. One effective way to solicit insurance in the life
insurance industry consists of asking an existing policyholder to provide thesolicitor with the contact information of potential new clients from among his or
her acquaintances. It is argued that as long as the referring person is doing
nothing but referring an acquaintance and is not specifically recommending an
insurance product to other potential clients, his or her actions will not satisfy thedefinition of solicitation as set forth above and he or she will not need to register
as a solicitor (Figure 2).
Figure 2

Referral actions for which you do not need to be certified
as a solicitor

Referring person

Client A

Insurance company
Introducing Client A
Insurance solicitor
Soliciting

Commissioning solicitation

Chapter 3 123

However, what if the referring party receives some kind of referral fee orother form of remuneration and does not simply refer an acquaintance but
strongly urges his or acquaintance to purchase an insurance product from a
specific insurance solicitor? If the referring party acts like this in concert withan insurance solicitor, the actions will constitute insurance solicitation.
Moreover, if referral actions that encompass specific product details are also
carried out, the referring party will need to be certified as an insurance solicitor
given that these actions constitute insurance solicitation as well.
A corporation is banned from serving as a referral agency (can only becomea solicitation agency upon registration).

3 Insurance-comparison websites
This issue has recently come back into the spotlight. This is because thegrowing popularity of the Internet has made it possible to use insurancecomparison websites in recent years. Questions have been raised as to whether
these websites constitute insurance solicitation.
Specifically speaking, insurance-comparison websites show the details ofeach product and even examples of premiums that might be paid for different
age brackets. Products are sometimes ranked by popularity and recommended
products are highlighted. Clicking the product field can bring you to the websiteof the underwriting life insurance company or insurance agency (Figure 3).
Figure 3

Referral actions of insurance-comparison websites
Insurance-comparison website
Searching the website forrankings and other details
Insurance company

Client A
Direct the client toofficial website
Website of insurance
solicitor
Soliciting

Commissioning ofsolicitation

The relationship between insurance-comparison websites and life insurancecompanies or insurance agencies can vary. For example, a company or agency
124

may be paying an advertising fee whose amount is determined as a function of
the number of clicks recorded or paying a certain fee per policy taken out.
Actions that are not unambiguously insurance-solicitation actions and thatare carried out on or through such a website are referred to as solicitation-related
actions. The mere reproduction of information provided by insurance companies
on an insurance-comparison website is a solicitation-related action. One whocarries out a solicitation-related action does not need to be certified as aninsurance solicitor. However, a life insurance company or insurance agency thatengages in transactions with a website that carries out solicitation-related actions
is obligated to oversee the website operator to ensure that the website is being
properly operated.
Incidentally, recommending only the products of specific companies fromwhich compensation is obtained, such as by indicating that these products arerecommended, and explaining insurance products in detail on a compensatedbasis constitute solicitation actions, which means that certification as aninsurance solicitor would be required in such a situation.

Chapter 3 125

II. The process of life insurance solicitation
In this section, I will begin by exploring why life insurance solicitation isneeded but I will be primarily explaining the process of life insurance solicitation.
This process is mainly predicated on the use of sales agents.

1 Why are actions to solicit life insurance necessary?
Let us look at things from the perspective of a life insurance company. As ageneral rule of thumb, all companies regardless of industry seek to grow. Thus,
it is natural that a life insurance company too will focus on selling life insurance
in hopes of achieving growth. And life insurance policies will rapidly diminish
in number as life insurance policies mature, death benefits are paid out, andfewer new policies are taken out.
That said, a life insurance company is unique in that the system of life
insurance per se, as mentioned in Chapter 1, is one that is based on the law oflarge numbers. In other words, a life insurance company will need to sell many
policies in order to ensure that changes in the amount of death benefits that it
disburses are soundly consistent with initial expectations.
Next, let us look at things from the perspective of clients. In particular, aclient will not always be clearly cognizant of the need for life insurance.
Moreover, as life insurance policies are not tangible goods, it is not possible tointuitively figure out if one is needed or not and if one is a good product or bad
product.
Since needs are latent, one is generally not inclined to take actions topurchase insurance products unless one is encouraged to do so by someone elseor something happens to trigger such actions. With non-life insurance, forexample, it is generally understood that the acquisition of a car makes it
necessary to take out automotive insurance. With death insurance, however, you
are called upon to imagine what would happen in the event of your own death;
it is rather difficult to try and imagine what might transpire after you are gone.
Even if this were possible to do with ease, few people know how much money
needs to be set aside to prepare for their own death. For this reason, someone
who can sit down with a client and work together to identify the client’s needs
in terms of life insurance is indispensable.

126

2 Why life insurance solicitation needs to be regulated
Allow me to expound a bit on what I mentioned in 1 above. This may sounda little complicated but it is said that there is an information gap (or asymmetry)in the area of life insurance solicitation. You might be able to grasp what an
information gap is by thinking about the relationship between a doctor and hisor her patient. Imagine that a patient, worried about his or her physical condition,
goes to visit his or her doctor. The doctor proceeds to diagnose what ails thepatient. The doctor is also the one who knows what course of treatment to apply
and which pharmaceutical drugs to administer for the ailment in question.
It is the doctor, not the patient, who possesses information on the illness
affecting the patient and its treatment. In this way, there is an information gap
here in which the possession of information is skewed as between these twoparties.
When it comes to life insurance solicitation as well, an information gap canbe seen in the way a client’s own needs are clarified through the advice provided
by an insurance solicitor and in the way that an insurance solicitor is more
knowledgeable about the contents of insurance products than any client.
When such an information gap exists, the interests of the party not inpossession of information will be harmed and the market will no longer function
effectively. Thus, initiatives to eliminate this gap and measures to prevent harmcaused by this gap are taken. To this end, certain regulations govern activities
carried out to sell life insurance.
Enrolment in unnecessarily expensive insurance and continued enrolment ininsurance that is no longer needed are nothing but examples of wasteful spending.
On the other hand, life insurance is notable for the need to measure a person’srisks in order to ensure fairness within the group being insured. Even if you weresold a life insurance policy, the insurance company may ultimately reject yourapplication. In other words, even if you find out later that you had taken out adifferent insurance policy than you intended or if you seek to switch to a different
policy, the fact that you are now older or may be afflicted with an illness could
mean that you will be forced to pay higher premiums or outright denied. This is
known as the difficulty of re-enrolling in life insurance.
Regulations as discussed in V of this chapter exist to address the need toensure that solicitation is properly undertaken. That said, however, the enrolment
in insurance plans by clients who fully understand and accept what they arepurchasing is essential for the sustainable growth of life insurance companies in
Chapter 3 127

the first place. Life insurance companies engage in all sorts of initiatives to thisend for this reason.

Information gap

Column 14

The existence of an information gap in the context of life insurance refers to one
of two situations: one in which the client lacks information on insurance products orinsurance needs (insurance company > client) and one in which the insurancecompany lacks information on the health of the insured when underwriting insurance(insurance company < client) (see the Figure).
Information gap in terms of information on insurance products
ClientLife insurancecompany (solicitor)(Lacksinformation)

Information on
insurance products

Information gap in terms of the status of the health of the insured
Life insurancecompany (solicitor)

ClientInformation on
the health of
the insured(Lacksinformation)

With respect to the former, legal regulations are imposed on solicitation actions.
The latter emerges as an issue concerning the duty to disclose. It is said that the duty
to disclose is based on the maximum good faith of an insurance policy. Maximum
good faith means that, since a large sum of money is supposed to be paid out in theevent that a contingency comes to pass, the policyholder is required to be rigorously
honest with the insurance company. See Chapter 2-II for more information on the
duty to disclose.

3 Finding clients
Beginning in this section, I will describe the process by which insurance issold by sales agents, a traditional sales channel used for life insurance. In IV, I
will explain specifically what a sales agent is.
128

When you turn on the television, you might see a commercial for a life
insurance company. Ads for life insurance are posted on the Internet. However,commercials and ads are not enough on their own to enable life insurance to beeasily sold to clients.
First, you must find clients in order to sell insurance. This means that you
need to find potential clients who have a need for insurance. Since a sales agent
is assigned geographical areas and company workplaces, he or she will work tofind potential clients by engaging in familiarization activities, such as by
distributing flyers in these areas or obtaining referrals from existing clients.
In addition, a sales agent will also solicit products upon obtaining
information to the effect that a family member of an existing client has found a
new job or gotten married.
By issuing regular publications containing information on life insurance andother matters concerning life in general to potential clients, a sales agent will
make themselves more familiar to these potential clients and raise awareness ofthe need for insurance.

4 Getting clients to recognize their needs
When efforts to solicit life insurance are commenced, you first need toascertain the life insurance needs of a potential client. The way this is done varies
from one company to the next and in accordance with the way a sales agent
engages in work. One possible approach that can be taken to ascertain needs
involves the administration of a questionnaire to the potential client. Just
remember that one’s needs at this time are subject to change since they are needs
at a stage when the potential client is probably not yet aware of what his or her
own life plan is like or familiar with life insurance products.
Where the needs of a potential client lie with the security of survivors after
his or her own death, financial planning based on the use of death insurance isundertaken. For example, the security of survivors is the first thing you would
think about for a young person with a small child.
Most tablets used by sales agents belonging to life insurance companies andcomputers operated by salespersons who provide advice and consultation
services out of so-called insurance shops contain software that can automaticallycalculate an estimated amount needed for protection. The required amount ofcoverage is calculated by plugging in the required numbers obtained through aprocess of talking with the client.
Chapter 3 129

Financial planning to provide security for survivors

Column 15

I will now present a simple illustration of financial planning for the security ofsurvivors. Imagine a household with two parents and two children. The husband is
thinking about taking out death insurance with himself as the insured. The basic
notion is that, if future expenses are greater than future income, then life insurancemoney can be used to make up the difference.
First, we calculate income by adding up the savings accumulated to date, death
retirement bonus from the company, the estimated amount of the survivors’
pension, the wife’s total income, and the estimated amount of the wife’s old-age
welfare pension subsequent to her own retirement. See Chapter 1-II for theestimated amount of the survivors’ pension and the estimated amount of the oldage welfare pension.
At the same time, future expenses should be calculated. First, calculate current
living expenses. Think of living expenses as salary minus the portion that goes intosavings. Next, assume that family living expenses after the death of the husband will
be reduced to 70% of current levels and that family living expenses after the children
leave the nest will be reduced to 50% of current levels. Living expenses of the wife
are calculated with reference to the average life expectancy for women and byassuming that she will live to that age. In addition, if the children are thinking about
studying liberal arts at a private university, you can add another 5 million yen for
university expenses alone.
Set the amount of the death benefit to equal the extent to which calculated
future income falls short of future expenses. The figure below illustrates how theamount of necessary coverage is calculated.
The wife’s future income has not been incorporated into the calculation. The
income of the wife, if she is working or plans on working, also needs to be includedin the calculation.
Illustration of financial planning to provide security for survivors
Expected income
Cash
Death retirement
bonus
equivalents

Husband’s survivors’
pension

Living funduntil children leave the nest

Wife’s public pension

Children’s educational
expenses

Shortfall = Death benefit

Wife’s living fundafter children leave the nest

Expected future expenses

What needs to be kept in mind is that the amount of death protection is larger

130

for families with more substantial current living expenses. An insurance policy is tobe designed while taking into account the amount of premiums that can be paid andthe extent to which living expenses can be curtailed when necessary.

In your late forties and fifties, you will need to also prepare a retirement fund.
Financial planning to set up a retirement fund is carried out for such individuals.

Financial planning for retirement funding

Column 16

Financial planning for retirement funding first entails estimating the extent towhich public pensions will be provided.
As explained in Chapter 1-II, a husband and wife couple receiving benefits fromthe employees’ pension fund scheme are paid approximately 230,000 yen a monthon average. On the other hand, a survey conducted by the Japan Institute of Life
Insurance (JILI) revealed that living funds needed to live comfortably in retirement
significantly exceed the public pension amounts that are received.
In this connection, if we assume here that 300,000 yen a month will be needed,
we must ask ourselves the following: how can a couple secure 70,000 yen a month?
If you have a retirement allowance or company pension, add that amount to yourincome. The rest of the shortfall can be covered by savings or you can think about
enrolling in a savings-type individual annuity insurance plan.
Illustration of Financial planning for retirement funding
Husband

Sub-total

81 years of age
80 years Husband dies
87 years
75 years 76 years
Wife dies

65 years

70 years

76 years

60 years

65 years

71 years

170,000
100,000
270,000

230,000
100,000
330,000

230,000

110,000

230,000

110,000-30,000+30,000-70,000-90,000

Wife

(Yen)

In the above figure, it is assumed that there is a five-year age gap between
husband and wife and that both will live to about the average life expectancy. The
numbers written in the bottom half of the figure are the expected employees’
pension amounts to be received by the husband and National Pension Plan amounts
to be received by the wife on average. In addition, it is assumed that the husband’s
Chapter 3 131

corporate pension of 100,000 yen a month as of his retirement will be received for aperiod of ten years.
It is also assumed, for example, that 300,000 yen a month will be needed to coverliving expenses when both husband and wife are still alive and that 200,000 yen amonth will be needed to cover living expenses when the wife is widowed.
The numbers written on the bottom row denote the excess or shortfall of funds
each month. This figure reveals that there would be a shortfall of funds if we were to
rely only on public pension payments. You can prepare a retirement fund with aretirement allowance, savings, a company pension, and other such options, but you
will likely require money from an individual annuity to address shortfalls in funds.

In addition, when it comes to the question of how to set benefit amounts for
medical insurance, it should be noted that the average amount for currently
enrolled people is around 10,000 yen a day. On the other hand, as mentioned in
Chapter 1-II, a survey revealed that hospitalization can cost 23,300 yen a day. It
is probably a good idea to think about such data points when determining benefit
amounts.
These days, a growing percentage of the population are single for life. For
such individuals, it may be advisable to limit death coverage to the cost of afuneral while enhancing critical illness insurance, medical insurance, long-termcare insurance, and individual annuity insurance instead.

5 Proposing insurance products
Once the needs of a potential client have taken shape to a certain extent, you
can design a specific product and propose it in the form of a design document
known as a policy outline. In many cases, needs are gradually consolidated whileboth sides look at the product design document. For this reason, step 4 above(“Getting clients to recognize their needs”) and the presentation of a design
document are carried out in a back-and-forth manner. In addition, the particularsof an insurance policy are explained by issuing the potential client with adocument outlining matters that should be kept in mind with respect to the policy,
which are collectively referred to as alert information.
Once the orientation of the application is determined, you should once again
ascertain what the potential client would like to do. Finally, confirm that theinsurance product is in line with the needs of the client with the use of a written
confirmation of intent. This process is legally required to fulfill the obligation toprovide information and obligation to ascertain intent in the context of the selling132

of life insurance (to be explained in V-3 below).

6 Applying for an insurance policy
For the process of applying for an insurance policy, you first get thepolicyholder-to-be to fill out an application form for the insurance policy. This
form includes the name of the policyholder, name of the insured, name of thebeneficiary, premium amount, coverage details, and other pertinent information.
This form is typically pre-printed and only needs to be signed. Some companies
even operate digitally in this area, such as by having a signature affixed to a
document presented on a tablet screen.
The insured shall also inform the life insurance company of his or her
physical condition and medical history in accordance with matters to bedisclosed as required by a disclosure form. The disclosure form shall becompleted and sealed by the insured before being kept by the sales agent or sentby post directly to the life insurance company.
Incidentally, since no insurance solicitor is ever granted the right to receive
disclosed information from a potential client, a potential client cannot argue thathe or she does not need to fill out a disclosure form if he or she has alreadyconveyed the necessary information to the insurance solicitor.
In addition, if the death benefit amount is high, a professional life insuranceinterviewer who assists the insured with the task of disclosing matters may also
be involved. A life insurance interviewer is certified by the Life Insurance
Association of Japan. No life insurance interviewer is granted the right to receive
disclosed information from a potential client either.
If the insured at the time of enrolment is older or the amount of the insurancemoney is large, the insured will be interviewed by a physician appointed by the
insurance company and asked to inform the physician of certain matters.
Finally, let me talk about the payment of premium amounts. It used to be thatan amount equivalent to a single premium payment would be obtained in cash at
the time an application for an insurance policy was made. These days, however,administrative tasks that are predicated on a cashless approach are carried out.
In many cases, payments by way of credit card payments or the withdrawal ofamounts from the bank account of the policyholder are actually undertaken after
a contract is concluded.

Chapter 3 133

Primary risk selection

Column 17

A sales agent is tasked with soliciting insurance but is, at the same time, the only
person on the company side who meets in person with policyholders and insured
persons. A sales agent takes on the role of observing each policyholder and insured
person, asking pertinent questions as appropriate, and reporting on what is found to
the life insurance company.
Tasks to be carried out by a person in charge of solicitation are as follows:(i) Interview
To interview the policyholder and insured is the responsibility of the insurance
solicitor. An insurance solicitor must not proceed with a policy without first directly
meeting the policyholder and insured. A physician will conduct an interview for an
insurance policy with a medical exam but, since only the insurance solicitor directlyinterviews the policyholder and insured when it comes to an insurance policy
without a medical exam, this step cannot be omitted. In extreme cases, thepolicyholder may try to enroll in an insurance plan while the insured is physically inthe hospital. This can be prevented by interviewing the insured.
(ii) Observe
Observe facts related to health, such as complexion, facial expression, attitude,
and language, and also observe with care anything that might relate to housing, living
conditions, and more.
(iii) Question
Questions shall be posed to confirm certain circumstances in such cases as where
someone is taking out insurance that is too expensive based on living conditions that
could be observed or where the beneficiary is not a parent, child, or spouse but
instead a nephew or niece or otherwise a person that is not commonly related tosomeone for insurance purposes.
This is known as primary risk selection. For example, a sales agent must reportcircumstances that he or she feels is suspicious to the life insurance company via awritten report (sub-application). Each sales agent bears the responsibility forensuring that enrolment in insurance is being done properly.
Incidentally, life insurance is also sold via mail order or online channels thesedays. Since primary risk selection cannot be carried out with these methods of selling
policies, it is believed that companies need to cap the amount of coverage one canobtain with an insurance policy and strengthen checks when paying out benefits.
When being informed of health-related matters, an insurance solicitor shall
explain only matters in response to questions received from the insured. Imagine,for example, that the insured asks whether or not he or she should indicate that heor she has seen a doctor for a cough and the insurance solicitor replies that it is not134necessary given that it is a trivial matter. This could give rise to problems at a later
date since there is a risk that this might constitute a breach of the duty to disclose if
the cough turns out to be a symptom of pneumonia.

7 Formation of insurance policies and the cooling-off system
An insurance policy application and disclosure form shall be sent to the life
insurance company. If the life insurance company decides to accept theapplication, an insurance certificate and notice of acceptance will then be sent to
the policyholder. See Chapter 4 for more information.
Traditionally, a sales agent would engage in the solicitation of life insurance
by visiting the home or workplace of the client and personally picking up an
insurance application. In such cases, the client would often apply for insurance
as proposed by the sales agent before being given a chance to think about it. In
this connection, the law now allows the policyholder to unilaterally withdraw anapplication or cancel the policy with or without cause at any point in the firsteight days from and inclusive of the date of the application or date of the issuanceof a document notifying the policyholder that he or she can take advantage of acooling-off period, whichever is later.
However, the cooling-off system cannot be used if the insured undergoes a
medical exam for a product requiring a medical exam, the policyholder
personally visits the sales office of the insurance company at a specified time ona specified date, or if a premium payment has been made by way of a banktransfer. This is because, in any such case, it is believed that there is no need toallow a withdrawal or cancelation since the intent of the policyholder to enroll
in a policy is clear.

Chapter 3 135

III. Life insurance solicitation channels undergo change anddiversification
Individuals and organizations engaged in the solicitation of life insurance arecollectively referred to as solicitation channels. In this section, we will take abrief look at the history and current state of solicitation channels. The specificcontents of each channel are described in IV below.

1 Establishment of traditional channels
When life insurance first emerged in Japan, solicitation activities wereprimarily carried out by sales agents employed by life insurance companies andlocal persons of note and influential persons operating as agencies. This system
underwent a wholesale change after the Second World War.
After the war, women who lost husbands in the war began to be hired as life
insurance sales agents. This was partly due to the limited opportunities to workthat were available to women at the time.
On the other hand, the Act on the Regulation of Insurance Solicitation wasenacted and put into force in July 1948 in response to inappropriate solicitation
activities carried out during the chaotic postwar years and criticism lodged
against what was known as special new policies, a type of transfer contract.
From around the middle of the 1950s, when the period of rapid economic
growth began, life insurance sales expanded greatly through the large-scale
recruitment of female sales agents. At that time, women who had finished raisingchildren were seeking employment. At the same time, there was a need for death
insurance for husbands since husbands were primary breadwinners and sincesocial security was inadequate. Against this backdrop, the industry grew throughthe selling of death insurance by female sales agents.
2 Entry of foreign-affiliated life insurance companies and thediversification of channels
In 1969, foreign-affiliated companies were allowed to operate in the Japaneselife insurance industry through subsidiaries or branch offices. In the beginning,
American Life Insurance Company (now Metropolitan Life Insurance
Company) and American Family Life Insurance Company made their foray into
the Japanese market by setting up branch offices in the country in February 1973
and November 1974, respectively. American Family Life Insurance Company
136was incorporated in Japan in 2018 and now goes by the name Aflac Life
Insurance. From its establishment, Aflac has been demonstrating its strength in
the area of sales via company-affiliated agencies with a focus on banks,
newspaper companies, television networks, power companies, and other large
enterprises.
In 1987, Prudential Life Insurance Company made its foray into the industry
and grew primarily on the backs of consulting sales carried out by insurance
solicitors known as life planners.
A turning point came with amendments made to the Insurance Business Act
in 1995. This revised statute allowed products offered by multiple life insurancecompanies to be sold by agencies, each of which had previously been exclusively
affiliated with just one life insurance company at a time.
The above amended statute also made it possible for non-life insurancecompanies to enter the life insurance business through subsidiaries. Twelve nonlife insurance companies (among which eleven were newly established) entered
the market through subsidiaries though this was done mainly by having
conventional non-life insurance agencies who were also certified as solicitors oflife insurance sell both life and non-life insurance products as a channel for both.

3 The emergence of new channels and the intensification of competition
While insurance solicitation by banks (over-the-counter sales at banks) began
in 2001, products were initially limited to credit life insurance. The ban on the
selling of individual annuities and other such products on an over-the-counterbasis by banks was lifted in October 2002, after which sales of variable
individual annuities in particular increased.
It was subsequently set forth that there would be a full lifting of the ban in2005 after a monitoring period. In December of that year, the ban on the sale ofsingle-premium whole life insurance, single-premium endowment insurance,and level-premium endowment insurance policies of 10 years or less was lifted.
After a two-year monitoring period, banks were able to sell all products
beginning in December 2007.
We also saw the development of large-scale agencies, particularly since thelatter half of the first decade of this century. Large-scale agencies arecommissioned by a large number of life insurance companies and present a wide
range of product options to clients. Insurance is sold on an over-the-counter basis
at insurance shops in town and by door-to-door insurance solicitors.
Chapter 3 137

Life insurance companies that mostly conclude insurance contracts online via
the Internet have also emerged.
In this way, sales channels for the solicitation of insurance have diversified
to allow clients to choose the channel through which they can enroll in an
insurance policy.

4 Trends in insurance solicitation channels(1) Number of registrants
According to materials released by the Life Insurance Association of Japan(Figure 4), registered sales agents increased in number for the fifth year in a row
to 236,987 in fiscal year 2019 (101.2% of the number for the preceding fiscal
year). This number grew from 220,000 to 250,000 over the course of a decadewith no significant fluctuations recorded along the way.
The number of corporate agencies declined slightly to 33,948 in fiscal year
2019 (97.9% of the number for the preceding fiscal year). Individual agencies
decreased in number for the fifth year in a row to 49,631 (97.0% of the number
for the preceding fiscal year). The number of agency employees employed bycorporate agencies or sole proprietors decreased for the second year in a row to
999,121 (99.0% of the number for the preceding fiscal year).
Figure 4

Changes in the number of sales agents, the number of agencies,
and the number of agency’s employees
FY2014FY2015FY2016FY2017FY2018FY2019Number ofregistered sales
agents227,724

229,668

232,006

232,942

234,286

236,987

Number ofcorporateagencies

35,21835,19935,30635,113

34,69333,948

Number ofindividual
agencies

59,70057,78655,80553,53751,16949,631

Number ofagencyemployees

992,266

999,218 1,003,507 1,012,385 1,009,058

999,121

Source: “2020 Life Insurance Trends”, The Life Insurance Association of Japan

138

(2) Through what channels do policyholders take out insurance
policies?
For a survey conducted by the Japan Institute of Life Insurance (JILI) in fiscal
year 2018 (Figure 5), households that took out private life insurance policies(other than policies offered by Japan Post Insurance) over the last five years – inother words, since 2013 – were asked to identify the channel through which they
took out these policies (enrolment channel). The response that accounted for thehighest percentage of responses was “Sales agent working for a life insurancecompany” at 53.7% (compared with 59.4% in the previous survey). While “sales
agent” was found to have declined by 12.6 percentage points over the 2006
survey, it remained a major channel. Note that the question concerned theenrolment channel and not the premium or policy amount.
Figure 5

State of enrolments by most recent enrolment channel

Most recent enrolment
channel (last 5 years)(Unit: %)FY 2006

FY 2009

FY 2012FY 2015

FY 2018

Sales agents with life insurancecompanies

66.3

68.1

68.2

59.4

53.7

Mail order sales

9.1

8.7

8.8

5.6

6.5

Internet

1.8

2.9

4.5

2.2

3.3

TV, newspapers,
other

7.3

5.7

4.3

3.4

3.3

2.1

1.9

2.5

3.1

2.9

2.9

2.1

3.0

4.2

3.3

2.6

4.3

5.5

5.4

Bank

3.1

2.6

4.2

5.3

4.9

Securities

0.2

0.0

0.1

0.2

0.5

Insurance agency contact orsales agent

7.0

6.4

6.9

13.7

17.8

Workplace or labor union

5.2

3.0

3.2

4.8

3.4

Other/unknown

7.0

5.2

4.0

4.8

6.2

Life insurance company
contact
Post office contact or sales
agentBank or securities company－

Source: Produced based on “National Survey on Life Insurance” (2018), Japan Institute of Life Insurance(JILI)

This was followed by “Insurance agency contact or sales agent”, at 17.8%
Chapter 3 139

(compared with 13.7% in the previous survey). Insurance agencies increased
sharply from the 6.9% figure that was obtained in the FY 2012 survey, which
could account for the increase in the volume of sales attributed to large-scaleagencies.
“Mail-order sales” accounted for 6.5% (compared with 5.6% in the previous
survey). As part of this category, Internet sales accounted for 3.3%, an increaseover the 2.2% figure obtained in the previous survey but still less than the 4.5%
obtained in FY 2012, such that it does not appear to have increased substantially.

(3) Information pipelines and comparisonsThrough what channel does a policyholder obtain information? Figure 6
presents the results of a survey that was conducted to determine the channels
through which information had been obtained.
First, the “From a life insurance company with human intervention”
specifically refers to a channel consisting of sales agents belonging to life
insurance companies and sales agents and point-of-sales contacts belonging toinsurance agencies and any other entity or person whose primary business is life
insurance. Over 60% of information is acquired through this channel, which
remains the top channel for obtaining information despite a slight downturn interms of percentage over the last decade.
Figure 6

Information and enrolment channels related to policies that havebeen taken out in recent years(Multiple responses) (Unit: %)Information pipeline

FY 2009

FY 2012FY 2015

FY 2018

From a life insurance company w/
human intervention

64.1

63.0

61.4

62.7

From a source other than a life
insurance company w/ humanintervention

34.2

37.7

37.6

37.8

From a life insurance company w/ohuman intervention

11.7

11.6

8.6

10.8

From a source other than a life
insurance company w/o humanintervention

10.5

8.8

7.6

8.9

Other

2.6

2.1

2.5

2.4

Unknown

1.0

0.7

0.8

0.6

Source: Same as for Figure 5.

140This was followed by “From a source rather than a life insurance company
w/ human intervention”, which accounted for a little under than 40%.
Information was found to have been obtained from friends, acquaintances,family, and relatives, which accounted for half of all cases of informationacquisition through this channel, or about 20% of all cases of informationacquisition. In addition, point-of-sales contacts at banks and securities
companies as well as financial planners accounted for around 5 to 6 percent of
all cases of information acquisition.
Third was “From a life insurance company without human intervention”,
which accounted for approximately 10%. This response corresponds mostly topamphlets as well as the websites of insurance companies and insurance
agencies.
The least used channel was “From a source other than a life insurancecompany without human intervention”, which accounted for less than 10%. This
response corresponds to such sources as television commercials, newspapers,
magazines, and general websites.
Figure 7 on the following pageexamines whether a product comparison wasundertaken and, if so, with what was a product comparison undertaken. In
looking at this figure, we see that “No particular comparison was made” wasindicated by two-thirds of respondents, such that we see that those who compare
before enrolling in a policy remain part of a minority. The largest proportion of
those who undertake a product comparison do so with products offered by a
private life insurance company; those who responded accordingly accounted forapproximately 27% of all respondents.
Those who enroll in a policy offered by an agency that deals with products
offered by multiple insurance companies do so after comparing multiple
products and others enroll after obtaining quotes from several sales agentsworking with different life insurance companies. Measures have also been taken
to encourage people to compare different products before enrolling (see Chapter
5).

Chapter 3 141

Figure 7

Products that were compared at the time of the most recent
enrollment(Unit: %)Information pipeline

FY 2009

FY 2012FY 2015

FY 2018

Other private life insurance (*1)

25.0

27.1

24.7

26.9

Life mutual aid from prefectural
mutual aid or cooperative

5.7

6.8

4.6

3.9

Japan Post Insurance

2.9

2.9

3.6

3.8

Life mutual aid from JA

2.4

1.5

1.3

1.5

Financial instrument other thanlife insurance

0.9

0.7

0.9

0.8

Did not compare in particular

67.7

66.4

69.6

66.7

Unknown

1.1

0.9

1.1

1.2

*1: Other than Japan Post Insurance.
Source: Same as for Figure 5.

142

IV. Structure of each channel through which life insurance
solicitation is carried out
In this section, I will provide an outline of each channel through which life
insurance solicitation is carried out. There are primarily three sales channels as
follows:(i) Sales by the employees of a life insurance company(ii) Sales by an agency commissioned by a life insurance company(iii) Direct sales by a life insurance company

First, (i) sales by the employees of a life insurance company refer to the sales
agent channel. Major life insurance companies have traditionally employed
many sales agents to engage in the selling of life insurance.
For (ii) sales by an agency, we see that small to medium-sized life insurancecompanies and foreign-affiliated life insurance companies have used agencies tosell insurance. Agencies operate independently of life insurance companies andsell insurance as individuals or corporations in their own right. These wereoriginally small agencies.
With independent agencies finally allowed to operate under the amended
Insurance Business Act of 1995, life insurance agencies proceeded to growbigger in scale. Large independent agencies are a type of agency.
Sales by banks and securities companies are also a type of agency sales.
However, banks in particular are subject to specific sales limits and restrictions
because they belong to a regulated industry with a license system and provide
loans to clients.
Finally, (iii) direct sales by a life insurance company would include direct
sales of life insurance products, such as mail-order sales or Internet sales
triggered by newspaper ads.

1 Sales agents(1) Organizational structure of sales agents in a life insurancecompany
As was mentioned in the section on the history of insurance, female sales
agents have traditionally been hired in large numbers by major life insurancecompanies. These days, there are even specialized organizations that hire women
Chapter 3 143

with advanced educational backgrounds to fortify consulting sales in thecompanies assigned to each.
There are also examples of foreign-affiliated life insurance companies that
aim to implement a consulting sales strategy with an organization of sales agents,
many of whom are men.
Figure 8 outlines the organizational structure of a traditional life insurancecompany. Life insurance companies set up branch offices for each prefecture.
Larger prefectures are divided among several branch offices while smaller
prefectures are sometimes grouped together to be served by a single branch
office. In the three large metropolitan areas of the country, a regional head office
may be established to oversee branch offices.
Figure 8

Structure of life insurance companies and sales agents(illustration)
Head officeCall center

Each prefecture is home to
one to several branch offices

Branch offices

Each prefecture is home tobetween 10 and several dozen Sales offices
sales offices

Offices that can be visited byclients

Sales agents are posted to these offices

A branch office will have jurisdiction over several to dozens of sales offices(sites). A sales agent will be assigned to a sales office and be placed in chargeof a geographical or job-related area that has been allocated to the sales office.
As noted above, a sales agent works to get a client to become enrolled in alife insurance policy through the provisions of all sorts of advice in face-to-faceinteractions.

(2) Sales agents’ work environment
The salary structure for sales agents comprises a fixed component and aperformance-based component. For the fixed component, a fixed salary basedon qualifications set upon taking into account such factors as performance overthe last year is paid monthly in accordance with these qualifications.
Proportional pay is based on insurance sales performance but is determined after144

a comprehensive assessment is made by also taking into account the continuityof insurance policies sold and service activities provided for existing policies(Figure 9).
Figure 9

Illustration of the salary structure for sales agents

Amount of new policy insurance money
Proportional pay

Status of policy continuity

Provision of services for existing policies

Fixed salary

Set based on past performance
Determined according to qualifications* Some companies offer semi-fixed salaries.

Incidentally, it is said that the situation with sales agents is negatively
affected by turnover. Turnover refers to a repetitive cycle whereby high numbersof new sales agents are hired, many of whom go on to quit after a short periodof time.
For example, let us say that a sales agent at a life insurance company isguaranteed a minimum level of fixed salary regardless of performance for the
first two years after getting hired. After two years, however, his or her
performance-linked proportional pay will account for a greater percentage ofsalary earned. Under such a system, some sales agents quit due to inadequate
performance results. In particular, a sales agent will often start out by selling
policies to relatives and neighbors but might then be unable to subsequently
improve his or her performance when the well, based on local and blood ties,
runs dry.
In this connection, life insurance companies designated geographical areas
where sales agent were assigned to work and developed education and training
programs to enable them to work productively in geographically andoccupationally defined areas with which they have no local or blood ties bygiving them the skills needed to be effective rather than compelling them to sell
insurance policies to their own relatives and neighbors. In addition, theytransitioned from a focus on obtaining new policies to a salary structure that also
places a value on providing services to existing policyholders. Moreover,
Chapter 3 145

companies extended their minimum guaranteed fixed salary period from two
years to three to five years and implemented various other initiatives along thisline.
The sales agent system is one that has been subject to criticism, but it cannot
be denied that there are many female sales agents who continue to actively
engage in their work even at an older age. Such sales agents are regarded astrustworthy and reliable in their communities. Sales agents will likely continue
to be seen as one, if not the only, major sales channel used by life insurancecompanies.

2 Agencies
In this section, I will talk about agencies, such as specialized agencies andprofessional agencies. A specialized agency is an agency with one or moremembers of staff who engage in actions to sell life insurance at the behest of alife insurance company. Traditionally, they have been used as a sales channel bysmall to medium-sized life insurance companies.
Agencies differ from sales agents in that, whereas a sales agent is normallyan employee of a life insurance company, an agency operates independently oflife insurance companies. A sales agent comes in to work at a sales office, but
an agency works out of the agency’s own office. An agency sales department or
agency sales section will be set up within a life insurance company to serve as alink between life insurance companies and agencies. A staff member known as
an agency manager who is assigned to the agency sales department will support
and oversee agencies (Figure 10).
Figure 10

A life insurance company’s organization for the management ofagencies (example)
Head office

Jurisdiction over a region(such as the three major
metropolitan areas)

Regional
Agency Sales Department
headquarters

Jurisdiction over aprefecture

Branch office Agency Sales Section

Support andoverseeSupport andoverseeAgencyAgencyPursuant to the amended Insurance Business Act of 1995, many entities that146

used to be agencies working for non-life insurance companies came to sell
insurance offered by life insurance companies affiliated with those non-life
insurance companies. While the remuneration system for agencies varies, we canpoint to examples in which the qualification of an agency is determined as afunction of sales performance over a certain period of time, such as one thatspans three or four months. Sales performance is then evaluated in accordancewith the agency’s qualification to determine the remuneration to be paid.
In other words, the more insurance that is sold, the higher an agency’s
qualification and the greater the commission per sale.
Payment methods include one-time payments of the commission at the timea contract is concluded and L-shaped payments of the commission at the time acontract is concluded and over a prescribed number of years during the ongoingterm of the policy (Figure 11).
Figure 11

How agency commission payments are madeLump-sumpayment
methodAt the time
contract isconcluded

L-shaped
payment
methodMethod by which payment
amount is calculated
・Qualification of agency
・Insurance amount set forth in
the policy
・Policy continuity rate
・Operational status and otherfactors

Year in which
From second year on
contract isconcluded

There are agencies known as professional agencies. A primary example of aprofessional agency is the licensed tax accountant agency. As a tax accountant
is familiar with the conditions of a client company, he or she can propose a life
insurance plan that is suitable for the situation in which the company and its
officers find themselves.

3 Large independent agencies and insurance shops
Enjoying a high profile these days as a sales channel for life insurance arelarge independent agencies. A large independent agency concludes agency
contracts with many life insurance companies. Many such agencies arecommissioned to sell insurance not just by life insurance companies but also
Chapter 3 147

many non-life insurance companies.
Some large independent agencies have divisions that engage in door-to-doorsales. Others operate sales outlets in urban locations to sell life insurance tovisitors. Sites known as insurance shops include those that are set up by life
insurance companies and those that are set up by large independent agencies(Figure 12).
Figure 12

Structure of large independent agencies

Insurance companies

Large independent agency

Solicitation iscommissioned

Offices that can be visitedby clients

Head office

Door-to-door salesorganization

These parties have been selling products to clients by asserting that they
propose products that best meet the needs of a client from among a wide rangeof choices offered by different life insurance companies. However, concerns
have been expressed to the effect that independent agencies do not propose
products that are the most suitable for a client but instead propose products thatgenerate the highest commissions for them. Regulations have been enacted toaddress this concern. Specific details on this point are discussed in V-3(4) hereof.

4 Over-the-counter sales at banks
As mentioned earlier, the ban on over-the-counter sales at banks wascompletely lifted in December 2007. Banks derive their strength from the factthat they have deposit accounts into which salary, pensions, retirement
allowance payments, and other items are transferred. If there is a large balance
in a deposit account, a bank can earn a sales commission by recommending an
insurance policy, investment trust, or other such product to the holder of theaccount. Given that low interest rates mean that a bank cannot expect to earn
substantial income from lending operations, the growth of commission-based148

services is a matter of great urgency for banks.
Banks enjoy a greater competitive advantage with savings-type products thatare more investment-oriented than with products that provide coverage. Banks
promote themselves as places where investment trusts, investment-oriented
insurance, and other financial instruments can be purchased on a one-stop basis.
On the other hand, they are less capable of selling coverage-oriented products.
This may be because front-line staff members dealing with clients may be able
to talk about asset management matters but find it more difficult to explain topics
pertaining to coverage.
As banks have had such a strong presence in the Japanese economy, they are
subject to a number of regulations. First, they are restricted from sellinginsurance to their own loan clients. This has the effect of restricting them fromselling insurance by threatening such clients with their loan approval. A loan
officer in a bank is not allowed to be involved in the selling of insurance.
In addition, the prior consent of the client is needed when using information
obtained through banking operations for insurance solicitation purposes.
Conversely, the consent of the client is also needed to use information obtained
through insurance solicitation activities for banking operations.
Furthermore, banks are also prohibited from exerting pressure on life
insurance companies in such a way that life insurance companies would offerbanks more discounts on premiums than those of regular agencies.
The commission issues that I talked about in connection with large
independent agencies also apply to over-the-counter sales at banks. In particular,commissions are sometimes disclosed for investment trusts, which are similar to
products that are highly investment oriented. Commissions are disclosed when
variable annuities and other investment-oriented products are sold by a bank.

5 Post office
As mentioned in Chapter 1-VI, Japan Post Insurance Company, Ltd., wasoriginally a department of the Ministry of Posts and Communications. The
Ministry of Posts and Communications created a simple life insurance productfor the masses for which no examination was needed and for which premiums
were paid monthly. The operations of this simple insurance product continued
to be subsequently expanded regardless of criticism from life insurancecompanies, who argued that they were being squeezed by this kind of insurance.
With the enactment of the Postal Services Privatization Act in 2005, Japan
Chapter 3 149

Post Insurance was established and later began operations as a joint-stockcompany in 2007. In the same year, the post office was broken up into Japan
Post Network Co., Ltd., which carries out over-the-counter operations, and Japan
Post Service, Limited, which performs logistics operations. In 2012, Japan Post
Network Co., Ltd., and Japan Post Service, Limited, were merged to form Japan
Post Co., Ltd.
The post office handles postal operations for such items as postcards andparcels as well as insurance solicitation activities for Japan Post Insurance anddeposits for Japan Post Bank.
The post office sells not just life insurance offered by Japan Post Insurance
but also cancer insurance, products for corporate clients, and non-life insurance
products underwritten by common private life insurance companies.
Japan Post Co., Ltd., is obligated to provide universal services (services notdivided by region) due to the fact that it provides postal services constituting a
set of basic national services. For this reason, it needs to maintain post officeseven in depopulated areas where postal services are invariably unprofitable.
From this perspective, commissions earned from selling life insurance can beseen as a valuable source of revenue to support the core of postal services.
In 2019, Japan Post Insurance and Japan Post Co., Ltd., were subject to abusiness suspension order in connection with insurance solicitation due to casesof improper sales, such as where a large number of policies that were not neededby the elderly were sold. Sales later resumed in October 2020.

6 Mail-order sales
In a typical example of mail-order sales, a newspaper ad is used to present
relatively simple insurance products, such as medical insurance and term
insurance plans. A client seeing such an ad would call the call center to apply
for insurance. Actual enrolment is processed through the conclusion of an
insurance contract by way of exchanging an application form and disclosure
form by post.
In some cases, a credit card company acts as the agency and solicits clientsby enclosing brochures that introduce insurance products together with credit
card invoices that are sent out to credit card holders.
Since explanations cannot be given on a face-to-face basis, products tend tobe simple; many consist of simple disclosure-type, non-disclosure-type, or
simple risk selection-type policies. Such products may also be subject to150

restrictions; for example, the amount of insurance money may be kept low, or
coverage may not be available for a certain period of time after enrolment.

7 Internet sales
In 2008, two companies specializing in Internet sales began operations.
These companies started by launching a system to complete disclosure andapplication procedures online with the exception of the sending of personal
identification documents. While only the Lifenet Insurance Company and AXA
Direct Life Insurance initially engaged in Internet sales, Rakuten Life Insurance
joined this segment in 2013. In addition, more and more life insurancecompanies that do not specialize in Internet sales allow clients to enroll via theInternet.
While Internet sales are expected to grow in line with increased digitalization
in society, it does not account for as great a share of the market as initially
expected. The selling of complex products over the Internet alone appears to bedifficult. This is likely due to the fact that a client who wants to enroll in acomplex policy will want to receive advice from someone.
Internet sales are appealing for the low premiums that are made possible
because the insurance company has no need for human resources to facilitate theenrolment process and does not spend on advertising. Since a high enoughprofile cannot be obtained through just the Internet, however, some Internetbased life insurance companies run television commercials to gain namerecognition.
8 Independent financial planners
Independent financial planners – who are usually referred to as independent
FPs in Japan – normally receive an advisory fee from clients as compensationby providing advice on life insurance to clients. Advice is provided not just withrespect to life insurance but also with respect to investment trusts and otherfinancial instruments in general. Independent financial planners do not conclude
solicitation commissioning agreements with specific life insurance companies.
While the notion of paying compensation for advice is not yet generally
recognized in Japan, there is, in the United Kingdom for example, a sales channel
occupied by independent financial advisors (IFAs) who provide advice on
insurance from a neutral standpoint and receive a fee only from clients.

Chapter 3 151

9 Insurance brokers
An insurance broker is someone who engages in the solicitation of insurance
without receiving a commission from an insurance company. Generally
speaking, a broker will be commissioned by a client to negotiate with life
insurance companies and conclude the most suitable insurance policy.
Operational tie-up agreements are concluded with life insurance companies andaffairs are carried out in accordance with these agreements.
Since there is normally not much room for negotiating contractual terms in alife insurance agreement, it is unlikely that the advantages of brokers, which arecharacterized by the ability of brokers to extract favorable provisions throughnegotiations with insurance companies, can be harnessed for life insurance. For
this reason, insurance brokers are a sales channel primarily used in the area of
non-life insurance.

152

V. Life insurance solicitation rules
I have already mentioned that the solicitation of life insurance is subject torules. This section will outline these rules in specific detail.
First, a life insurance solicitor has an obligation to register. Certain actions
are obligatory while inappropriate actions are prohibited. Large agencies havean obligation to put in place certain systems.

1 Certification as a life insurance solicitor
At the beginning of this chapter, I explained that certification as a life
insurance solicitor is required for sales agents and other life insurance company
employees as well as agencies who are commissioned by life insurancecompanies to engage in the solicitation of life insurance. To become a life
insurance solicitor, you need to be registered with the Prime Minister. In practice,
you would register with your local finance bureau or local finance office.
While someone engaging in insurance solicitation without beingcommissioned by an insurance company needs to be certified as an insurance
broker, this matter will not be explored in this book.
An application to register a life insurance solicitor is made by a life insurancecompany. A life insurance solicitor who is an employee of an insurance agency,
which is a separate entity from any life insurance company, is also registered by
the commissioning life insurance company. A life insurance company that
registers a life insurance solicitor in this way is referred to as a proxy applicationcompany.
In registering as a life insurance solicitor, certain knowledge of life insurance
is required. For this reason, the Life Insurance Association of Japan administers
exams for insurance solicitors. By passing this exam, you will be recognized as
possessing the knowledge required for registration. A life insurance company
will provide education concerning proper sales activities before and after
registration in order to facilitate the recruitment of prospective insurance
solicitors and ensure that they pass this exam and are capable of effectively
explaining the company’s own products to clients.
The Life Insurance Association of Japan administers not only the minimal
knowledge exams required for registration but also more advanced exams, suchas the specialty course exam. Moreover, it also administers an exam for selling
Chapter 3 153

variable insurance and variable annuities and an exam for selling foreign
currency-denominated insurance and annuity plans. Life insurance companies
allow only those who have passed these exams to sell variable annuities andforeign currency-denominated insurance. A system for registering persons whoare certified to sell foreign currency-denominated insurance with the Life
Insurance Association of Japan is set to begin in 2022.
An insurance solicitor needs to receive ongoing education each year in orderto maintain his or her skills and specialized knowledge.

2 One-company exclusive affiliation system and independence
As mentioned above, a life insurance solicitor is, in principle, supposed to be
exclusively affiliated with one company under the law; independent agencies areset forth as an exception to this rule.
(1) One-company exclusive affiliation system
The one-company exclusive affiliation rule is set forth as a rule that is
applicable to both life insurance companies and life insurance solicitors. First, alife insurance company is prohibited from commissioning the solicitation of
insurance to a life insurance solicitor affiliated with another life insurancecompany. On the other hand, a life insurance solicitor is prohibited fromengaging in the solicitation of insurance on behalf of another life insurancecompany.
Under the Insurance Business Act, an insurance company with which an
insurance solicitor is affiliated shall be liable to compensate for any damage
caused to a policyholder in connection with the solicitation of insurance by the
insurance solicitor. This clarifies which life insurance company will be held
liable for an action carried out by a life insurance solicitor.
A life insurance company must educate life insurance solicitors to ensure thatproper solicitation activities are undertaken. In addition, the implementation ofa one-company exclusive affiliation system will facilitate the ongoing andefficient provisions of consulting sales and after-sales services by a life
insurance company.

154

(2) Independence
If you have read this far into the book, you might be wondering why
independent agencies are allowed to operate. Yet, a new life insurance company
that enters the market and seeks to utilize a channel consisting of agencies willfind it impossible to do so while operating under the one-company exclusive
affiliation system. In response, the Insurance Business Act permits independent
operations as long as an agency is able to ensure a certain level of solicitation
quality.
Two types of independent agencies are allowed as exceptions to the onecompany exclusive affiliation system.
The first is allowed by way of a rule for non-life insurance agencies that
previously sold the products of life insurance companies before the entry of lifeand non-life insurance companies into each other’s sector through subsidiaries
came to be permitted. When a non-life insurance company to which such anagency belongs sets up a new life insurance company as a subsidiary, the nonlife insurance agency is also able to sell life insurance underwritten by thesubsidiary of the non-life insurance company to which it belongs (independent
approach by non-life insurance agencies (Figure 13)).
Figure 13

Independent approach based on the use of a non-life
insurance agency

Life Insurance Company A
Solicitation iscommissioned(life insurance)

Non-Life Insurance Company B
Solicitation iscommissioned(non-life insurance)

Established as subsidiary
Life Insurance Company B’
Solicitation iscommissioned(life insurance)(subsidiary of Non-Life Insurance Company B)

The other involves cases in which a life insurance solicitor and his or her
employees have acquired prescribed knowledge or is capable of engaging in theappropriate management of operations in order to accurately and fairly perform
Chapter 3 155

operations pertaining to insurance solicitation carried out on behalf of two or
more affiliated insurance companies. Specifically, there need to be at least twolife insurance solicitors in total: at least one who has passed a general course runby the Life Insurance Association of Japan and at least one who has passed thespecialized course run by the same organization (Figure 14 on the followingpage).
Figure 14

Independent approach by way of the appointment of an
administrator

Life Insurance Company A
Solicitation iscommissioned(life insurance)

Life Insurance Company B
IndependentagencyOrdinary insurance solicitor

Solicitation iscommissioned(life insurance)

Insurance solicitor as administrator

Prohibition against re-commissioning solicitation

Column 18

In principle, an agency commissioned to engage in the solicitation of life
insurance is prohibited from commissioning the solicitation of life insurance toanother agency or party (re-commissioning). This is because doing so would make itless likely for oversight and control to be exercised by the life insurance company
and would also make the responsibilities become unclear.
The only permitted exception would be the re-commissioning of solicitation by alife insurance company commissioned to engage in solicitation to one of its own
agencies in the event that solicitation is commissioned between life insurancecompanies within the same corporate group. In such a case, the situation isconsidered to be less harmful since the life insurance company is commissioning
operations to an agency over which it has direct control.

3 Rules governing insurance solicitation
In engaging in the solicitation of insurance, the insurance company or156

insurance solicitor (hereinafter referred to as “Insurance Solicitor”) shall have apositive obligation to ascertain the intent of the client and provide information.
It shall also be subject to a negative obligation in that it will be prohibited fromengaging in improper sales. Furthermore, the amendments made to the Insurance
Business Act in 2014 set forth an obligation to develop a system for insurance
solicitors. This obligation will be explained later in 4 while the positive andnegative obligations mentioned above will be explained here in this section.

(1) Obligation to ascertain the intent of the client
As mentioned above, the Insurance Solicitor is required to sell insurance
products that are consistent with the intent of the client. While this is carried out
as a service in the course of engaging in the solicitation of insurance in that
products are to be sold in accordance with client needs, it is also a legal
obligation. Requirements along this line include the following:(i) Ascertain the intent of the client when engaging in thesolicitation of insuranceThis is to propose products that are consistent with the intent of the client.
(ii) Ascertain the intent of the client before accepting anapplication for a specific productThrough this requirement, the insurance solicitor confirms how the intent of
the client has changed from the outset to the time of application, the intent of theclient at the time of application, and how the characteristics of the product for
which an application is ultimately made have changed.
(iii) Verify that the product is consistent with the client’s own intent
at the time of the application for an insurance policy
This is to provide an opportunity to the client to verify before applying thatthe product for which he or she wishes to apply matches his or her own needs.
Obligation to ascertain the intent of the client andthe principle of suitability

Column 19

As will be explained later, the principle of suitability applies to life insurance withinvestment characteristics. There have long been discussions as to whether or not
the principle of suitability should also apply to life insurance without investment

Chapter 3 157

characteristics. However, the principle of suitability is a principle to determine
whether or not a given investment product is suitable for a given person in light of
his or her investment experience, the state of his or her assets, his or her investment
objectives, and other factors. Simply put, it is a principle for assessing whether it isappropriate to have the client shoulder the risk of a decline in the value of theinvestment product in question, which means that it is hard to see how it might apply
to general life insurance products.
As a result of discussions held by the Financial System Council and other bodies,
the issue when it comes to general life insurance is not suitability but whether aninsurance product meets the needs of a client. Yet, it is difficult for anyone otherthan the client himself or herself to ultimately determine whether or not needs arebeing met. Thus, as outlined here, an Insurance Solicitor is obligated to ascertain theintent of the client, propose a product accordingly, and ultimately provide the clientwith an opportunity to confirm that the insurance product is in line with his or her
own intent.

(2) Obligation to provide information
The obligation to provide information is the obligation on the part of the
Insurance Solicitor to provide the policyholder with information that would be
helpful when the Insurance Solicitor is engaging in the solicitation of insurance.
Specifically, the Insurance Solicitor is obligated to ensure that the client
understands the characteristics of and matters to be noted as concerns the life
insurance product in question.
(i) Policy summary
The policy summary is a document that is used to explain the characteristics
of a life insurance policy. It is a document that explains, among other details, thecontents of coverage provided by the life insurance policy.
When selling life insurance, an outline of the insurance product, such as one
for medical insurance or term insurance, should first be provided in a brochure.
If the client is interested, ask him or her questions to glean his or her date of birth,desired insurance amount and term, desired premium amount, and otherpertinent information and then propose a specific insurance policy that satisfies
his or her conditions. This written proposal is generally known as a policy
illustration. Since the policy summary explains the specific contents of coveragedesigned for that person, it is often integrated with the policy illustration.
(ii) Advisory information
158

Advisory information that alerts the insured to matters that should be notedis also provided together with the policy summary. It contains matters to be notedwhen an application is made for an insurance policy. For example, it might statethat you might not be refunded premiums paid in the event of an earlycancelation, that you might not be paid insurance money if you breach the duty
to disclose, and that you are entitled to a cooling-off period.

(iii) Obligation to explain
Based on these documents, matters need to be carefully explained inaccordance with the client’s knowledge.
At the same time, you will need to explain important matters by issuing theclient with the policy provisions and a policy booklet, which should containexcerpts of important points in the policy provisions, before receiving an
insurance policy application form.
This obligation to explain is imposed as a supervisory regulation, the breachof which will be met with the implementation of administrative measures. In
addition, the obligation to compensate for damages is sometimes imposed on alife insurance company when a life insurance product is sold through a serious
failure to comply with the obligation to explain.
(3) Prohibition against improper sales
Examples of improper sales that are prohibited include sales for which
important matters are not explained and sales for which an incorrect explanationof important matters is provided. While this appears to overlap with the
obligation to explain as described in (2) above, the Insurance Business Act had
not, until recently, set forth a positive obligation to explain as described above.
It was on the basis of this prohibition against improper sales that insurance
solicitors came to be required to comply with the obligation to explain.
Also prohibited are actions to impede any attempt on the part of the insured
to properly fulfill the duty to disclose and the imposition of any requirement on
the insured to give a fraudulent disclosure. If there has been a breach of the duty
to disclose, the insurance policy may be canceled without any payment of
insurance money forthcoming. However, if the insurance solicitor was involvedin an improper disclosure, the insurance company will be unable to cancel thepolicy. If there has been any action taken to impede disclosure, the insurance
solicitor will be subject to criminal punishment and other penalties.
Chapter 3 159

Unauthorized contract switching is also banned. If done properly, contract
switching is not problematic. Since commissions are earned by an insurance
solicitor by acquiring new policies, however, one might come up with the ideaof extinguishing an existing policy and having a new contract concluded eventhough there is no need to carry out such actions.
In order to prevent such actions, a life insurance company will not recognizethat a case in which an existing policy is canceled and a new policy is taken out
within a short period of time counts towards the performance of the insurance
solicitor and will, if anything, draw attention to such a case as one that isproblematic.

(4) Rules pertaining to comparative sales
An independent agency handles similar products offered by multiple life
insurance companies. Regulations have been enacted to ensure that products soldby an independent agency to clients are compared with other similarly handled
products and are more in line with client needs.
First, an independent agency is required to present an outline of comparable(similar) products that it handles. When products are narrowed down asrequested by the client (such as in terms of desired premium amount andcoverage) after this outline has been presented, the criteria and reasons for thisnarrowing-down process need to be indicated. The client will then select a
product suitable for himself or herself from among the narrowed-down products
and submit an application accordingly.
There is also another method by which a product recommended by anindependent agency is presented while taking the client’s intent into account. In
such a case, objective reasons for recommending this product, such as reasonsthat are framed in terms of product characteristics and insurance premium level,
will need to be indicated by the independent agency to the client.
4

Rules of solicitation concerning insurance with investment
characteristics
Life insurance with investment characteristics, such as variable insurance,
variable annuity insurance, foreign currency-denominated insurance, andforeign currency-denominated annuity insurance, are defined under the
Insurance Business Act as “specified insurance” in the form of insurance withinvestment characteristics.
160

Regulations as provided for in the Financial Instruments and Exchange Act,
which regulates the sale of investment trusts and other financial instruments,
apply mutatis mutandis to investment-oriented insurance (specified insurance).
Key rules include the following: (i) principle of suitability, (ii) the obligation toissue documents prior to and at the time of the conclusion of a contract, and (iii)
a prohibition against false disclosures and other forms of improper conduct.

(1) Principle of suitability
The principle of suitability is a regulation under the Financial Instruments
and Exchange Act that prohibits solicitation that is improper in light of theclient’s knowledge, experience, asset situation, and purpose of concluding acontract for a financial instruments transaction.
Like investment trusts, an investment-oriented insurance policy is also
subject to price fluctuations in the market, as can be seen with share prices andforeign currency exchange rates. In this connection, the Financial Instruments
and Exchange Act applies mutatis mutandis as a set of rules applicable to anyone
selling investment-oriented insurance given that he or she needs to appropriately
engage in solicitation activities upon learning of the client’s background.
These rules proclaim, for example, that an explanation tailored to theattributes of the person who wishes to take out investment-oriented insurance
must be given and that no product with excessively high risks may be sold to anelderly person lacking investment experience.
(2) Issuance of documents prior to and at the time of the conclusion ofa contract
Documents issued prior to the conclusion of a contract are documents thatmust be issued in advance in order to allow the client to assess the investment inquestion in accordance with the Financial Instruments and Exchange Act. They
shall, for the protection of the client, state important matters, such as an outlineof the policy, costs, and main risks. In order to have risks associated with thetransaction correctly understood, these documents should be reviewed prior to
the transaction. These documents shall be provided to the client as an integral
part of the policy summary and advisory information, which must be provided
under the Insurance Business Act.
Where a contract has been concluded, the contents of the transaction
undertaken by the client need to be presented to the client without delay as part
Chapter 3 161

of the issuance of documents at the time of the conclusion of the contract. For
investment-oriented insurance policies, it is believed that an insurance certificate
is commonly issued in lieu of these documents.

(3) Prohibition against false disclosures and other forms of improper
conduct
The following are examples of conduct that is prohibited: making a false
statement concerning an important matter and making a statement informing theclient of important matters or matters related to important matters that would bein the client’s interest while deliberately failing to disclose facts concerning suchimportant matters that would be detrimental to the client.
5 Obligation to develop a system for insurance solicitors(1) General discussion
Rules governing the selling of insurance as provided for in the Insurance
Business Act have thus far required that insurance companies enact clientprotection rules and be responsible for ensuring compliance therewith byaffiliated sales agents and agencies. Insurance companies are also to be held
liable for improper sales and insufficient explanations.
However, insurance solicitors with larger operations than smaller insurancecompanies, such as large insurance agencies, banks, and securities companies,
have emerged. In addition, these large insurance agencies usually operate
independently and sell insurance as commissioned by large numbers of
insurance companies. Thus, a life insurance company may seek to have its rules
observed but may find it impossible to do so any time these rules differ fromrules enacted by an independent agency.
In this connection, the obligation to develop a system for insurance solicitors
came to be introduced through the 2014 amendment to the Insurance BusinessAct. In talking about insurance solicitors in this context, it is sufficient foragencies operating with sales agents or on an individual basis to comply withthis obligation by complying with the obligation to develop a system as imposedby life insurance companies. Thus, the term insurance solicitor in this context
refers mainly to large insurance agencies.
The term employee refers to anyone who is employed by an insurance
solicitor and who is actually involved in the solicitation of insurance.

162

(2) Contents of the obligation to develop a system(i) Ensuring the eligibility of officers and employees
An insurance solicitor is required to possess appropriate knowledge for thesolicitation of life insurance in order to be registered as a solicitor. Therefore, acheck first needs to be conducted to ensure that no board member or employee
engaged in the business of an insurance solicitor are in contravention of theeligibility conditions for registration under the law. In addition, education needs
to be provided to ensure that knowledge on insurance solicitation sufficient forregistration is possessed and maintained.
As mentioned above, the commissioning of solicitation by an insurance
solicitor to someone else in a life insurance business is, in principle, prohibited.
For this reason, an employee must be in an employment relationship with aninsurance solicitor and someone who follows directions and orders issued by the
insurance solicitor. Solicitation cannot be commissioned to an independent third
party.
(ii) Education, management, and guidance pertaining to compliancewith laws and regulationsFirst, an insurance solicitor is required, by internal rules, to set forthcompliance with laws and regulations concerning insurance solicitation,knowledge concerning insurance policies, the development of an internal officecontrol system (including the proper management of client information), andother matters.
These internal rules should provide for appropriate education, management,
and guidance, such as by way of the implementation of measures to educate andimprove the qualifications of officers and employees engaged in insurance
solicitation.
When it comes to internal rules, it is not enough to simply enact them; theaudit department and other sections need to engage in monitoring to ensurecompliance with these rules. However, if an audit department cannot be set up
due to the size of an insurance solicitor, alternative measures can be put in place,such as by appointing a person in charge of audits.
(iii) Managing client information
An insurance solicitor or external party to whom administrative office work
is outsourced needs to develop a system suitable for the size and operational
Chapter 3 163

characteristics of the insurance solicitor and take appropriate measures inaccordance with the Act on the Protection of Personal Information to ensure thatclient information is appropriately managed.
The Act on the Protection of Personal Information requires that information
be appropriately acquired, used, stored, and disposed of. In appropriately
acquiring information, the purpose to which the information will be used needs
to be expressly indicated.
In particular, the express consent of the individual is required when acquiringsuch sensitive personal information as information on the individual’s ethnicity,
creed, social status, and medical history.
Safety control measures pertaining to personal client information need to be
implemented to prevent the leakage or loss of or damage caused to suchinformation irrespective of the size or operational characteristics of the insurance
solicitor.
Personal information is required to be used within the scope of the purposeof use as initially indicated and its provisions to a third party, in principle,
requires the consent of the individual to whom such information pertains. The
provisions by an insurance solicitor of information for the purpose ofoutsourcing office administration does not constitute the provisions of personal
information to a third party as long as the information is used for the operationsof the insurance solicitor.
Client information can also in some cases constitute inside information under
the Financial Instruments and Exchange Act. In such a case, the use of inside
information to trade shares or securities would be a violation of rules governing
insider trading.
In these ways, a solicitation agency is required to develop a system for andshoulder the costs of compliance with laws and regulations.

164

Chapter 4: Operations of life insurancecompanies

We have to this point learned about the basics of life insurance(Chapter 1), life insurance products (Chapter 2), and the solicitationof life insurance (Chapter 3).
In Chapter 4, I would like to look at an outline of the operations oflife insurance companies.
First, I will explain everything from the establishment andacquisition of a license for a life insurance company to the way a life
insurance company is managed. At the same time, I will also talkabout life insurance companies forming corporate groups.
Next, I will explain how the financial soundness of a life insurancecompany, which is integral to its management, is ensured.
I will then talk about life insurance underwriting, a core operationof a life insurance company, followed by another core operation in
asset management.

Chapter 4 165

I. Management of a life insurance company
In this section, I will start by going over the process by which a life insurancecompany is established and is then granted a license. I will then explain the formof governance by which a life insurance company operates and the appointmentof its officers.

1 Life insurance business operations that are subject to a license
As the life insurance business is a licensed business, the operations of a life
insurance company require the granting of a license by the Prime Minister.
It is then necessary to start by clarifying what the business of life insurance
is. According to the Insurance Business Act, the life insurance business isdefined as a business that underwrites insurance through which it promises to
pay out a certain amount of insurance money in connection with the survival ordeath of a person (including a physical condition, as determined by a medical
doctor, by which life expectancy is found to be no greater than a certain lengthof time) and collects premiums. In other words, a life insurance businessunderwrites insurance policies in connection with the survival (such as in termsof policies with maturity benefits or annuities) or death (policies that pay out
death benefits) of a person as a business.
However, small-amount, short-term insurance providers and insurance andmutual-aid businesses that provide mutual aid are businesses that have a
different legal basis and thus engage in business in accordance with other laws.
See Chapter 1-VI for more information on small-amount, short-term insurance
providers and mutual aid. Incidentally, the definition of a life insurance businessas set forth above includes a part in parentheses; this part can correspond to arider designed to meet what is known as living needs and which pays out
insurance money when the insured has a life expectancy of, for example, sixmonths. This part in parentheses has been incorporated into the definition.
Operating a life insurance business without a license granted by the Prime
Minister is subject to criminal punishment.
2 Applying for a license
Since a life insurance business is conducted not by an individual but by acompany, a preparatory company is to be established first in the process of166

applying for a license. A preparatory company is established either as a jointstock company or a mutual company.
The following points are examined when granting a license to a preparatorycompany:(i) The company has a sufficient financial basis and its income and expenditure
projections are favorable (sufficient economic basis);(ii) The persons operating the company have the knowledge, experience, andsufficient social credibility (appropriate basis in terms of human resources);(iii) The statement of business procedures and policy provisions are appropriate(proper policy provisions);(iv) The statement of methodology for making premium and policy reserve
calculations is appropriate (proper actuarial principles).

In addition to the above, a company applying for a license needs to havecapital for a joint-stock company or a fund for a mutual company of at least 1
billion yen. Moreover, a board of directors and board of auditors (or an audit
committee or nominating committee) must be established as bodies within thecompany. The board of auditors and other such bodies shall be explained in 4
below. An accounting auditor to audit financial documents of the company also
needs to be appointed.
A life insurance company that is granted a license needs to promptly
commence its business.

3 Business operations that can be carried out by a life insurance company
A life insurance company can engage in the underwriting of accident andsickness insurance, such as medical insurance and long-term care insurance(third-sector insurance) at the same time as it runs a life insurance business. The
underwriting of third-sector insurance can be done concurrently by either a life
insurance company or a non-life insurance company. Conversely, no insurancecompany specializing in the underwriting of third-sector insurance is assumed
to exist.
No company is allowed to concurrently operate both a life insurance businessand a non-life insurance business. A summary of the above points is presented
in Figure 1 on the following page.

Chapter 4 167

Figure 1

Life insurance business, non-life insurance business, andaccident and sickness insurance businessLife insurance business (first sector)

LicenseCan engage in both concurrently
Accident and sickness insurance business(third sector)

Cannot engage inboth concurrently

Can engage in both concurrently
Non-life insurance (second sector)

LicenseThe core businesses of a life insurance company are thought to be insurance
underwriting and asset management (inherent operations). In principle, a life
insurance company is restricted from engaging in any other business (restriction
against engaging in other businesses). However, a life insurance company is able
to engage in operations that are incidental to an inherent operation and that areallowed under the Insurance Business Act (incidental operations) and in any
business that is specifically allowed by law (other businesses that are statutorily
allowed). A summary of operations that a life insurance company is allowed to
run is presented below:(i) Inherent operations (underwriting of insurance, asset management)(ii) Incidental operations (acting as an agency for operations pertaining to a financial
business, performing administrative work for another party, guaranteeing debts,
and more)(iii) Other businesses that are statutorily allowed (operations for the solicitation andadministration of corporate bonds on a commissioned basis, insurance trust
operations, and more)

4 Management of a life insurance company
As mentioned in Chapter 1, life insurance companies consist of joint-stockcompanies and mutual companies. In principle, directors and other officers areelected, financial statements are approved, and shareholder dividends are
determined at general meetings of shareholders in a joint-stock company. In amutual company, delegates representing employees are normally elected by
employees. Meetings of delegates play the same role as general meetings ofshareholders in a joint-stock company. In a mutual company, share dividends
are not paid; dividends are only paid on insurance policies.
168For both joint-stock companies and mutual companies, the board of directors,
whose members comprise elected directors, make decisions with respect toimportant management matters. Specifically, the important functions carried out
by a board of directors consist of determining management strategies, appointing
and dismissing the president and other executive directors, and monitoring andoverseeing the execution of management.
In a company that has set up a board of auditors, auditors are appointed
separately from directors to audit management. Some general operatingcompanies appoint auditors but do not set up a board of auditors. A life insurancecompany, however, is required to set up a board of auditors consisting of at least
three auditors. In a company that has set up a nominating committee or acompany that has set up an audit committee, auditors are not appointed; instead,management is audited by the audit committee in a company that has set up a
nominating committee or directors who comprise the audit committee in acompany that has set up an audit committee.
Company with a board of auditors, company with a nominating
committee, and company with an audit committee

Column 20

Originally, large companies like life insurance companies were thought to takethe form of companies with a board of auditors as permitted under Japan’sCompanies Act (formerly set forth in the Commercial Code of Japan). However, thesystem of auditors who audit the duties performed by directors is unique to Japanand was rather difficult to understand as seen from the perspective of non-Japaneseobservers. In response, the Anglo-American system of companies with a nominating
committee came to be allowed. A company with a nominating committee is required
to set up three committees: a nominating committee, remuneration committee, andaudit committee, each of which is composed of directors. On the other hand,operating officers who are appointed separately from directors are charged withexecuting the management of the company. At a company with a nominating
committee, audits are conducted by an audit committee composed of directors,
which means that auditors are not appointed.
In companies with a nominating committee, the system was too strict and its
usage did not spread due, for example, to the fact that matters determined by thenominating committee could not be modified by the board of directors.
Subsequently, the system corresponding to a company with an audit committee
under which an audit committee is the only body to be established along with theboard of directors came to be permitted. Companies with an audit committee also

Chapter 4 169

do not appoint auditors.
Joint-stock companies and mutual companies that operate as life insurancecompanies are allowed to assume one of three forms: company with a board ofauditors, company with a nominating committee, and company with an audit
committee. For example, the Nippon Life Insurance Company is a company with aboard of auditors but the Meiji Yasuda Life Insurance Company and Sumitomo Life
Insurance Company are companies with a nominating committee. The Dai-ichi Life
Insurance Company is a company with an audit committee. (See Figure 2.)

Three different company forms (joint-stock companies
and mutual companies)

Figure 2

Company with a board ofauditorsCompany with a nominating
committee

Company with an audit
committee

General meeting of shareholders(meeting of delegates)

General meeting of shareholders(meeting of delegates)

General meeting of shareholders(meeting of delegates)

Elect directors

Elect directors and audit
committee member

Elect directors

Elect auditors

Board of directors
Board ofdirectors

Board ofauditors

RemuneraAudit
Nominatingtioncommittee committee committee

Board of directors

Audit
committee(auditcommittee
members
serve
concurrently
as directors)

Elect representative
director

Elect executive officers

Elect a representative
director

Representative
director

Executive
officers

Representative
director

5 Election of officers
Directors, executive officers, and auditors engaged in the management of alife insurance company are required to be eligible as officers under the Insurance
Business Act. This eligibility rule is modeled after the fit-and-proper principle
applicable in the United Kingdom. By ensuring the knowledge and suitability ofofficers engaged in the management of a life insurance company, the appropriate
operations of the company can be ensured. This is analogous to the right to electofficers at a general meeting of shareholders, the exercise of which is a key
means of ensuring that a company is appropriately compliant, subject to risk
management, and effectively and efficiently managed.
Directors and executive officers engaged in management duties are required170

by law to possess the knowledge and experience to be able to precisely, fairly,
and efficiently carry out the management of an insurance company. These days,
the election of outside directors or independent outside directors has come to berequired not just of life insurance companies but also of general operatingcompanies.
See Column 21 for more information.
Likewise, auditors are required by law to possess the knowledge andexperience to be able to precisely, fairly, and efficiently audit the execution ofduties by directors and executive officers.

Outside directors and independent outside directors

Column 21

It is difficult to distinguish between outside directors and independent outside
directors, but the former are required by the Companies Act while the latter are
required by stock exchange listing rules.
They are both the same in that each is required to express opinions from an
independent standpoint to the roster of executive officers as headed by thepresident of the company. Since, in principle, the Companies Act applies regardlessof whether or not an entity is listed, outside directors are needed as part of thecorporate structure. Outside directors must be appointed in both companies with anominating committee and companies with an audit committee. In addition, outside
directors are also now required to be appointed at companies with auditors,
although this is, in principle, limited to listed companies (Companies Act amended in2019). Statutory requirements applicable to an outside director include not being
now and not having been at any time in the last ten years an officer or employee ofthe company or subsidiary of the company.
On the other hand, listing rules that require an independent outside director area system that applies only to listed joint-stock companies. The requirement for an
independent outside director is one that is prescribed by stock exchanges. In addition
to being required to be outside the company in terms of status, an independent
outside director is strictly required to be independent, such as by not having any
conflict of interest with a general shareholder. Originally, a company, under listing
rules, had to have at least one independent officer among its directors and auditors.
An independent officer is an outside director or outside auditor who is not at risk of
having a conflict of interest with a general shareholder. While there are certain
guidelines, it is ultimately the company itself that determines whether or not
someone is independent.
With the adoption of the Corporate Governance Code of June 2015 by the Tokyo
Chapter 4 171

Stock Exchange (to be explained in VI-2(2) below), each listed company came to berequired to elect at least two independent outside directors or explain the reasoning
behind any failure to do so (“comply or explain”). This point is explained in VI-2(2)below.

172

II. Insurance company group
Life insurance companies form corporate groups to develop their operations.
There are all sorts of variations in this respect that can be seen. In some cases,
an operating company will form a group to place a life insurance company under
its umbrella. In other cases, a group will be formed by a life insurance company
to place an overseas insurance company under its umbrella. Keep in mind,
however, that life insurance companies are subject to regulations that must be
observed when a group is formed. This is what I will be primarily looking at inthis section.

1 Major shareholder regulations
The shares of a listed life insurance company can be acquired by anyone.
In principle, however, the approval of the Prime Minister is needed if you
wish to acquire at least 20% of the outstanding voting rights of a life insurancecompany. For a mutual company, policyholders become ‘employees’ and partowners of the company, which means that nobody other than policyholders havean ownership stake in the company.
The purpose of regulations as outlined in Figure 3 is tied to the fact that,
whereas a life insurance company may be restricted from engaging in otherindustries, a major shareholder owning shares of the life insurance company inquestion is not subject to any operational restrictions.
Figure 3

Regulations governing major shareholders

General operating company

Requires approval

Acquiring/holding shares representing
at least 20% of the voting rights in the company
Life insurance company

For example, a life insurance company cannot make an automobile
manufacturer into its own subsidiary, but an automobile manufacturer is entitledto make a life insurance company into its subsidiary. In such a case, the life
Chapter 4 173

insurance company is not engaging in another business. However, there is someconcern that if the automobile manufacturer, as a major shareholder, were to
become mired by financial difficulties, the risks involved could negatively affectthe life insurance company. For this reason, regulations to ensure that such asituation does not transpire are needed.
In this connection, the Insurance Business Act requires the granting ofapproval to anyone wishing to become a major shareholder in accordance withthe following rules:(i) There is no risk of a loss of the sound and proper running of the insurancecompany’s operations in light of the funds to be acquired and the purpose of theacquisition thereof;(ii) There is no risk of a loss of the sound and proper running of the insurancecompany’s operations in light of the state of the assets, income, and expenses of
the company that will constitute a major shareholder (including any subsidiary
thereof);(iii) The person is someone with sufficient understanding of the public nature of theinsurance business and sufficient social credibility in light of the personnel
structure of major shareholders.

This requirement for approval and the ability to obtain at least 20% of thevoting rights of the company if this requirement is met are because such an
outcome would be acceptable as long as no major shareholder imposes its own
business risks onto the life insurance company.
In contrast, any attempt by a life insurance company to expand into anotherbusiness as a parent company would be strictly controlled since the risks
associated with the other business could become risks that directly affect the life
insurance company (to be explained in 3 below).

2 Insurance holding companies
A life insurance holding company refers to a company that has a life
insurance company as a subsidiary and that has been granted approval by thePrime Minister. In the earlier example of an automobile manufacturer, acompany can directly own a life insurance company as a subsidiary. In anotherscenario, a holding company can be established as a subsidiary and made to run
a life insurance company as a subsidiary of a subsidiary. An example of this canbe seen in Sony Group company (a parent company) Sony Financial Holdings(a subsidiary) and Sony Life Insurance (a subsidiary’s subsidiary).
174

In addition, there have been examples in recent years – like the Daido Life
Insurance Company, Taiyo Life Insurance Company, and Dai-ichi Life
Insurance Company – in which a life insurance company sets up a holding
company and arranges to become a subsidiary of this holding company (Figure
4).
Figure 4

Example of an operating company establishing an intermediateholding company downstream and example of multiple insurancecompanies establishing a holding company

General operatingcompany

Insurance holding
company

Insurance holding
company

Requires approval

Owns a life insurancecompany as a
subsidiary; only
manages operations

Requires approval

Owns a life insurancecompany as a
subsidiary; only
manages operations
Life insurancecompanyLife insurancecompanyLife insurancecompany

One of the advantages of establishing such a holding company is that if, forexample, a company wishes to make an overseas life insurance company into
one of its subsidiaries, the procurement of funds for acquiring this company canbe flexibly undertaken. Moreover, the target company is not made into a
subsidiary of a Japanese life insurance company; rather, it is made into a groupcompany of the same rank under the holding company.
However, you will often get a case in which there is only one major life
insurance company operating under an insurance holding company. In such acase, the task of reconciling differences between what the management of thelife insurance company intends and what the management of the insurance
holding company intends is a challenge. Thus, management executives
belonging to the insurance holding company sometime serve concurrently as
management executives for the major life insurance company.
The operations of the insurance holding company are limited to holding
insurance companies and other entities as subsidiaries and managing theiroperations.

Chapter 4 175

3 Subsidiaries
A life insurance company is restricted from engaging in other businesses.
While the direct undertaking of actions by life insurance companies themselves
has already been discussed in I above, it should be noted that regulations are also
imposed on the effective expansion of life insurance companies into otherbusinesses through subsidiaries.
An insurance company may not make a company other than a company listed
below a subsidiary:(i)Life insurance company; non-life insurance company; small-amount, shortterm insurance provider(ii) Bank, long-term credit bank(iii) Company specializing in fund transfers(iv) Company specializing in securities, company specializing in securities
intermediary services(v) Company specializing in trusts(vi) Foreign company engaged in the insurance business(vii) Foreign company engaged in the banking business, foreign company engaged
in the negotiable securities-related business, foreign company engaged in thetrust business(viii) Company exclusively engaged in a subordinate business or finance-related
business(ix) Company cultivating a new business field (venture business company)(x) Holding company whose subsidiaries consist only of companies coming under
any of (i) through (ix) above

A few characteristic points will be mentioned here. Amendments made to theInsurance Business Act in 1995 allowed for the entry of life and non-life
insurance companies into each other’s sector through subsidiaries (related to (i)and (vi)). In addition, amendments made in 1998 made it possible for life
insurance companies to expand into other domains of the financial industry,
namely the banking, securities, and trust sectors (related too (ii), (iv), (v), and(vii)). The fund transfer business in (iii) is a business that has recently come tobe permitted and consists of operations whereby ICT technologies are used toenable individuals to settle payments with one another.
The entry of life and non-life insurance companies into each other’s domain
in the financial industry involves entry by the main company or entry by a
subsidiary. In the case of entry by a subsidiary, any business failure by the176subsidiary will result in nothing more than the loss of the subsidiary’s capital(wherein the value of shares owned by the parent insurance company becomeszero). For this reason, it is believed that this approach limits risks more
effectively than entry by the main company.
A subordinate business in (viii) is one that involves the outsourcing of theadministrative work of a life insurance company itself. A company that engages
in a dependent business could be, for example, one that buys and sells goods
used for solicitation by sales agents (such as calendars and folding fans) or one
that undertakes the development and operations of a system for a life insurancecompany. While such a company would constitute a general operating company,
they are permitted since they can be owned as subsidiaries without taking on any
new risks.
There are regulations that require that a minimum percentage of revenue
earned by a dependent company is derived from a parent life insurance company
or a group insurance company.
A finance-related business in (viii) is permitted for life insurance companies,
including companies that engage in the solicitation of insurance or conduct
investigations of insurance incidents. More recently, the operations of daycare
centers and other such entities have come to be allowed in the interests ofsupporting dual-earner families.

Chapter 4 177

III. Ensuring financial soundness
A core element of the life insurance business is ensuring financial soundness.
In this section, I will explain the ways by which the financial soundness of life
insurance companies is ensured, including the method by which premiums areset, the accumulation of policy reserves, and regulations governing the solvency
margin ratio.

1 General discussion
With life insurance policies, premiums are normally paid in advance by thepolicyholder while insurance money to be paid by the life insurance company ispaid out at a later date. From the perspective of the policyholder, nothing is ofgreater importance than the eventual return of insurance money as paid
consideration.
In order to make certain that insurance money will be paid, it is importantthat the financial soundness of the life insurance company is ensured on an
ongoing basis.
Measures to ensure financial soundness in a manner that is specific to life
insurance companies generally comprise the following three pillars:(i) Accumulation of a standard policy reserve(ii) Regulations governing the solvency margin ratio(iii) Having an actuary verify the sufficiency of the policy reserve, fairness ofdividends, and continuity of management

Before I explain each of these in greater detail, allow me to provide an outline
in brief. First, a policy reserve is money set aside within a life insurance company
in anticipation of paying claims in the future, and is accumulated for the purposeof covering the normal range of insurance payments for which claims are made.
The standard policy reserve system regulates the level of the policy reserve tobe accumulated.
The solvency margin ratio is the ratio of a life insurance company’s money(which the company is not obligated to return to anyone else), which includes
capital and retained earnings, to the risks that are assumed by the life insurancecompany.
178

Thus, the solvency margin ratio indicates the extent to which money isavailable to cover “beyond normal” level events should they occur.
An actuary is an actuarial specialist that should be appointed by a life
insurance company to ensure financial soundness by confirming theappropriateness of actuarial calculations, including the calculation of premiums
charged by the life insurance company. A summary of these three pillars ispresented in Figure 5.
While I will begin by explaining matters related to standard policy reserves,
I should note that an understanding of the process by which life insurance
premiums are designed is first necessary to understand the system of policy
reserves. In this connection, I will start by first talking about the way premiums
are calculated.
Figure 5

3 pillars for confirming the financial soundness of a life
insurance company

Standard policy reserve system

Dealing with normally occurring risks

Regulations governing the solvency
margin ratio
Verification by an actuary

Dealing with beyond normal risks
Verification of the sufficiency of thepolicy reserve, the continuity ofmanagement, and more

2 Natural premiums and level premiums
Natural premium refers to a premium that is calculated in such a way that abreak-even state is achieved from year to year based on mortality rates by age.
Premium amounts are calculated based on the mortality rate at age 30 years for
an insured person who is 30 years old and the mortality rate at age 60 years for
an insured person who is 60 years old.
Generally, since the mortality rate rises with age, the natural premium also
rises in line with the mortality rate. The premium for a 60-year-old person ishigher than it is for a 30-year-old person. This is disadvantageous in that thepremium amount increases as a policyholder ages, which makes it increasingly
difficult to continue the policy.
With level premiums, the premium is calculated in such a way that a breakeven state is achieved over the entire insurance term – from the beginning to theend of the policy – with the same premium amount to be paid each time in order
Chapter 4 179

to encourage a continuation of the policy even into old age. (Figure 6.)
Figure 6

Natural premiums and level premiums
Natural premiums

Level premiums
PremiumAge(60 years old)

(30 years old)

Today, most life insurance products sold by life insurance companies are tied
to level premiums.
When the level-premium method is used, the amount of premiums notallocated to paying out death benefits in a given year will be accumulated tocover future payments of claims. The accumulated amount is the policy reserve(Figure 7). In the latter part of an insurance term, the difference between thegrowing natural premium amount and the level premium amount will bereversed.
Figure 7

Accumulating and drawing down a policy reserve

Accumulating thepolicy reserve

Drawing down thepolicy reserve

Natural premiums

Level premiums
Premium
Elapsed number of years (age)3 Net and additional premiums
The actual premium consists of a portion that is allocated to the payment ofclaims and a portion that is used to cover costs incurred by the life insurancecompany. The portion of paid-in premiums that will be allocated to the payment180

of insurance money in the current and subsequent fiscal years is known as net
premium. This net premium is generally calculated for death insurance based on
the expected mortality rate and the assumed interest rate. The expected mortality
rate is the rate at which it is assumed people will die when the insured is at agiven age.
In addition, reserves accumulated for the payment of claims in subsequentfiscal years are expected to earn a certain rate of return that is invested by thelife insurance company and that will help to reduce premium amounts going
forward. This yield is known as the assumed interest rate.
An additional premium is the portion of the premium that is used to cover
costs incurred by the life insurance company and is calculated based on the
expected business expense rate for which the extent to which expenses will be
incurred is estimated.
The sum of the net and additional premiums is the gross premium, whichconstitutes the premium that the policyholder will actually pay (Figure 8).
Figure 8

Net premium, additional premium, and gross premium
Gross premium

Net premium

Calculated based on the expectedmortality rate and assumed interest rate

Additional
premium

Allocated to cover insurancecompany expenses

Calculated based on the expectedbusiness expense rate

Payment of claims in the current fiscal year
Accumulated for the payment of claims in subsequent fiscal years

4 Accumulating a policy reserve
As explained above, a certain portion of paid premiums is accumulated in thefirst half of an insurance term. While the money accumulated from premium
payments is known as policy reserve, the level at which the policy reserve isaccumulated is determined based on the following two factors:(i) Accumulation method(ii) Basic computation rate

Chapter 4 181

(1) Accumulation method
First, there are, broadly speaking, two types of accumulation methods: theZillmerization method and net premium method.
There are two methods because the amount of the additional premium that isincluded in the premium amounts received each time and that is allocated to thelife insurance company’s expenses is the same throughout the premium payment
period. On the other hand, expenses pertaining to a life insurance premium arehigher in the first year of an insurance policy due to the costs of procedures forprocessing a new policy and the remuneration payable to the solicitor.
In other words, expenses are incurred by a life insurance company that cannot
be covered by the additional premium in the first year of a policy. However, thenet premium portion needs to be allocated to pay claims in the current year aswell as accumulated for the payment of claims in subsequent years. For thisreason, premium amounts in the first year of a policy are invariably insufficient(Figure 9).
Figure 9

Relationship between reserves and first-year expenses
and premiums (illustration)

Claims paid out in the current year and amountaccumulated for the payment of claims in
subsequent years

Net premiumFirst-year expenses

Additional
premium

Shortfall emerges

In the first year of a policy, amounts to cover necessary expenses areprocured from other sources and a policy reserve is built up in accordance withthe premium-calculation rules under what is known as the net premium method.
On the other hand, the Zillmerization method is a method that reduces thepolicy reserve by diverting part of the first year’s net premium to expenses thatare initially incurred. With the Zillmerization method, the initial shortfall in thereserve relative to what the rule mandates is eliminated through the accumulationof additional premium amounts over a five- or ten-year period (Figure 10 on thefollowing page).
The elimination of a shortfall in five years is referred to as five-year
Zillmerization and the elimination of a shortfall in ten years is referred to as tenyear Zillmerization.
182

Figure 10

Policy reserves under the net premium method and theZillmerization method (example of level-premium endowment
insurance policy)

Net premium method

Zillmerization method
Accumulated amount of policy reserve
Number ofyears elapsed(2) Basic computation rate
Next, the basic computation rate calculates the extent to which a policy
reserve must be built up now based on the assumed interest rate and expectedmortality rate as explained in the premium-calculation section above. When theassumed interest rate is high or the expected mortality rate is low, the policy
reserve can be low. Conversely, if the assumed interest rate is low or the
expected mortality rate is high, the policy reserve must be increased in amount.
The amended Insurance Business Act of 1995 introduced the standard policy
reserve system. Under the standard policy reserve system, a policy reserve mustbe accumulated with (i) the method of accumulating a policy reserve and (ii) thebasic computation rate being in accordance with the rules as set forth by thegovernment.
In other words, for a standard policy reserve, a standard level must be
accumulated after being set by the regulating authority from the standpoints ofmaintaining the soundness of the insurance company and protecting
policyholders, irrespective of the insurance premium level set by the insurancecompany.
In principle, the method of accumulation is the level net premium method.
However, the adoption of the five-year Zillmerization method is allowed forcompanies that have recently been established.
The other basic computation rate varies according to when the contract was
concluded.
In principle, the expected mortality rate is based on the 1996 life insurance
standard life table for policies concluded in or after April 1996, the 2007 life
Chapter 4 183

insurance standard life table for policies concluded in or after April 2007, andthe 2018 life insurance standard life table for policies concluded in or after April
2018.
The standard interest rate was reduced to 2.75% for policies concluded in orafter April 1996, 2.0% for policies concluded in or after April 1999, 1.5% forpolicies concluded in or after April 2001, 1.0% for policies concluded in or after
April 2013, and 0.25% for policies concluded in or after April 2017. Most
recently, they have been reduced to 0% for single-premium whole life insurance
policies in April 2020.
Planned basic rate of premiums and planned basic
rate of policy reserves

Column 22

Take a look at the figure below. It shows the extent to which the policy reserve isbuilt up when a single-premium endowment insurance policy is designed and soldwith an assumed interest rate of 4% on premiums at a time when the assumed
interest rate for the standard policy reserve (referred to as the standard interest rate)
is 3%.
Case in which a single-premium endowment insurance policy is designed with anassumed interest rate of 4% and the standard policy reserve builds up at a rate of 3%Standard interest rate of 3%
for the standard policy
reserve
Policy reserve for which the assumed
interest rate at the time the product isdesigned is 4%
Accumulated amountof policy reserve
Number ofyears elapsed

Since the assumed interest rate is 4% for the designing of this product, only
premium amounts based on the assumption that the reserve will be built up along
the dotted line will be paid (assumed interest rate is high → premium amounts fromthe policyholder are low). However, since the standard interest rate for the standard
policy reserve is 3%, an amount greater than the dotted line as indicated by the solidline in the graph needs to be accumulated.
In other words, since a high assumed interest rate for a product would mean thatyou can expect to invest at a high level for the future, you should be able tocorrespondingly lower the policy reserve to be built up and require lower premium
amounts to be paid.
184

However, if the standard interest rate for a standard policy reserve is low asshown in the figure, the low premium amounts must be invested to the fullest extent
possible to somehow build up the reserve to the standard policy reserve amount. If
the expected investment results are not achieved and the amount actually
accumulated falls short of the standard policy reserve amount, the company willneed to secure funds from somewhere to accumulate what is required.
Thus, while it is possible to set premium amounts at a higher interest rate than
the standard interest rate for the standard policy reserve, significant management
issues could arise if there is a failure to achieve a high level of investment
performance.

Basic profits and dividends

Column 23

As described to this point in the text, premiums are calculated based on theassumed interest rate, expected mortality rate, expected business expense rate, andother factors and built up into a policy reserve to cover future claims payments.
Even if the required reserve is built up, such as where investment performanceis favorable enough to generate a return greater than the assumed interest rate(known as interest gain), where deaths do not occur as much as what is reflected in
the expected mortality rate (known as mortality gain), or where business expenses
incurred by the insurance company are not as great as what is reflected in the
expected business expense rate (known as expense savings), a surplus may still
result.
I will spare you the details, but the sum of these different surplus amounts iscalled basic profit. It is conceptually similar to operating profits earned by general
operating companies. Since basic profit does not include capital gains and losses(such as valuation gains or losses on shares), it is used to evaluate the performanceof a life insurance company as an indicator of a life insurance company’s pureearnings.
Where a surplus is generated, a dividend will be paid to policyholders of
insurance policies with policyholder (employee) dividends.
After the collapse of the bubble economy, life insurance companies struggled toinvest policy reserves for policies with high assumed interest rates that werepromised during the bubble economy. A negative spread refers to negative
investment yields caused by an inability to generate investment earnings exceedingassumed interest rates (known as interest loss).
In recent years, it is believed that the problem of negative spread has beenmostly eliminated with the disappearance of policies from the bubble era.

Chapter 4 185

5 Solvency margin ratio
The solvency margin ratio is a measure of the solvency of a life insurancecompany in the event that a large-scale disaster or financial market crash occurs.
Whereas normal risks are covered by the standard policy reserve, thesolvency margin ratio is intended to ensure an ability to cope with the occurrenceof risks exceeding normal levels.
For example, a bank is subject to regulations that require it to meet a certain
ratio of owned capital to total assets that depends on the scope of its operations;this ratio is known as the capital adequacy ratio. The solvency margin ratio is
the insurance industry’s version of this measure.
The formula for calculating the solvency margin ratio is as shown in Figure
11.
Figure 11

Solvency margin ratio

200 % ≤

Solvency margin
Risk amount × 1/2

The solvency margin ratio is, simply put, a ratio that indicates the extent towhich the life insurance company’s own money for covering risks is sufficient
to cover risks.
The risks in the denominator of the formula include insurance risks, assumed
interest rate risks, asset management risks, and operational management risks,
the amount of each of which is calculated according to a certain formula. The
sum of these risk amounts is called the capital requirement.
The solvency margin, which is the numerator in the formula, equals the net
assets of the life insurance company (assets minus liabilities) minus theappropriation of retained earnings plus the life insurance company’s own
reserves, such as a reserve for price fluctuations. The solvency margin ratio is ameasure of the extent to which solvency has been built up relative to the capitalrequirement.
If you look at the formula in Figure 11, you will see that the risk amount in
the denominator is multiplied by 1/2 (in other words, the numerator, which
represents the solvency margin, is doubled), such that if the solvency margin
ratio exceeds 200%, it will mean that the life insurance company is capable of186sufficiently covering the occurrence of greater-than-normal risks with its own
funds.
If the solvency margin ratio falls below a certain level, the life insurancecompany would be subject to an early-warning system that is designed to enable
the supervisory authority to require management improvement.
If the solvency margin ratio falls below 200%, an operational improvement
order for improved profitability and an improved method of coping with various
types of risks will be issued by the supervisory authority. A more severe
improvement order will be issued if the solvency margin ratio falls below 100%and the company will be ordered to suspend operations if the solvency margin
ratio falls below 0%.
In 2025, the current regulations will be revised and regulations for an
economic value-based solvency margin ratio are slated to be introduced. Under
regulations for an economic value-based solvency margin ratio, the ratio will becalculated after revaluating both the assets and liabilities of the life insurancecompany based on the interest rate level in effect at the time of valuation andother values that can be measured at that time.

6 Actuary
Actuarial functions by which premiums and policy reserves are calculated
are exceedingly important for an insurance company. Thus, the Insurance
Business Act stipulates that “an insurance company… must appoint a
responsible actuary to take part in the… actuarial particulars involving, among
others, the method of calculating insurance premiums and method of calculating
policy reserves.” The duties of an actuary are to check (i) through (iii) below andsubmit a written opinion in which the results of this process are stated to theboard of directors:(i) Sufficient policy reserves have been built up to cover future claims paymentsfrom the standpoint of the soundness of the insurance company;(ii) The distribution of policyholder dividends and surplus funds is done in a fair andequitable manner;(iii) The insurance company can continue to operate.

An actuary is required to meet several conditions, among which are that heor she must be a full-fledged member of the Institute of Actuaries of Japan andthat he or she must have engaged in actuarial duties for at least five years at an
Chapter 4 187

insurance company. In these ways, an actuary is required to possess specialized
knowledge and a wealth of professional experience.

Actuaries

Column 24

An actuary is a full-fledged member of the Institute of Actuaries of Japan. The
emergence of actuaries can be traced back to the emergence in the United Kingdom
of insurance policies for which premiums were set forth according to the age of theenrollee and the number of years of enrolment. The design of such insurance
requires the calculation of premiums and reserves based on the theory of probability
and statistics. Those who were involved in making such calculations can be regarded
as the first actuaries.
To become an actuary these days in Japan requires that you pass an examinationin five basic subjects and two specialized subjects (from among a life insurance
course, non-life insurance course, and pension course). Examinations are held oncea year and are normally sat while the test-taker is working for a life insurancecompany. Some people take their first examination while still enrolled at a university.
An actuary does not just help design life insurance products and engage in duties
related to actuarial matters for a life insurance company. They are also active acrossa wide range of different areas, including planning and corporate sales. A university
student who is majoring in science and who wishes to work in the insurance industry
might want to consider becoming an actuary as an option.

7 ERM
These days, life insurance companies are required to develop an enterpriserisk management (ERM) system to undertake what is known as company-widerisk management or integrated risk management.
Risk management to date had been carried out from the perspective of
avoiding and controlling risk but ERM thinking aims to increase the value of thecompany in accordance with a policy of proactively taking certain risks. In otherwords, risks are not meant to be simply avoided or controlled under an ERM
system. Instead, a company should strike a proper balance based on its own
capital in order to obtain a return. (Figure 12 on the following page)
In an ERM system, risk management and management strategies areformulated on an integrated basis. Internal controls, corporate governance, or
routine operational policies are also formulated based on a risk management
policy. Officers and employees are required to make operational decisions and188carry out executive functions as risk managers.
Figure 12

Conceptual diagram depicting an ERM system
Risks

Balancing risk-taking and profitability

Balancing profitability andown capital

Returns

Balancing risk-taking andown capital

Own capital

Source: Excerpted from “Summary of ERM evaluation results based on a report concerning selfassessments of risk and solvency in insurance companies (ORSA Report) and hearings onenterprise risk management (ERM) systems”, Financial Services Agency (September 15, 2014)

Risks should be rendered visible, and the state of their occurrence need to bereported.
Specific elements of ERM are listed in the Comprehensive Supervisory
Guidelines for Interpreting Insurance, as set forth by the Financial Services
Agency, and include the following:
Elements of integrated risk management (ERM)
・Risk identification and profiles
・Operational continuity preparedness
・Risk measurements
・Comprehensive management of assets and liabilities
・Enactment of a risk management policy
・System for managing underwriting risks
・Self-assessment of risks and solvency
・Risk management for reinsurance
・Group-based integrated risk management
・System for managing liquidity risks
・Reporting system
・System for managing operational risks

Chapter 4 189

IV. Underwriting operations
In this section, I will be talking about underwriting operations, one of the
major pillars of the main business of a life insurance company. These operations
consist of the development of products to be underwritten, underwriting,preservation functions, and the payment of claims.

1 Planning and designing insurance(1) Law and principles underlying the design of insurance products
As explained in Chapter 1-III, life insurance products are based on the law oflarge numbers, the principle of equivalence between proceeds and disbursements,
and the individual equivalence principle. Allow me to briefly review theseconcepts.
First, there is the law of large numbers, which can be explained by talking
about dice. If you were to roll a die enough times, the probability of rolling agiven number will approach one in six. When it comes to the death of individuals,
you can likewise determine probabilistically how many people in a large cohortof persons in the same age bracket will die in a one-year period. A life table(mortality table) outlines the results of efforts to ascertain these values. You canlook up a life table to see what the mortality rate is by sex and for a specific age.
Premiums needed to pay claims are determined in accordance with theprinciple of equivalence between proceeds and disbursements. In other words,
premiums to be paid are set so that they are equivalent to the total amount ofclaims to be paid by a life insurance company.
Finally, the extent to which an individual policyholder shall pay premiums isdetermined in accordance with the individual equivalence principle. In otherwords, premiums that are in accordance with the degree of risk corresponding to
the policyholder (the insured in the context of a life insurance policy) should be
levied.
(2) Statement of the calculation of the basic computation rate,insurance premium, and policy reserve
As touched on in III above, a policyholder pays a gross premium, which isthe sum of the net premium, as calculated according to the assumed interest rateand expected mortality rate for a life insurance policy, and the additional190

premium, as calculated according to the expected business expense rate. In
calculating the net premium for a low surrender value-type policy for which thesurrender value has been reduced, a life insurance company might also calculate
the expected surrender rate.
Any calculation of the net premium or accumulation of a policy reserve
requires the approval of the Prime Minister at the time a calculation or change ismade.

(3) Policy provisions
As also touched on in Chapter 2, documents stating promises made between
a life insurance company and a policyholder are known as policy provisions.
Major clauses in these policy provisions set forth the types of cases in whichclaims will be paid, the point in time from which responsibility for the provisionsof coverage will be assumed, how premiums should be paid, what will happen
if there is a failure to pay premium amounts, how a claim should be made in theevent of a death or other event for which a claim will be paid, and the types ofcases in which a claim will not be paid.
Policy provisions need to be approved. As stated in Chapter 3, they also need
to be issued to the policyholder before an application for a policy is made.
(4) Statement of business proceduresFor the specific method by which
an insurance policy is to be handled, such as in terms of the age from whicha policy can be taken out, a legal document known as a Statement of businessprocedures needs to be drafted and approved. This plan should include theage at which someone can enroll, the method by which the consent of theinsured shall be obtained, and the method by which the surrender value is tobe calculated and disclosed.
Any change to a statement of business procedures likewise requires approval.

Basic documents

Column 25

As indicated in this book, insurance oversight in Japan involves looking into andsupervising the business of life insurance companies in detail. One aspect of this is
the approval of basic documents, which consist of the following four types of
documents:(i) An insurance company’s articles of association(ii) Statement of business procedures
Chapter 4 191

(iii) Policy provisions(iv) The statement of methodology for making premium and policy reserve
calculations
The articles of association constitute the most fundamental document for a life
insurance company, one that sets forth the purpose of the company and its
organizational structure, among other points. A company needs to be registeredwhen it is established as a company. The other basic documents listed herein havebeen explained previously in this book. The approval of the Prime Minister is needed
whenever these documents are produced or revised.

(5) Summary of the planning and development of insurance
In developing an insurance product, an insurance company will, as would
anyone in any other business, conduct a market survey to, in part, determine theextent to which there is demand for the intended product. Since the marketing ofa product would incur costs, the insurance company will need to determine
whether the product can cover these costs and still generate an appropriate levelof profit. The insurance company will also be called upon to figure out whichcustomer groups to target, the way marketing activities should be carried out,
what the market environment is like, and what trends pertaining to othercompanies can be considered pertinent.
While the framework of a product is put together in this way, actuarial designand legal design work will be carried out. Such work will need to be granted
government approval as stated above.
In addition, a system for managing the conclusion of insurance contracts,
preservation functions, and payments will need to be developed. Application
forms, solicitation materials, and other documents for the selling of insurance
will also need to be produced.
Furthermore, it is important that insurance solicitors be educated. Since sales
agents are staff members belonging to a life insurance company, sales
departments and branch offices organize educational courses. In some cases, theemployees of an independent agency are educated when an employee of a life
insurance company is dispatched to the independent agency or bank for thispurpose. In other cases, an employee in charge of education at an agency
receives information from a life insurance company and uses it to educate fellow
employees.
In this way, cross-departmental work is performed until a new insurance
product is released for sale.
192

2 New insurance underwriting operations(1) Risk selection
Life insurance will not be made available for everyone who applies for it.
Given that life insurance brings together many people with similar risk profiles,
coverage is provided by receiving premiums according to the level of risk
associated with a given person in such terms as age and health condition.
Someone with a medical history and a higher level of risk than healthy people
can sometimes receive coverage for what is known as a special premium, which
is a higher premium than what might be charged to a healthy individual. A
company may also be able to underwrite a policy for a person with an illness
affecting a specific part of his or her body by withholding coverage for just the
specific body part in question. If the risk level for an individual is too high giventhat he or she is currently in the hospital or has just been treated for cancer, hisor her application for life insurance will be rejected.
The process by which the risk level associated with a policyholder or insured
is assessed in order to determine whether or not insurance can be underwritten
for that individual, such as by way of considering his or her health condition andoccupation, is known as risk selection. This is derived from the individual
equivalence principle as described earlier in Chapter 1-III.
As explained in Chapter 2-II, the attempt by a person associated with a highlevel of risk, such as where an illness has been diagnosed in the course of a
medical checkup, to take out life insurance is known as an adverse selection or
moral risk. A life insurance company conducts underwriting assessments inorder to prevent such moral risks and otherwise for risk selection purposes.

Handling genetic information

Column 26

In recent years, services that analyze genetic information just by sending saliva
samples have been launched to make it possible to know, to some extent, what
diseases you are susceptible to contracting at some point in the future if you wish.
Whether a life insurance company can demand to be informed of such genetic
information when it is in the possession of a policyholder or insured is an open
question.
Taking out life insurance after you find out that you are susceptible to contracting
a specific illness is arguably an example of an adverse selection. On the other hand,
genetic information also constitutes sensitive information that could lead todiscrimination.
Chapter 4 193

Some jurisdictions abroad ban the use of genetic information or allow for its
disclosure to be requested in limited cases.
Presently, life insurance companies in Japan do not ask to be informed of genetic
information but I believe that it will become necessary to determine what should bedone when the acquisition of genetic information becomes commonplace.

(2) Disclosure of information
Comprising a core element of the risk selection process is the disclosure of
information by the insured. See Chapter 2-II to review details concerning this
topic. The disclosure of information requires the provisions by the insured ofaccurate answers to questions concerning important matters as asked by the
insurance company.
A policy shall be canceled by the insurance company if the insured
deliberately fails to disclose a matter that should be disclosed or that the insured,with minimal thought, should have known is required to be disclosed. In addition,
no claim will be paid if the insured dies for the same reason as a matter that heor she failed to disclose.
(3) Risk assessments
A life insurance company will determine whether or not to underwrite apolicy and the conditions under which it would be underwritten after it checks
the contents of the disclosure form and other pertinent documents and, forexample, assigns a score to the level of risk associated with the insured.
If a policy is to be underwritten with conditions, a contract incorporating theconditions imposed by the company is not simply concluded accordingly.
Instead, conditions imposed need to be accepted by the policyholder. Even if
relevant matters emerge from disclosed information, it does not necessarilymean that conditions will be imposed or that the application will be declined. In
some cases, a policy may be underwritten without conditions if the level of risk
is low or without conditions by having the insured undergo an additional healthcheckup.
(4) Underwriting decision
If a life insurance company conducts an assessment and decides that it canunderwrite a policy and the policyholder agrees to any and all conditions that are
imposed in the case of a conditional decision, a decision will be made to194underwrite the policy as an internal decision of the life insurance company. If adecision to underwrite is made, a notice of acceptance and insurance certificate
will be sent to the policyholder.
Incidentally, from what point in time is a life insurance company liable? For
example, what would happen if the insured were to die after the application anddisclosure forms are sent but before the application has been accepted by the life
insurance company?
Historically, if an insurance application form, disclosure form, and amountequivalent to the first premium payment were all received by a life insurancecompany, the application was such that it could be accepted by the life insurancecompany, and an event for which a claim payment can be made, such as a death,
were to occur prior to approval, the life insurance company would be required
to pay insurance money. Thus, if, for example, a healthy person submitted an
application, disclosed pertinent information, and paid an amount equivalent to
the first premium payment owed before dying in an automobile accident, a death
benefit would be paid.
These days, there are cases in which, in line with the development of cashlesstransactions, a life insurance company would be required to pay insurancemoney even if an amount equivalent to the first premium payment has not yet
been remitted as long as the life insurance company has received an insurance
application form and disclosure form and is able to accept the application (seeFigure 13).
Figure 13

Commencement of liability (in normally conceivable cases)

Conventional scenario
Application Disclosure

Payment of amount equivalent to
the first premium amount

Decision to accept

Notice ofacceptanceContract isconcluded

Policy liability commences

Cashless scenario
Application Disclosure

Credit cardis used

Policy liability commences

Decision to accept

Notice ofacceptance

Credit transfer

Contract is concluded

Chapter 4 195

3 Operations of an insurance company while a policy is in effect(1) Management of the collection of premium amounts
The most important operation of a life insurance company after an insurance
contract has been concluded is the collection of premium amounts, the paymentof which enables a policy to be continued in force.
The continuation of a policy in force means that insurance money will, in thecase of life insurance, be paid if the insured dies at a time when the policy is inforce.These days, premiums are paid on a one-time basis for savings-type
products but on a monthly basis for products designed to provide coverage. The
monthly payment method requires the payment of premium amounts each month.
In the context of the practices carried out by an ordinary life insurancecompany, a policy will cease to be valid after a defined grace period if premium
amounts fail to be paid by the policyholder. This is known as the lapsing of apolicy.
If the current month’s premium amount for a life insurance policy for which
premiums are paid monthly is not paid and payment continues to be withheld foranother full month, the policy will lapse. A life insurance company will send out
notices of payment and inform the policyholder that, if no payment is received,no claim will be paid even if a death or other claim event occurs after the policy
lapses.

Automatic premium loan

Column 27

There is a system whereby, when a policy has already been in continuous force
for a long period of time and a sufficient amount has been accumulated, thepolicyholder can be automatically lent the premium amount owing from theaccumulated funds even if premiums are not paid. This is known as an automatic
premium loan.
This system prevents the policyholder from being cut off from coverage due to atemporary shortage of funds. Because a loan is involved, it will be subject to a rateof interest as set forth in advance in the policy provisions.
Such a loan can be repaid at any time. On the other hand, if the transfer period
is extended and the upper limit on funds that can be transferred is reached, thepolicy will lapse.
The automatic premium loan option is not offered by some life insurancecompanies or for certain products these days.

196

However, a policy can generally be reinstated if a request for reinstatement
and the premium amounts for the period of the lapse are submitted to the life
insurance company within a certain period of time (such as three years) after thepolicy lapses. There are cases in which, because the policyholder enrolled in alife insurance plan at a young age, it would be more favorable to him or her to
use the reinstatement option rather than enroll in a separate brand-new policy.
What should be noted here is that information will need to be disclosed again
at the time of reinstatement, such that, if the insured had been hospitalized during
the lapse period, the life insurance company may refuse to accommodate therequest for reinstatement.

(2) Policyholder loans
A policyholder sometimes needs funds while he or she is enrolled in an
insurance plan. If the plan consists of a savings-type insurance policy, cancelingthe policy before the expiration of its term will result in the payment of asurrender value to the policyholder. However, cancelation of an insurance policy
will also result in the cessation of coverage. Even if the policyholder were toattempt to once again take out insurance after the restoration of his or her
financial wherewithal, it is possible that he or she would be unable to do so if
his or her health has deteriorated in the meantime. In addition, as the age ofenrollment would have increased, premiums would normally have gone up overwhat was being paid under the previous policy.
In this connection, life insurance companies offer loans to policyholders who
have taken out certain savings-type insurance policies by using the accumulated
portion of premiums received as collateral. Policyholder loans thus enable
policyholders to obtain necessary funds without losing coverage.
A policyholder loan is subject to the accrual of interest costs. While the loan
principal and interest amounts can be repaid at any time, any claim to be paid
will be paid net of any outstanding loan and interest payments owing.
(3) Policy verification activities
An important activity undertaken by life insurance companies is the annual
process by which policy contents are checked. For this process, sales agents andothers visit the home of each client, re-explain the contents of policies currently
in effect, and confirm that the insured has not been hospitalized or undergone asurgical operation and that no event for which a claim can be made has otherwise
Chapter 4 197

occurred over the last year.
This is an opportunity for the policyholder to review his or her current policy
to see if coverage is deemed to be insufficient or if some aspects of coverage are
redundant.

Payment problems

Column 28

Policy verification activities came to be carried out in response to payment
problems in the life insurance industry. Up until then, regular visits to existing clients
had been undertaken. Now, the reconfirmation of policy contents and theconfirmation of whether or not the insured has been hospitalized or undergone asurgical operation for which a claim would be paid are seen as important activities.
The payment problem initially occurred when insurance companies went too far
in rejecting claims by using the provisions of policy provisions to justify non-payment.
However, further investigations in certain cases revealed that there might have been
another reason for paying a benefit other than the benefit for which a claim wasmade (for example, the name of a surgical operation was written on a medical
certificate attached to a claim form for hospitalization benefits, such that a surgicalbenefit was payable) and, despite the fact that this was written on the medical
certificate, no payment was made.
While the inability to pay a benefit for which no claim has been made isunavoidable, it is possible to encourage a policyholder to make a claim if a medical
certificate can be checked for confirmation purposes. The existence of this problem
was what led to such actions.

(4) Policy cancelation
If a policyholder believes that a policy is no longer needed or cannot be
continued, he or she can cancel the policy at any time. For a policy for which
premiums are paid monthly, premium amounts corresponding to the period up
to the end of the month of cancelation will be collected. In other words, if you
have already paid for the current month, no refund for premiums corresponding
to the rest of the current month will be received.
With a policy that has a savings component, a surrender value will be paid.
With a coverage-providing policy, the provisions of death coverage and otherguarantees means that the amount of the surrender value will normally be lessthan the sum of premium amounts paid to date. Also, cancelation will result in
the provisions of no subsequent coverage. For these reasons, a life insurance198company will offer advice to make it possible to continue a policy, such as by
reducing benefit amounts, reducing premiums, or extending a policyholder loan
if funds are temporarily needed by the policyholder.
What should be kept in mind is that there may be variable annuity insurance
plans and other such options that can be purchased. These products are
sometimes sold by highlighting the fact that they offer a minimum guarantee;
for example, the total annuity amount will never fall below the total amount ofpremiums paid provided that such a product is continued until the annuity
premium payments are completed. Even for such products, cancelation of thepolicy before it expires will render invalid any minimum guarantee that may
have been promised, such that the money you get back could fall far short of thetotal premiums paid if market prices were to fall.

4 Paying claims(1) Handling claims
In order to make a claim for a death benefit, you will need to submit the deathcertificate and certificate of residence of the insured, an extract from the family
register of the beneficiary, and other documents along with the insurancecompany’s prescribed claim form. For a normal death insurance policy, the merefact of death is sufficient to have the benefit paid. However, if there are grounds
for nonpayment, the life insurance company will refuse to pay after looking into
the matter. The process by which this investigation is conducted and a decision
is made to accept or refuse payment is known as a payment assessment.
One reason for refusing to pay is a breach of the duty to disclose at the timeof enrolment. If there is a connection between the matter that was not disclosed
or matter that was inaccurately disclosed and the cause of death, no benefit will
be paid. In addition, no claim will be paid if the insured commits suicide within
three years of enrolment or where a serious event occurs. See Chapter 2-II for
an explanation of these points.
(2) Payment deadline
The deadline for the payment of a claim is normally five business days after
the claim form is received by the insurance company in the event that noinvestigation is necessary. In addition, policy provisions also stipulate that aclaim should, in principle, be paid within forty-five days even in the event thatan investigation is needed to determine whether payment can be made following
Chapter 4 199

a breach of the duty to disclose or the cancelation of the policy due to a serious
event.
Policy provisions also state that payment shall be made within 180 days
where the death of the insured is investigated as a criminal matter.
In principle, insurance money is paid with interest for any delay in payment
beyond the deadline for payment.

200

V. Asset management system
Along with underwriting, asset management is another pillar of the businessof life insurance companies. In this section, I will explain matters related to thesystem of asset management.

1 Why are asset-management operations necessary?
As explained earlier, a modern life insurance company that is using the level
premiums method needs to accumulate a policy reserve in anticipation of paying
future claims. Premiums are set forth on the assumption that the assets
comprising the policy reserve are invested at a certain rate of interest. For thisreason, a failure to invest assets at an assumed rate of interest will render it
impossible to pay future claims.
In addition, if investments yield greater earnings than expected with theassumed interest rate for a policy that pays out dividends whenever investment
performance is good, then a dividend can be paid out to the policyholder (Figure
14).
It is for these reasons that asset management is undertaken.

Figure 14

Asset management by insurance companies

Policyholders

Insurance company
Premiums

Dividends

Investments

Adding to
the policy
reserve

Investment targets• Negotiable securities• Loans• Real estate• Deposits and savings

Earnings

2 An insurance company’s stance on investment
A life insurance company will manage assets upon taking into account safety,
profitability, liquidity, and the public interest. Asset management is undertaken
by a life insurance company in order to pay future claims. For this reason,
Chapter 4 201

investments with inappropriately high levels of risk should not be made. Yet,simply placing assets in a deposit account to generate sufficient investment
earnings is problematic as profitability needs to be ensured. In addition, liquidity
must also be achieved by ensuring that a portion of assets is invested in cash
equivalents and short-term maturing assets as a way to prepare for claims thatwill be made.
Finally, investments should be consistent with the public interest and are
expected to contribute to society and industrial development. In this connection,
the concept of ESG investments has emerged in recent years.
I will talk about ESG investments in Chapter 5-II.

3 Investment management system
The investment asset structure of a life insurance company is called aportfolio. When making investments, you need to consider risks and returns inlight of the characteristics of the liabilities - in other words, the policy reserves– and determine how investments shall be made accordingly. Returns consist of
the interest and dividends earned on an investment in an investment target aswell as any gains obtained from an increase in the value of the investment target.
As stated at the beginning of this book, risk is the increase or decrease in theactual return relative to the expected return. While a situation in which the actual
return is greater than the expected return is also referred to as risk, risk mainlyrefers to a situation in which there is a failure to attain the expected return (Figure
15: reproduction of Figure 1 from Chapter 1).
Figure 15

Risks associated with and returns on investment instruments(reproduced)
Variability of return= riskHigh
ReturnAverage value of return(expected outcome)
Low

Low

202

Risk

High

Generally speaking, investment targets with low levels of return and risk
include savings accounts and national government bonds. Likewise, foreign
shares are, generally speaking, an example of an investment target with highlevels of return and risk.

Asset/liability management (ALM)

Column 29

One of the concepts underlying the investment strategy followed by life
insurance companies is ALM. This involves asset management based on liability-side
characteristics with a focus on investment periods and returns that match thesecharacteristics.
The liabilities of a life insurance company consist of reserves for life insurance
policies – in other words, policy reserves. Assumed interest rates and fixed terms areset forth for life insurance policies included in a policy reserve. Assets should be
invested to ensure that assumed interest rates and terms match (see the figure).
Illustration of ALM
Life insurance company

AssetsLiabilities

Varioustypes ofinvestment
assetsPrimarily
consists ofthe policy
reserve
Average assumed
interest rate
Average time to maturity

Average interest yield
Average time tomaturity

Manage in a compatible manner

However, given that there are life insurance policies, such as whole-life insurance
policies, with long residual terms as well as some past life insurance policies that have
had high assumed rates of interests, ALM is not, in a nutshell, something that is easy
to implement.

A life insurance company determines what investments it shall make bytaking into account premium income as well as disbursements for insurance
Chapter 4 203

claims and business expenses each year. The section carrying out a distributionof assets or the board of directors will decide on the amount to be invested andthe investment term for each asset. The section in charge of each investment
asset will then decide on specific investment targets, such as shares or bonds tied
to a certain company and the amount to be invested.

4 Investment review system
The internal system of investment is one that includes a section that actually
makes investment decisions (front office) and a section that engages in trading
activities and administrative affairs (back office). In addition, there is also a
section tasked with managing investment risks (middle office).
The middle office examines the credit risks (such as the risk that theinvestment target will be unable to pay interest) and market risks (such as therisk that the share price will fall) associated with each investment target.
If a loan is made, the company’s financial situation will be examined toassess the ability of the company to repay the loan. A given section will examine
creditworthiness for loans while a different section will examine theappropriateness of investing in marketable investment products, such as sharesand company bonds. This is done since there is a possibility that the loans
department will have access to inside information concerning the borrower;
trading market assets like shares based on certain inside information that has not
yet been publicly disclosed is banned under the Financial Instruments andExchange Act.
5 General accounts and special accounts
Assets deposited with a life insurance company by policyholders are invested
in a general account or special account. A general account is meant for the assetsof all common insurance products and is an account for investing the assets of
insurance products for which a certain assumed rate of interest has beenguaranteed to the policyholder.
The other type of account consists of a special account, which is an accountfor investing the assets of insurance products for which insurance money, thesurrender value to be paid, and other amounts are variable in accordance withinvestment performance.
For example, a variable annuity insurance plan is insurance for which theannuity amount and surrender value fluctuate depending on investment
204

performance. The pension resources of policyholders are invested through aspecial account.
In addition, the assets of company pensions with special account riders are
likewise invested through a special account.
For most variable annuity insurance plans, assets are invested into investment
trusts that are managed as special accounts. In other words, the portion ofpremiums paid by a policyholder that is allocated to resources for the paymentof an annuity will be invested into investment trusts selected by the policyholder.
Generally speaking, several types of investment trusts that vary according toinvestment target will be made available; examples include an investment trust
for investing in Japanese shares, an investment trust for investing in Japanesebonds, an investment trust for investing in overseas shares, and an investment
trust for investing in overseas bonds. A policyholder will select an investment
trust from among these options for the investment of his or her own pension
resource. After an investment commences, a policyholder can switch special
accounts (investment trusts) at his or her own discretion while keeping an eye
on trends in the economy and in financial markets.

Chapter 4 205

VI. Investment assets
In this section, I will explain what is entailed by asset management practices
carried out by life insurance companies, including with respect to assets subject
to investment.

1 Total assets
Figure 16 shows changes in the total assets of all life insurance companies
over the last ten years. Figure 17 on the following page states changes in theratio of investment assets to total assets over the same time period. These figures
include figures for Japan Post Insurance, which was privatized in 2007.
In looking at these changes over a ten-year period, we see that the amount of
total assets steadily increased each year with the exception of fiscal year 2015.
Over the course of this ten-year period, total assets rose by approximately 70
trillion yen.
In terms of the percentage of total assets, negotiable securities accounted for
77.3% of total assets in fiscal year 2010; this figure increased to 81.9% in fiscal
year 2019.
Figure 16

Total assets of all life insurance companies and balances by typeof investment asset(unit: x 100 million yen)
Cash anddeposits

TangibleCall Monetary Negotiable
fixed
Other
loans trusts securities Loans assets

Total
assets

FY 201056,559 20,096

20,711 2,479,809 438,771 67,729 123,232

3,206,911

FY 201135,155 25,093

20,144 2,575,603 421,738 66,011 125,782

3,629,538

FY 201235,749 27,668

20,599 2,782,448 402,446 64,600 116,468

3,449,981

FY 2013

44,167 26,697

24,591 2,850,317 380,992 63,199 115,860

3,505,826

FY 201456,080 36,729

33,325 2,994,295 368,103 63,294 120,723

3,672,552

FY 2015

74,584 12,809

37,013 3,005,235 349,869 62,504 129,663

3,671,678

FY 2016

75,349 12,010

45,438 3,097,144 340,714 61,243 123,141

3,755,051

FY 201780,295 15,941

55,907 3,137,466 329,731 60,929 132,478

3,812,751

FY 2018

89,949 16,549

61,714 3,203,095 318,785 61,560 126,290

3,877,945

FY 2019

105,322 21,087

69,991 3,218,383 301,986 61,623 148,956

3,927,350

Source: “2020 Life Insurance Trends”, The Life Insurance Association of Japan

206

Figure 17

Percentage of the total assets of all life insurance companies
accounted for by each type of investment asset(unit: %)Cash anddeposits

Call Monetary Negotiable
Loans
loans
trusts securities

Tangible
fixed
assets

Other

Total
assets

FY 2010

1.8

0.6

0.6

77.3

13.7

2.1

3.8

100.0

FY 2011

1.1

0.8

0.6

78.8

12.9

2.0

3.8

100.0

FY 2012

1.0

0.8

0.6

80.7

11.7

1.9

3.4

100.0

FY 2013

1.3

0.8

0.7

81.3

10.9

1.8

3.3

100.0

FY 2014

1.5

1.0

0.9

81.5

10.0

1.7

3.3

100.0

FY 2015

2.0

0.3

1.0

81.8

9.5

1.7

3.5

100.0

FY 2016

2.0

0.3

1.2

82.5

9.1

1.6

3.3

100.0

FY 2017

2.1

0.4

1.5

82.3

8.6

1.6

3.5

100.0

FY 2018

2.3

0.4

1.6

82.6

8.2

1.6

3.3

100.0

FY 2019

2.7

0.5

1.8

81.9

7.7

1.6

3.8

100.0

Source: Same as for Figure 16 hereof.

On the other hand, loans, which traditionally constituted a pillar of asset
management, went from accounting for 13.7% of total assets to 7.7%.
Moreover, life insurance companies might be associated with blue-chipbuildings located in front of train stations but tangible fixed assets, including realestate, have fallen to account for a mere 1.6% of total assets.

2 Negotiable securities
Let us take a look at a breakdown of negotiable securities, which account forover 80% of the total assets of life insurance companies.
(1) Public and company bonds
Figure 18 on the following page reveals that national government bonds are
the most common type of negotiable securities and account for nearly half of thetotal. A national government bond is a bond certificate that is issued by the state
and that pays interest and principal. Interest is paid semiannually while theprincipal is redeemed at maturity. However, only discount national government
bonds are issued at a price that is below face value and are redeemed at facevalue at maturity without any payment of interest made prior to maturity.
Chapter 4 207

Figure 18

Breakdown of negotiable securities of all life insurancecompanies(Unit: x 100 million yen)
National
Local government
government bonds
bonds
AmountCompoComposition Amount sition
ratio
ratio

Company bonds

Company shares

AmountComposition
ratio

AmountComposition
ratio

FY 2010

1,323,987

53.4

119,1644.8

252,835

10.2

162,149

6.5

FY 2011

1,412,757

54.9

131,630

5.1

253,4299.8

147,444

5.7

FY 20121,487,692

53.5

139,3465.0

251,5519.0

167,256

6.0

FY 2013

1,498,157

52.6

140,0894.9

248,959

8.7

180,209

6.3

FY 2014

1,487,617

49.7

138,686

5.0

248,5539.0

226,979

8.0

FY 2015

1,485,684

49.4

135,178

4.5

253,634

8.4

198,130

6.6

FY 2016

1,485,538

48.0

129,8214.2

258,2428.3

215,146

6.9

FY 2017

1,473,650

47.0

120,8173.9

261,876

8.3

231,820

7.4

FY 2018

1,482,230

46.3

109,400

3.4

271,0828.5

217,827

6.8

FY 2019

1,512,024

47.0

101,3423.1

283,830

8.8

187,661

5.8(Unit: x 100 million yen)
Foreign securities
AmountOther securities

Total

CompoComposition Amount sition
ratio
ratio

AmountFY 2010457,384

18.4

164,2886.6

2,479,809

FY 2011469,26718.2

161,074

6.3

2,575,603

FY 2012559,864

20.1

176,735

6.4

2,782,448

FY 2013614,50921.6

168,3035.9

2,850,317

FY 2014732,804

24.5

159,7545.3

2,994,295

FY 2015

786,53126.2

146,074

4.9

3,005,235

FY 2016

851,97427.5

156,4215.1

3,097,144

FY 2017889,98728.4

159,3145.1

3,137,466

FY 2018

965,26230.1

157,2904.9

3,203,095

FY 2019

981,28330.5

152,239

4.7

3,218,383

Source: Same as for Figure 16 hereof.

208

A bond certificate in this context is a certificate that is issued when borrowing
money (negotiable security) and can generally be sold in the market without theconsent of the debtor (the national government in this case) and without having
to notify the debtor.
National government bonds are the most common investment target for life
insurance companies, but the amount invested in national government bonds
peaked in fiscal year 2013 and has been declining ever since. The percentage ofnegotiable securities that they account for has also decreased to 47.0%. This isconnected to the Bank of Japan’s monetary easing policy known as quantitativeand qualitative monetary easing, which has been in effect since 2013 and which
has resulted in the purchase of national government bonds. This is believed tobe because their appeal as an investment target and the quantity of national
government bonds available for purchase decline as interest rates go down.
Incidentally, the Bank of Japan now holds more than 500 trillion yen in national
government bonds.
Local government bonds constitute debt obligations incurred by local
governments to procure funds needed for financial administration from outside
sources. In principle, local government bonds can only be issued to procure
funds to finance the expenses of public enterprises (such as transit, gas, andwaterworks) and public-sector construction projects.
The amount invested in local government bonds also peaked in fiscal year
2013 and has been declining ever since. In recent years, the percentage ofnegotiable securities that they account for has decreased to 3.1%.
National government bonds, local government bonds, and company bonds
are collectively referred to as public and company bonds. For a company bond,a company issues a certificate (negotiable security) after funds are solicited froman investor in order to procure funds. The repayment date and interest rate arestated on a company bond, which serves as a written acknowledgement of debt
issued by a company to an investor.
Company bonds were on the decline for a time in terms of investment amountbut have rebounded in recent years.
Rather than being issued in a physical form, bonds are now issued
electronically as a proof of rights, which can be transferred with the transfer ofelectronic data.

Chapter 4 209

(2) Shares
Shares are certificates issued by a joint-stock company in exchange for funds
procured from shareholders. They differ from company bonds in thatshareholders, by providing funds, gain the right to obtain a portion of profit
earned by the company in the form of dividends or an increase in the share price.
With bonds, no matter how much profit a joint-stock company makes, you can
only receive a set amount of interest and principal payments. Conversely, even
if a joint-stock company fails to generate profits, a holder of company bonds will
still be entitled to receive interest and principal payments.
Securities exchanges establish trading markets for shares (stock markets).
Listing shares on a stock market allows them to be freely bought and sold byordinary investors. A listed company is obligated to disclose information on thecompany both at the time shares are listed and on an ongoing basis.
Life insurance companies invest in listed companies and in unlisted sharesthat are promising in hopes of profiting from the listing of shares. Investments
in shares have increased slightly over the last ten years in terms of monetaryamount and declined slightly in terms of percentage.
However, considering that the Nikkei Average sank to its lowest level since
the bursting of the bubble at around 7,000 yen in the fiscal year ended in March
2009, the increase in investment amount to this level means that life insurancecompanies have not made new investments in shares to a substantial extent.
Incidentally, life insurance companies and other institutional investors thatinvest in shares are required to comply with the Stewardship Code. At the sametime, listed companies in which investments are made are required to comply
with the Corporate Governance Code.
Corporate Governance Code and Stewardship Code (principles
applicable to “responsible institutional investors”)

Column 30

The Corporate Governance Code is stipulated in the listing rules set forth by the
Tokyo Stock Exchange and other stock exchanges as a set of guidelines for how listedcompanies should be managed.
Thus, this code is applicable to listed companies. Modeled after businessadministration guidelines enacted in the West, the Corporate Governance Codebegan to be studied in 2014 and was adopted in June 2015. More recently, it wasrevised in 2018.
The Corporate Governance Code requires that directors and boards of directors

210endeavor to engage in dialogue with shareholders, employees, business partners,
and other stakeholders in order to achieve sustainable, highly capital-efficient
growth and thereby work to increase the value of the company.
An outline of basic principles in the Code is as follows:
1. A listed company shall take appropriate measures to ensure that the rights ofshareholders are effectively ensured and develop an environment in whichshareholders are able to properly exercise their rights. In addition, a listedcompany shall ensure the substantive equality of shareholders. Minority
shareholders and foreign shareholders shall be granted due consideration.
2. A listed company shall endeavor to collaborate effectively with employees,
clients, business partners, creditors, the local community, and other stakeholders
to achieve sustainable growth for the company and generate medium- to longterm corporate value. The board of directors and management shalldemonstrate leadership in cultivating a corporate culture and climate.
3. A listed company shall engage in the disclosure of financial information on thecompany’s financial condition and operating results and other non-financial
information as mandated by the laws and regulations and the provisions of othertypes of information. The board of directors shall ensure that information to beaccordingly disclosed or provided is highly useful as information for engaging inconstructive dialogue with shareholders.
4. In order to improve profitability and capital efficiency, the board of directors
shall (1) broadly define the orientation of the company’s corporate strategy, (2)develop an environment to support appropriate risk-taking by senior
management, and (3) oversee, at a high level of effectiveness, management anddirectors from an independent and objective standpoint.
5. A listed company shall engage in constructive dialogue with shareholders insettings other than just general meetings of shareholders. Senior managementand directors (including outside directors) shall listen to shareholders throughsuch dialogue and explain their own management policy to shareholders clearlyin an easy-to-understand manner to obtain the understanding of shareholders.

In brief, a listed company shall develop an environment that allows shareholders,
as the providers of capital, to exercise their rights with ease. In particular, anenvironment that would allow minority shareholders and others who normally do
not have much say in the affairs of management to easily exercise their rights should
be maintained. On the other hand, collaboration with stakeholders who form thebasis for the realization of corporate value – such as business partners, the local
community, and employees – shall be promoted based on efforts to strike a balancewith shareholder rights. In addition, the timely and appropriate disclosure of
information shall be undertaken with a view to securing the trust of the capital
markets and protecting investors. The appropriate disclosure of non-financial
information, such as with information concerning risk and governance in particularand matters concerning environmental issues, is also required.
While management stands at the center of company activities carried out for thefulfilment of these principles, the board of directors should present major
management strategies and carry out effective oversight of management. Finally,

Chapter 4 211

dialogue with shareholders is done in response to the Stewardship Code, which will
be explained below. It is a principle that a company should engage in constructive
dialogue with shareholders in settings other than just general meetings ofshareholders.
That each company should appoint at least two independent, outside directors,
as I explained at the beginning of this chapter, is stated in this principle. With respect
to this point, there are those who have suggested that a listed company thatconsiders it to be appropriate given its size and other factors should have at least
one-third of its directors consist of independent, outside directors.
These principles are to be fulfilled by way of the so-called comply-or-explain
approach. In other words, appropriate basic principles will be applied based on thecompany’s size and actual situation. Any failure to carry out what is stated in thebasic principles shall be indicated and the reasons for such failure should be
explained.
The Stewardship Code is a principle meant to be paired with the Corporate
Governance Code and was formulated in February 2014 by a panel of experts put
together by the Financial Services Agency. It was later revised in May 2017 and March
2020. It is a code that applies to life insurance companies and other institutional
investors and consists of principles that are set forth to try and maximize theprovisions of medium- to long-term returns to the providers of funds to institutional
investors (in other words, clients) through constructive dialogue (engagement) withcompanies constituting investment targets from the standpoint of the sustainabilityof these companies and others. By endorsing the Stewardship Code, institutional
investors are to implement matters stated in the Code. The Stewardship Code is also
subject to a comply-or-explain approach.
The principles are as follows:
1. An institutional investor should formulate and disclose a clear policy to fulfill its
stewardship responsibilities.
2. An institutional investor should formulate and disclose a clear policy on conflictsof interest to be managed in fulfilling its stewardship responsibilities.
3. An institutional investor should accurately ascertain the state of companies
constituting investment targets in order to appropriately fulfill its stewardship
responsibilities in connection with the sustainable growth of such companies.
4. An institutional investor should endeavor to share their awareness of matterswith companies constituting investment targets and work to ameliorate issues
through constructive “dialogue with a purpose” with such companies.
5. An institutional investor should have a clear policy on the exercise of voting
rights and the disclosure of the results of the exercise of these rights and devise
ways to promote the sustainable growth of companies constituting investment
targets rather than just adhere to formal assessment criteria.
6. An institutional investor should, in principle, provide regular reports to clientsand beneficiaries on how its stewardship responsibilities are being fulfilled,
including with respect to the exercise of voting rights.

212

7. An institutional investor should be capable of appropriately making decisions inconnection with carrying out dialogue with and stewardship of companies
constituting investment targets based on a deep understanding of suchcompanies and their business environment and sustainability considerations thatare in line with investment strategies in order to contribute to the sustainablegrowth of such companies.
8. A provider of services to institutional investors should endeavor to appropriately
provide services and help improve the functionality of the entire investment
chain as these institutional investors fulfill their stewardship responsibilities.

An outline is as set forth below:
An institutional investor shall decide on an investment policy in maximizing
returns to clients. It is on the basis of this policy that it will engage in constructive
dialogue with companies constituting investment targets in accordance with anunderstanding of the business environment in which such companies operate and its
thinking on ESG investments (see Chapter 5-II).
In addition, a policy on dealing with any case in which the relationship between
an institutional investor and a company constituting an investment target potentiallyconstitutes a conflict of interest with a client needs to be publicly disclosed.
An institutional investor shall also work to identify issues by ascertaining
information on companies constituting investment targets and resolve such issues
through dialogue with such companies. It must also have an appropriate policy forexercising voting rights at general meetings of shareholders.
An institutional investor shall also explain to clients how it is fulfilling its
stewardship responsibilities.
The Corporate Governance Code is slated to be revised again in April 2022, with
June 2021 as the base date for this purpose.

(3) Foreign securities
In general, foreign securities refer to non-yen-denominated public andcompany bonds and shares held overseas. Examples of investment targets
include U.S.-dollar-denominated or euro-denominated bonds, U.S. shares,
European shares, and shares in companies based in emerging markets.
Over the past ten years, foreign securities have doubled in terms ofinvestment amount and nearly doubled in terms of percentage.
Investments in foreign securities increased when domestic securities losttheir appeal as investment targets due to a zero-interest rate policy in Japan,
while in contrast foreign interest rates could be expected to stay above a certain
level. In addition, some believe that investing only in Japan means that risk
diversification is inadequate and that risks should be diversified regionallyacross countries.
Chapter 4 213

When it comes to foreign securities, however, there is a need to assess theextent of risks pertaining to a given country or company as well as countryspecific and currency-specific risks; this process can be more difficult than it isfor domestic investments.
Given the ongoing severity of the investment environment in Japan,
opportunities to invest in foreign securities will need to continue to be seizedwith precision. From this perspective, focus is currently being placed on
infrastructure investments.

214

Chapter 5: Latest developments in the life
insurance business

In Chapter 5, I will first look at changes in the environment
surrounding the life insurance industry.
The column in this chapter will explore dementia insurance andlong-term care insurance.
I will also shed light on SDG-based management, a new movement
being promoted in the area of management.
In addition, I will explain the client-oriented principle that
constitutes a new regulatory approach for life insurance companies.
Furthermore, the current state of and outlook for the latest in ICT
innovations in the life insurance industry will be discussed.

Chapter 5 215

I. Changes in the environment surrounding the life
insurance industry
In this section, I will first present an overview of the environment
surrounding the life insurance industry as it has evolved to this day. I willproceed by looking at (1) the law and regulations, (2) the economic environment,and (3) the demographic structure.

1 The law and regulations
In this section (Section 1), I will quickly review matters that have been
discussed up to this point in this book.
The life insurance industry was substantially reformed with the enactment of
the amended Insurance Business Act in 1995. This statute induced significant
progress in terms of regulatory reforms designed to ensure the operational andfinancial soundness of insurance companies, and also allowed both life insurancecompanies and non-life insurance companies to enter each other’s domain
through subsidiaries. This statutory reform gave rise to the establishment of a
succession of life insurance companies as subsidiaries of non-life insurancecompanies, thereby increasing the number of life insurance companies
seemingly at once.
Subsequently, beginning in 1997, we saw an increase in foreign participation
through the acquisition of failed life insurance companies. There are now many
types of life insurance companies operating in Japan, including life insurancecompanies specializing in over-the-counter products that were established oncethe ban on over-the-counter sales of insurance at banks was fully lifted, life
insurance companies specializing in online sales made possible by the spread of
the Internet, life insurance companies catering to corporate clients, and life
insurance companies primarily dealing with products for independent agencies.
The number of life insurance companies stayed at around thirty until 1996 but
has now increased to forty-two in total (as of February 2021).
In terms of sales channels, independent agencies came to be allowed under
the amended Insurance Business Act of 1995; this triggered an expansion oflarge-scale independent agencies that has been underway since 2000.
Starting in 2001, we have seen the ban on over-the-counter sales at banks
progressively lifted. The ban on the selling of individual annuity insurance waslifted in October 2002. This led to the substantial presence of banks in the216industry through the selling of savings-type and investment-type products. Later,
the ban on single-premium whole life insurance policies and other products waslifted in December 2005. The ban on the selling of all products was lifted in
December 2007 after a two-year monitoring period.
In terms of products, life insurance companies came to be expressly
permitted to underwrite not just life insurance but also third-sector insurance
products under the amended Insurance Business Act of 1995. Due in part to theimpact of U.S.-Japan talks on insurance, however, life insurance companies
were not authorized to offer stand-alone medical insurance plans, cancer
insurance plans, and other examples of third-sector insurance products. Later, in
2001, the ban on the selling of third-sector insurance products was lifted for
major life insurance companies and the life insurance subsidiaries of non-life
insurance companies.
The latest developments concerning statutes and regulations that we shouldtake note of include (1) the improved quality of the operations of life insurancecompanies and insurance solicitors through client-oriented business operationsand (2) the enactment of the new Financial Service Intermediary Act. These
matters will be discussed in III below.

2 Economic environment(1) Formation of the bubble economy
In this section, I will broadly review the economic environment since thebeginning of the Heisei era (1989-2019.4) prior to the onset of the Reiwa era(2019.5-) (see Figure 1 on the following page for economic developments). 1989,
when the Heisei era began, coincided with the peak of the bubble economy. The
Nikkei average reached 38,957 yen at the end of that year. What led to thisbubble economy in the first place was the Plaza Accord of 1985, an international
agreement among five leading industrialized economies. This agreement set
forth a policy to devalue the U.S. dollar, whereupon the yen rose in value against
the dollar at the same time. Consequently, Japanese companies suffered from a
recession induced by a strong yen.
In this connection, the Bank of Japan adopted a low interest rate policy tosupply money to the market in response to the recession that was induced by astrong yen. However, this caused surplus funds to pool in the market. As
companies recovered in terms of their performance, money came to beconcentrated in land and shares, thereby creating a bubble.
Chapter 5 217

Figure 1

Nov.
1986

Economic trends as based on a representative diffusion index(CI coincident index)
Feb. Oct.
1991 to 1993

May
Jan.
1997 to 1999

Nov. Jan.
2000 to 2002

Feb.
Mar.
2008 to 2009

Mar.
2012

Nov.

Oct.
2018

(Abenomics)

Collapse of the Financial crisis
bubble economy
AmendedInsurance
Business Act

Collapse of Lehman Shock Economic crisis
the IT bubble
in Europe

Disposition of
the bankruptcyof life insurancecompanies

COVID-19

Economic recession

Source: Produced by the author based on press releases and other reference sources(2) Collapse of the bubble economy and the lost decadeShare prices began to decline from the beginning of 1990. It may be hard tofathom now but the myth of land was a deeply rooted one until the bubble era,such that people believed that even land that was not being used productively
would increase in value just by owning it. What turned this myth completely on
its head was the collapse of the bubble economy.
Economic growth since then has been stagnant enough to give rise to the term
the lost decade or the two lost decades. Such long-term economic stagnation has
also been recently observed in overseas markets as well. A combination of
conditions marked by low growth, low interest rates, and low rates of inflation
is known in some quarters as Japanization. During the lost decade (or two), only
Japan appears to have been left behind as it continues to wrestle with the impactof the collapse of its bubble economy even as other developed nations managed
to secure a certain level of growth and emerging countries, particularly in Asia,
continued to grow to a considerable degree.
Against this backdrop, it is also said that Japan entered a period of
demographic “onus” at the start of the 1990s. While the word onus is perhaps
unfamiliar to some readers, it is an antonym of bonus and means burden. Thus,a period of demographic onus refers to a period in which the working-age
population (aged 15 to 64 years) declines and economic development slows
down.
A period of demographic bonus, which is when the working-age population
increases, may be one in which economic growth might occur in an organic218manner. In contrast, a period of demographic onus is one in which the economy
inevitably stagnates in the absence of some kind of economic reform or
breakthrough.

(3) Deterioration in the state of the management of financial
institutions
After the collapse of the bubble economy, financial institutions that had beenlending money backed by land suffered from bad loans. Just as the managementof companies that had borrowed money worsened, the prices of land that had
been used as collateral also declined.
Securities companies also sought to compensate companies with which they
had a close relationship and to whom they had sold shares for losses caused by
the fall in share prices (compensating for losses was not expressly against thelaw at the time). In addition, they also engaged in a practice known as shuffling,whereby they would shift shares with unrealized losses held by a company withwhich they had a close relationship to a different company with which they had
a close relationship after promising that they would compensate for any losses.
It was through these actions that the management of securities companies tooka wrong turn.
Life insurance companies too suffered when it came to the management ofsavings-type products with high assumed rates of interest that were sold during
the bubble era.
(4) The failure and rehabilitation of financial institutions
As the crisis continued to affect the financial industry, public funds were
injected into housing loan companies in 1995. These companies specialized in
housing loans, but they also provided corporate loans as a separate unit of banks
and other financial institutions. If these housing loan companies were allowed tofail, the impact of their failure would have spread to the financial institutions
that had lent funds to them, which is why public funds were extended to allow
for a soft landing. Yet, there was public debate around the question of why
housing loan companies, which were not even banks, had to be saved. It has been
pointed out that this ended up causing a delay in carrying out the primaryobjective of the government, which was the injection of public funds into banks
dealing with financial difficulties at the time.
In 1997, Yamaichi Securities, one of the four big securities firms at the time,
Chapter 5 219

and city bank Hokkaido Takushoku Bank, went under. Turmoil continued
thereafter, such as with the collapse of the Long-Term Credit Bank of Japan.
Public funds were finally injected into fifteen major banks in 1999.
Nissan Life Insurance went bankrupt in 1997 and a total of seven life
insurance companies failed in the period leading up to 2001. When a life
insurance company failed, it would try to reduce policy reserves, lower assumed
interest rates, and, if this were still not enough to restructure effectively, receive
financial assistance from the Life Insurance Policyholders Protection
Corporation of Japan, an entity to which funds are contributed by members of
the life insurance industry (see Chapter 1-V-5). In the life insurance industry,financial assistance was extended using only funds provided by life insurancecompanies. Tax-funded public money was never used for this purpose.
Amid such economic tumult, students found it difficult to find postgraduation jobs. The emergence of a generation that underwent an employment
ice age continues to be felt as a problem to this day.

(5) Recovery from financial turmoil
The 1990s were an era of financial turmoil but nevertheless the economy
began to grow from around February 2002, which then led to an extended periodof growth known as the Izanami Boom. In 2008, the Lehman Shock caused theeconomy to falter momentarily before the Great East Japan Earthquake struck in
2011. In 2012, the second Shinzo Abe administration was formed. Long-term
economic growth continued thanks to quantitative and qualitative monetaryeasing by the Bank of Japan.
Global economic stagnation attributed to the emergence of COVID-19 beganat the time of the writing of this book. Declarations of a state of emergency madebetween April and May 2020 and between January and March 2021 worsened
the state of the economy. COVID-19 spread worldwide and had a huge impact
on tourism and trade. Since the last state of emergency was lifted, economic
activities have been resumed with people continuing to maintain social
distancing practices that are emblematic of what it means to live with COVID19.

220

3 Demographic changes(1) Population changes by age bracket
Japan’s population continued to increase over the approximately 72 million
people that were alive in the country at the end of the Second World War to apeak of 128.08 million in 2008. The birthrate (total fertility rate; see (2) for more
information) exceeded two during the second baby boom of the 1970s but had
already declined to 1.57 by 1989. In other words, the increase in the population
up to 2008 is likely due to an increase in average life expectancy rather than to
an increase in the number of children.
According to population estimates provided by the Ministry of Internal
Affairs and Communications’ Statistics Bureau, the population of the country in2020 was 125.81 million. According to the National Institute of Population andSocial Security Research, the population is expected to fall below 100 million to
99.24 million in 2053, and decline to 88.08 million in 2065 (Figure 2).
Figure 2

Demographic changes by age bracket

2025:
Aging ofthe elderly

Working-age
population
peaked2040: Population of
persons aged 65 years
and over peaks

2065: Workingage population
shrinks toapproximately
half of what it
was in 1995

0 to 19 years

20 to 64 years

65 to 74 years

75 years and over

Source: “Demographic Dataset (revised in 2017)”, National Institute of Population and Social Security
Research; annotations added by the author

Generally speaking, the generation that earns money – in other words, theworking-age population of people between the ages of 15 and 64 years – peakedat 87.16 million in 1995. It will have declined to 68.41 million in 2020. This
Chapter 5 221trend will continue apace, such that the working-age population is expected toshrink to 45.29 million by 2065.

(2) A dwindling birthrate and aging population
Let us examine Japan’s dwindling birthrate and aging population. First, ouraging population is the result of average life expectancy continuing to increase.
In 1990 at the outset of the Heisei era, average life expectancy was 75.92 years
for men and 81.90 years for women. In 2018, it increased by more than five years
to 81.25 years for men and by more than six years to 87.32 years for women. In
recent years, it has continued to increase from one year to the next, with average
life expectancy increasing by 0.16 years for men and 0.06 years for women from2017 to 2018.
In 2020, the population of people between the ages of 65 and 74 years willbe 17.47 million (13.9% of the total population; same hereinafter) and people 75
years of age and over will be 18.72 million (14.9%). Compare these numberswith those corresponding to 1990, when there were 8.92 million people (7.2%)
who were between the ages of 65 and 74 years and 5.97 million people (4.8%)
who were 75 years of age and over. The number of elderly persons and thepercentage of the total population that they collectively account for are higher
by approximately 2.4 times.
On the other hand, as we shall see here, the birthrate is dwindling. We
normally look at the total fertility rate to glean birthrate trends. The total fertility
rate is the sum of birthrates by age for women between the ages of 15 and 49
and equals the number of children to whom each woman will give birth in her
lifetime.
The total fertility rate fell to 1.26 in 2005 but thereafter recovered slightly to
1.46 in 2015 after measures to combat a declining birthrate were implemented.
The total fertility rate declined to 1.42 in 2018 and 1.36 in 2019 (with 865,000
births in that year). In general terms, only 1.36 children will be born to eachcouple, which means that the population will naturally shrink. It has also beenreported that the number of pregnancies that were notified in 2020 declined,
perhaps due to the tendency on the part of many people to put off childbirth inresponse to COVID-19.
The decline in the birthrate is also tied to the increase in the rate of people
who remain unmarried. The rate of people who do not get married at any pointin their lives (percentage of people who do not get married even once at any
222point in time up to their fiftieth birthday) is approximately 26% for men andapproximately 17% for women in 2020. These figures were 5.57% for men and4.33% for women in 1990.
In 2020, there were 20.72 million minors (0 to 19 years of age) (16.5% of thetotal population). Incidentally, the age of majority will be lowered to 18 years in
2022; however, this will not be taken into account for this discussion. In
comparing this figure once again to figures corresponding to 1990, we see that
there were 32.49 million minors (0 to 19 years of age) (26.3% of the total
population). Both the number and rate of minors today have declined by a third
over the last three decades.

(3) Aging of the elderly
Looking to the future, we see that there are two problems that are expected
to come up with respect to aging; these are commonly referred to as the 2025
problem and the 2035 problem. The 2025 problem is in reference to the timing
at which those who belong to the first baby-boom generation – those who wereborn between 1947 and 1949 – will be over 75 years of age.
In 2025, there will be 14.97 million people between the ages of 65 and 74
years (12.2% of the total population) and 21.80 million people over the age of
75 years (17.8% of the total population); the so-called “aging of the elderly” will
be well underway at that time.
The 2035 problem is in reference to the timing at which those who belong to
the second baby-boom generation – those who were born between 1971 and1974 – will turn 65 years of age. In that year, there will be 15.21 million people
between the ages of 65 and 74 (13.2% of the total population) and 22.59 million
people over the age of 75 (19.6% of the total population); the elderly population
will account for around one-third of the total population. The looming 2040
problem refers to the timing at which the population of those who are 65 yearsof age or over will reach its peak and 1.5 persons will end up having to support
one elderly person.
Let us turn our attention to the declining birthrate. It is expected that there
will be 19.42 million minors (0 to 19 years of age) (15.9% of the total
population) in 2025 and 17.23 million minors (15.0% of the total population) in
2035. The number of women of childbearing age is already decreasing, such that,together with the reduction in the birthrate, the number of children is expected
to continue declining.
Chapter 5 223

4 Impact of a dwindling birthrate and aging population on the life
insurance industry
The standard household in which the husband works and the wife raises twochildren as a homemaker, which is the premise on which the system of social
security was designed, is already no longer the norm. Even where households
conform to this structure, the rate of female employment has increased over theyears. Some women use the parental leave system to remain regular employeesof whatever company they joined as new graduates while others return to workin a non-regular capacity of some sort. In any case, while the need for deathcoverage for household heads remains unchanged, it is thought that the amountof coverage for household heads has gone down compared to before.
Instead, the need for third-sector products like medical insurance andinsurance products for oneself in preparation for a super-aging society, such as
dementia insurance and long-term care insurance, is on the rise.

Dementia insurance and long-term care insurance

Column 31

Dementia insurance is, in general terms, a product that pays out insurancemoney when the insured is certified as having dementia. In addition to a diagnosis
made by a doctor, certification in this sense may also require a CT scan or other typeof imaging test. Alternatively, a claim might be paid subject to both a diagnosis ofdementia and a long-term care certification under the long-term care insurance
scheme. With some dementia insurance policies, the policy will be voided if adiagnosis of dementia is made within a certain period after enrolment (between 90
days and 1 year), such that the policy will be deemed to have never been in force
from the beginning. In such a case, premiums will be refunded. Some policies will
provide coverage not just for a confirmed diagnosis of dementia but also for a
confirmed diagnosis of mild dementia, death, bone fractures, and more.
Dementia insurance consists of fixed-term and whole-life plans. Premiums forwhole-life plans are high. A point that needs to be considered when designingdementia insurance is the fact that the insured himself or herself needs to submit aclaim when he or she develops dementia. However, it is difficult for someone withsevere symptoms of dementia to make a claim.
In this connection, dementia insurance is handled to allow a person other than
the insured to submit a claim subject to the condition that a claim representative be
designated at the time of enrolment.
On the other hand, private long-term care insurance generally pays out insurancemoney when the insured is assessed as requiring long-term care under the public
224

long-term care insurance scheme (for example, long-term care level 2 or above). For
some products, assessments are made according to the insurance company’s own
criteria in a manner that is independent of any assessment made under the public
long-term care insurance scheme. The public long-term care insurance scheme also
provides for payouts of insurance money in cases not involving dementia, such as
when a person’s lower body has declined in terms of strength.
Dementia refers to the presentation of symptoms of cognitive impairment
brought about by certain illnesses. Whether or not dementia impedes daily life varies
from person to person, such that a person will not necessarily be assessed as
requiring long-term care.
Conversely, there may be cases in which an individual does not have dementia
but will still need long-term care due to a physical or mental impairment. Thus,
coverage provided by dementia insurance differs from coverage provided by longterm care insurance (see figure).
Insurance money paid out under dementia insuranceState of dementia
for which long-termcare is not needed
Some dementia insurance
policies will not pay out
insurance money

Long-term care is required due todementia

Long-term care isrequired due to aphysical impairment

Insurance money paid out underlong-term care insurance policies

According to a survey conducted by the Japan Institute of Life Insurance (JILI)(fiscal year 2019), the rate of enrolment in long-term care insurance policies andriders is still low, with 13.0% of men and 11.7% of women taking out such insurance
for all life insurance companies (no figures for dementia insurance are available).

As a way to deal with the low birthrate in the country, life insurance productsthat pay out insurance money for infertility treatments are being sold. Since there
is a limit to what private insurance alone can do for this issue, however, it isbelieved that comprehensive support is needed, including measures to address
the increasing age at which people get married these days, support for gainfully
employed women, the development of an employment system and leave systemthat accommodates childcare regardless of the sex of the parent, and thecomplete elimination of children on waiting lists for admission to preschool
institutions.

Chapter 5 225

II. New approach to business administration at life
insurance companies
A major management challenge that life insurance companies currently faceis the development and implementation of management strategies from theperspective of sustainable development goals (SDGs).
In addition, strategies for making investments and extending loans need tobe redeveloped from the standpoint of the environment, society, and governance(ESG).
This section concerns these matters.

1 Sustainable development goals (SDGs)(1) Societal contributions of companies
It has long been recognized that companies need to make societal
contributions. In days of old, it was believed that the foundation of a company’s
development lay in aligning management with morality and ethics, as reflectedin the Sanpo Yoshi, a principle that guided the activities of Omi merchants, andexplained in Shibusawa Eiichi’s The Analects and the Abacus.
In recent years as well, such concepts as those of corporate patronage andcorporate social responsibility (CSR) have come to be integrated into a
company’s management strategies. A general consensus has now been reachedto the effect that a company needs to make societal contributions while also
existing to earn profits.
Sustainable development goals (SDGs) are an example of this movement thatcan be considered to be groundbreaking on a global scale. They constituteinternational goals that were set out in the 2030 Agenda for Sustainable
Development, which was adopted at a United Nations summit held in September
2015.
SDGs are international goals that aim to achieve a better sustainable world
by 2030 through collaborations between public- and private-sector actors.
Comprising seventeen goals and 169 targets, SDGs are based on a central
promise of leaving no one behind. They are universal goals to be pursued byboth developing and developed countries together, as well as goals that will betackled not just by governments but also by entities in the private sector.
In Japan, the SDGs Promotion Headquarters, which is headed by the Prime
Minister, was established in May 2016. An SDGs Promotion Roundtable, whose226

members consist of experts in the field, was also established under the purview
of the Headquarters to proactively work on attaining SDGs.

(2) Aims of SDGs
The significance of SDGs can be found in the way companies, despite
differences between countries, emphasize that they are to be managed primarily
for the purpose of increasing shareholder value (primacy of shareholders). Thereis the risk that taking such a short-sighted view could give companies a license
to ignore other circumstances that are not directly in their line of sight, such asenvironmental issues and the issue of poverty in developing countries, as longas they make a profit.
However, if we look at environmental issues as an example, we see that
unlimited emissions of carbon dioxide is causing (albeit with somedisagreement) average temperatures around the world to rise and abnormal
weather conditions to become the norm. These abnormal weather conditions arein turn causing companies to lose production facilities and markets. Thus,
managing companies without taking the environment into account is notsustainable. All seventeen sustainable development goals are listed in Figure 3
on the following page.
To address climate change, the Financial Stability Board (FSB), aninternational organization whose members consist of financial officials fromeach country around the world, has set up the Task Force on Climate-related
Financial Disclosures (TCFD). The TCFD has formulated a declaration on
climate change. This declaration is intended to have the financial impact of therisks and opportunities posed by climate change ascertained and disclosed. Thisdeclaration entails voluntary participation and disclosure on the part ofcompanies that agree with its aims.
In recent years, the problem of plastic dumping in the ocean has become quite
severe. The ingestion of plastic by fish affects people who eat the fish. The mass
production of plastic and its adverse consequence as manifested through the
dumping of plastic in the ocean are also unsustainable.
Moreover, poverty and human rights in developing countries, which areissues left unaddressed by companies, will ultimately make it difficult forcompanies to sustainably continue to exist and grow. There are also clear
examples of companies based in developed countries that employ children as
cheap sources of labor in developing countries.
Chapter 5 227

Figure 3

The seventeen sustainable development goals (SDGs)

1: End poverty in all its forms
everywhere
2: End hunger, achieve food security andimproved nutrition and promotesustainable agriculture
3: Ensure healthy lives and promote wellbeing for all at all ages
4: Ensure inclusive and equitable quality
education and promote lifelong
learning opportunities for all
5: Achieve gender equality and empower
all women and girls
6: Ensure availability and sustainable
management of water and sanitation
for all
7: Ensure access to affordable, reliable,
sustainable and modern energy for all
8: Promote sustained, inclusive andsustainable economic growth, full andproductive employment and decent
work for all
9: Build resilient infrastructure, promote
inclusive and sustainableindustrialization and foster innovation

10: Reduce inequality within and among
countries
11: Make cities and human settlements
inclusive, safe, resilient and sustainable
12: Ensure sustainable consumption andproduction patterns
13: Take urgent action to combat climatechange and its impacts
14: Conserve and sustainably use the oceans,seas and marine resources for sustainable
development
15: Protect, restore and promote sustainable
use of terrestrial ecosystems, sustainably
manage forests, combat desertification,and halt and reverse land degradation andhalt biodiversity loss
16: Promote peaceful and inclusive societies
for sustainable development, provide
access to justice for all and build effective,
accountable and inclusive institutions at
all levels
17: Strengthen the means of implementation
and revitalize the Global Partnership for
Sustainable Development

The cycle of poverty brought about by these circumstances and the existenceof disparities between nations and between individuals within nations threaten
the lives of people, induce instability in the world, and are not sustainable.

(3) Life insurance companies and SDGs
Life insurance companies also incorporate the concept of SDGs into their
management. For example, the Nippon Life Insurance Company has integrated
SDGs into their management strategy. Specifically, this company has
established eighteen important sustainability challenges and provides progress
updates with respect to how they are meeting these challenges each year.
Let me put forth an example. One aim of SDGs is to “ensure healthy lives
and promote well-being for all at all ages” (Goal 3).
From this perspective, life insurance companies work hard to engage inmanagement with an emphasis on health. First, a company ensuring the healthof employees working for it is an exceedingly important challenge for achieving
sustainable growth.
228

The Nippon Life Insurance Company has enacted a medium-term plan that
includes such objectives as a 20% reduction in average monthly overtime hours
over fiscal year 2016 and a 70% regular leave utilization rate (Sustainability
Report 2020). A non-smoking campaign is also being promoted primarily byhealth insurance associations.

Health-promoting insurance

Column 32

The third sustainable development goal aims to ensure healthy lives for all. On
this note, I would like to point out that there are health-promoting insurance
products that have been developed by life insurance companies in accordance withthe concept of promoting the health of clients.
There are many different patterns of such products. One provides a discount onpremiums – in other words, cash back – if the results of a medical checkup are
submitted. There are two types of such a product: one that requires the submissionof results only at the outset of the agreement and another that requires submissionof the results once a year.
With these products, a discount is provided upon the submission of a healthcertificate regardless of the results of the medical checkup. A further discount isoffered if the results are favorable. With a product for which results are submitted
only at the outset of the policy, there might not be much in the way of a healthpromoting effect. For products for which results are submitted annually, a healthpromoting effect can be expected but certain issues that a client might have a hardtime accepting could emerge in that it can take time and effort to submit checkup
results annually and premiums could effectively rise at a later date depending on the
results of a checkup.
In addition, there are also products that extend discounts depending on the
average number of steps taken per day or that provide discounts on premiums basedon the collection of health-related data made possible by the wearing of asmartwatch on the wrist (wearable device) and the conversion of such data into
points.
There are also likely to be issues with respect to the calculation of steps and withthe ability of the individual to wear a wearable device all day. On this point,
companies are developing and providing their own health apps and other tools withwhich points can be conferred or gifts can be given when a certain amount of
exercise is performed.
These products can be criticized for benefiting those who are already consciousof health-related matters and for not really speaking to those who actually need to

Chapter 5 229

be more health-conscious. In any case, these are products that demonstrate that life
insurance companies are making an effort that is consistent with the concept ofpromoting health within the framework of sustainable development goals.
The latter product, which is based on the use of wearable devices, is a type of
product known as insurtech. Insurtech is a term that combines the words insurance
and technology and refers to what you get by applying information andcommunication technology (ICT) to the insurance business. This point will be
explored in IV hereof.

2 ESG investments(1) What is an ESG investment?
An ESG investment refers to the policy by which investment companies are
selected by taking into account three factors – the environment, society, andgovernance - whenever an institutional investor makes an investment. Efforts tomake ESG investments began before sustainable development goals (SDGs)
were recognized. However, as SDGs are a more comprehensive initiative thataims to achieve sustainability, it is believed that ESG investments are often
undertaken within a framework consisting of SDGs. The ESG perspective is also
reflected in the Stewardship Code. See Chapter 4-VI for more information on
this point.
ESG investments are typically undertaken by agreeing with (signing) the
Principles for Responsible Investment (PRI) as set forth by the United Nations
Environment Programme Finance Initiative (UNEP FI) in 2006. The term
initiative is perhaps difficult to grasp and there is no suitable Japanese translation,
but it refers to voluntary collaborative actions carried out by multiple publicsector and private-sector actors as part of a partnership.
Incidentally, in recent years, we have seen companies and national
governments voluntarily participating in and working towards declarations andprinciples based not on formal laws and treaties but on declarations andannouncements of basic principles for the attainment of policy objectives madein domestic and international settings.
Voluntary initiatives taken in accordance with such declarations andprinciples have a number of advantages. First, they can be pursued
independently of any political agenda (and of any conflict between nations in aninternational sense). In addition, because they are not mandated by law, acompany can carry them out to the extent they are capable of doing so. They are230flexible in that companies that are able will be encouraged to voluntarily andcreatively undertake higher-level initiatives.

(2) Negative screening and positive screening
As noted above, ESG investments are carried out by signing the Principles
for Responsible Investment (PRI) (Figure 4).
The basis of PRI initiatives is negative screening, which means refraining
from investing in companies that meet certain criteria. For example, noinvestment will be made in a company that engages in a business that emits large
amounts of carbon dioxide or that otherwise harms the environment.
Furthermore, positive screening – whereby companies that are proactively
involved in ESG issues, such as companies that treat environmental and humanrights considerations as a basic corporate value and companies that areproactively committed to proper governance, such as by having a majority of
their board of directors consist of independent outside directors – are selected as
investment targets has also come to be undertaken.
SDGs, ESG investments, and PRI are all concepts that are known by threeletter acronyms. A rough outline of their relationship to one another is provided
in Figure 5 on the following page to allow you to better grasp what they mean.
Figure 4

Principles for Responsible Investment (PRI)

1. We will incorporate ESG issues into investment analysis and decision-making
processes.
2. We will be active owners and incorporate ESG issues into our ownership policies andpractices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within theinvestment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will each report on our activities and progress towards implementing thePrinciples.

Figure 5

Relationship among SDGs, ESG investments, and PRI

Sustainable development goals (SDGs)
17 goals, including those addressing human rights issues, environmental issues(TCFD), education, and agriculture
ESG investments (environment, society, governance)—— PRI (Principles for Responsible Investment)

Chapter 5 231

(3) ESG investments and fiduciary duty
Incidentally, there are some who assert that the exclusion of such companies
from the scope of investment or the selection of companies as investment targets
according to criteria other than profit will prevent the growth of the stock market
from being properly captured. For example, investment funds operate by being
entrusted with funds from clients and thus owe a fiduciary duty to investors.
Fiduciary duty will be explained in greater detail below but should be
regarded here as the responsibility of an asset management company tomaximize the economic return to fund-providing clients (trustees). If this duty
applies, the relationship between an ESG investment policy and the fiduciary
duty will become problematic if the exclusion of specific companies from thescope of investment pursuant to an ESG investment policy were to be prejudicial
to investment performance. This is because, while some studies indicate that thegrowth rate of companies managed with a focus on ESG exceeds that ofcompanies that are managed without such a focus, this question has not yet been
definitively settled.
On this point, the Employee Retirement Income Security Act (ERISA) in the
United States has set forth an interpretation of the relationship between thefiduciary duty and ESG investment policies. ERISA is a basic piece oflegislation related to corporate pensions in the United States and imposes afiduciary duty of the managers of corporate employee pensions towards pension
beneficiaries (expected beneficiaries). As a fiduciary duty is thus imposed on
managers, managers need to invest so as to maximize returns to pension
beneficiaries and others.
At one point in time, some interpretations suggested that ESG investment
policies could elicit a better investment performance than other investment
approaches. Currently (in 2020), the rules have changed to have the monetary
return of the trustee prioritized and enable ESG factors to be considered only inthe event that the monetary return is insufficient to allow an investment decision
to be made. In other words, an investor needs to invest while focusing on boththe ESG investment policy and his or her fiduciary duty.
(4) ESG investments in Japan
In Japan, the signing of the PRI by the Government Pension Investment Fund(GPIF), which operates part of the assets held by the country’s public pension
scheme, in September 2015 represented a major moment of truth. The total assets
232

of the GPIF amount to 162 trillion yen (fiscal year 2020), the investment of muchof which has been entrusted to outside investment management firms. Given thissigning, the investment management firms to which investments have been
entrusted now need to engage in management activities in accordance with the
PRI.
New investment management firms wishing to undertake the outsourcing ofinvestments from the GPIF will be effectively required to sign the PRI as well.
For this reason, 85 companies have already signed the PRI in Japan. (Globally,
3,328 companies have signed the PRI as of August 2020.)

Chapter 5 233

III. New regulatory orientation for the insurance industry
Regulation of the insurance industry has undergone significant changes inrecent years. This is due to the excessive pace at which socioeconomic
conditions have been changing, such as by way of massive developments in thearea of ICT, such that the traditional approach to regulating the industry whereby
rules would be stipulated by government and complied with by life insurancecompanies is becoming increasingly ineffective.
In this section, I will be talking about the reformation of the way the
insurance industry is being regulated.

1 Overview(1) Clarifying financial supervisory rules
Until the Insurance Business Act was amended in 1995, the government
traditionally controlled the industry by defining a general framework and issuing
administrative guidance on very specific points. Regulation at the time was
known as the convoy system and was designed to ensure that the industry
proceeded at the same pace as the slowest boat (insurance company).
As people then came to call for economic revitalization through deregulation,
rules were clarified and a system to enable free competition to flourish underthese rules was developed under the amended Insurance Business Act of 1995.
In particular, the law aimed to stimulate competition through the codification ofrules to ensure financial soundness. This stimulation of competition occurred on
the basis of rules by stipulating supervisory regulations applicable to insurancecompanies and insurance solicitors and allowing competition to play out as longas there was compliance with these rules.
Incidentally, this was a period during which we saw problems with bad loans
in the wake of the collapse of the bubble economy and the government issuing
instructions on specific aspects of the operations of financial institutions. In
addition, the government also developed, in addition to supervisory guidelines,
inspection matters setting forth items and content to be checked in the course of
conducting on-site inspections of financial institutions. The government also
exercised its right of supervision and intervened extensively in the operations offinancial institutions.
With respect to the issue of bad loans in particular, the government ranks234

borrowers according to the status of borrowers to whom loans have been made,such as those that are sub-performing, those that are in danger of bankruptcy,
and those that are substantively bankrupt. There were certain rules in place, suchas rules that required an allowance for bad debts to be built up or that prohibitednew loans from being made if a borrower dropped in terms of rank. Sinceborrowers’ ranks dropped at the direction of inspectors, some have suggested
that such actions led to the downfall of companies.

(2) Limitations of rules-based supervision
On the other hand, it had been pointed out that financial institutions, in orderto prevent loans from becoming unrecoverable to them, may have been
continuing to lend to companies that should have been allowed to fail at an earlystage, thereby allowing so-called zombie companies that should have beenculled to survive, which in turn impeded the revitalization of the economy. On
this point, it becomes difficult to assess the continuity of a company and to
determine the manner in which a sound financial system can be attained. In
addition, it is not possible to say which option is correct given that company
failures invariably lead to unemployment, however temporary such a situation
may be.
Regardless, there are limitations now to this sort of approach to supervisionon the basis of rules alone given that it requires compliance with rules that havebeen stipulated in advance by statute or government decree at a time when there
is intensifying competition among companies and substantive changes in theenvironment surrounding companies, including through innovations in
information and communication technology (ICT). From a different perspective,
we note that an information gap (asymmetry) between the possession of the latest
information on the insurance business by supervised entities in the industry andthe paucity of information in the possession of the supervising government
authorities is behind the impossibility of continuing to carry out rules-based
supervision.
(3) Adopting principles-based supervision
In this connection, the government declared that it would incorporate theperspective of principles-based supervision to go along with rules-based
supervision. Principles-based supervision is something for which broad
operational principles that financial institutions should observe are set forth
Chapter 5 235

rather than detailed rules that are set forth in advance in a statute or by thegovernment. Financial institutions formulate internal rules in compliance with
operational principles and upon determining what kinds of rules have been set
forth by other companies and in other industries and figuring out what kind ofcompany they should aspire to become. Normally, principles – such as in termsof putting clients first and contributing to the local community – and rules thatset forth the detailed handling of administrative matters and operations are bothprescribed.
You should not regard these internal rules as something that is fixed in place.
Rather, these rules need to be enhanced through a PDCA (plan, do, check, act)
cycle. The PDCA cycle is not a concept that is unique to the world of finance.
Generally, it refers to an approach whereby a given rule or strategy that you are
unsure about at a certain point in time is tried out and then improved upon over
and over again while checking the results. It is one of the basic approaches to beundertaken for any business that is being operated in an uncertain businessenvironment (Figure 6).
Figure 6

The Plan-Do-Check-Act cycle

Plan
Act

Do
Check

The role of government in the context of this type of approach to supervision
is to provide financial institutions with information that could be helpful informulating their own rules, such as examples of good practice at different
companies and examples of improper conduct that companies were required toameliorate.

(4) Evolution of supervisory policies
The stance taken by government on risk is also changing. Supervision to datehas been carried out from the perspective of determining how life insurancecompanies are adopting policies to avoid risks, including the risk of incurring236

investment losses and the risk of paying large amounts of insurance claims, andwhether life insurance companies have sufficient funds to cover thematerialization of such risks.
These days, however, it is believed that the acceptance of a certain possibilityof loss (risk) is necessary to obtain a return. For this reason, life insurancecompanies define the extent to which they have what is often referred to as anappetite for risk and check to see if sufficient returns are being obtained inaccordance with these risks.
In addition, an important change in how we think about government
supervision is the emphasis on taking a forward-looking approach.
Historically speaking, the style of supervision essentially consisted of areview of the state of the management and operations of a given life insurancecompany at a specific point in time, as captured in an inspection or report, toverify the appropriateness of past operations. These days, however, thegovernment is taking the stance that it shall supervise and advise from a futureoriented perspective on what can be described as a better response now that is inline with the changing economic environment and changing state of the
management of life insurance companies.

2 Client-oriented principle(1) Introducing the client-oriented principle
As stated above, the government has introduced a principles-based approachto supervision. The principle at the heart of this approach is the “principle ofclient-oriented business operations (client-oriented principle)” (Figure 7 on thefollowing page).
The client-oriented principle was formulated and released by the Financial
Services Agency in March 2017 in accordance with recommendations made by
the Financial System Council’s Market Working Group in December 2016. It is
not a legal regulation. It is hoped that financial institutions will voluntarily adopt
the client-oriented principle and disclose the results as key performanceindicators (KPIs). A KPI provides a reference value on the results of efforts taken
by a financial institution to abide by the client-oriented principle.
KPI consists of common KPIs and in-house KPIs. Common KPIs are KPIs
that are common across a single industry. At this time, there are some that relate
to companies that sell investment trusts. KPIs for investment trust sellingcompanies include those that indicate the state of profit and loss for each
Chapter 5 237

investment trust product sold to clients. This particular KPI shows in what ways
profitable investment trusts have been recommended to clients. Since investment
results are also affected by market trends at the time in question, however,different KPI values need to be examined with caution.
Figure 7

Client-oriented principles related to business operations

Principle 1: A financial services provider should formulate and release a clear policy forthe realization of client-oriented business operations and periodically release
the state of its efforts as pertains to this policy. This policy should beperiodically reviewed in order to realize better business operations.
Principle 2. A financial services provider should possess a high level of professionalism
and professional ethics, carry out operations with integrity and fairness
towards their clients, and endeavor to serve the best interests of their clients.
A financial services provider should endeavor to have such an approach tobusiness operations incorporated into their corporate culture.
Principle 3. A financial services provider should accurately ascertain the potential
conflicts of interest with clients in their transactions and appropriately
manage any such potential conflicts of interest that may exist. A financial
services provider should formulate a specific response policy for thispurpose in advance.
Principle 4. A financial services provider should provide clients with information to
enable them to understand the details of service fees and other costs assumed
by clients, irrespective of what any given fee or cost is nominally referred toas and including with respect to an identification of the service to which an
incurred service fee or cost relates.
Principle 5. A financial services provider should provide clients with matters indicatedin Principle 4 above as well as important information pertaining to the sellingor recommendation of financial products and services in a manner that iseasy for clients to understand while remaining cognizant of the fact that there
is a state of information asymmetry with clients.
Principle 6. A financial services provider should ascertain each client’s asset situation,
trading experience, knowledge, trading objectives, and needs and put
together, sell, and recommend financial products and services suitable forsuch client.
Principle 7. A financial services provider should develop a compensation- andperformance-evaluation system, an employee training program, and otherframeworks for appropriately motivating employees as well as an
appropriate governance system designed to promote conduct in pursuit of thebest interests and fair treatment of clients, and the appropriate managementof conflicts of interests.

238

I stated earlier that the client-oriented principle is not mandated by law but
the conducting of business operations in a manner that significantly undermines
this principle could cause the government to carry out corrective measures on
the grounds that there has been a violation of the obligation to maintain a system
to manage the protection of clients as set forth in the Insurance Business Act.

(2) Client-oriented principle and fiduciary duty
The client-oriented principle has been formulated with reference made to thecommon-law concept of the fiduciary duty (Figure 8). Fiduciary duty originallyrefers to the obligation to maintain a high level of trust and good faith as imposedon persons who invest assets on behalf of another. The fiduciary duty isrecognized as a concept applicable to the managers of investment trusts,
investment advisors, and persons in charge of asset management for corporate
pension plans.
Figure 8

Fiduciary duty

Consigner(investor)

Entrusts the
management ofassetsTrustee(manager)Manages assets

Fiduciary duty

AssetsAssets(3) Appropriate management of conflicts of interests
There are various explanations concerning the specifics of fiduciary duty but
the two most important points are as follows: (1) the interests of the consignor(principal person) is to be given top priority (pursue the best interests of theclient) and (2) do not allow the interests of the entrusted party (trustee) to be atodds with the interests of the principal person (conflict of interest).
Of these two, (2) is more frequently subject to debate and a key point in
discussions on this point turns on the identification of the “party from whom
remuneration is being received”. For example, in the case of an investment
Chapter 5 239

advisory business, a situation in which advice is provided to a client who wishes
to make investments and remuneration is then received from this client does notconstitute a conflict of interest. This is because the recipient of the service andthe source of the remuneration are the same party and there is no motive forconsidering other interests (incentives).
On the other hand, an insurance solicitor, for example, can be regarded asproviding a service to clients by which he or she explains and engages in thesolicitation of insurance products; remuneration, however, is paid by a life
insurance company or insurance agency. An insurance solicitor receives
remuneration from a life insurance company because he or she is employed bya life insurance company or engages in solicitation as commissioned by a life
insurance company. In other words, solicitation activities are essentially
undertaken as work for a life insurance company.
As mentioned earlier, if we think of the act of recommending a product to aclient as something that is done for the client, then the party to whom the service
is provided and the source of the remuneration are different. Thus, it isconceivable that an insurance solicitor would have a clear incentive torecommend a life insurance product whose sale would generate a substantial
amount of remuneration for him or her.
In order to broaden the scope of the application of the client-oriented
principle to also encompass those who sell financial products, the fiduciary
principle requires (1) the provisions of the best interests of the client (Principle2) but does not require that (2) not allowing the interests of the entrusted party(trustee) to be at odds with the interests of the principal person (conflict ofinterest) is to be strictly applied as a principle. This is because the strict
application of (2) is conceivable if the solicitation of insurance had to becommissioned by the client and remuneration for the solicitation of insurance
had to be collected from the client but such an arrangement would be unrealistic.
The client-oriented principle requires that potential conflicts of interest be
ascertained and managed appropriately (Principle 3) and that information
concerning service fees incurred by clients be provided (Principle 4).
In addition, the client-oriented principle sets forth other principles, including
the following: important information shall be provided in an easy-to-understandmanner (Principle 5), services suitable for each client shall be provided(Principle 6), and an appropriate framework of incentives shall be provided to
employees (Principle 7).
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3 Best-interest regulations
Beginning three years after the client-oriented principle was formulated, theFinancial System Council’s Market Working Group recommended a review ofthe principle in August 2020. In addition, regulatory revisions reflecting
regulatory trends in Europe and the United States have also been made.
I will explain, in principle, current issues in line with the “Report of the
Financial System Council’s Market Working Group: Towards progress in thearea of client-oriented business operations”, which was formulated andpublished on August 5, 2020 (hereinafter referred to as the “Report”):(1) Sales and recommendations going beyond mere sales
The current Principle 6 requires the provisions of services suitable for theclient. In the Report, three issues were presented in connection with this point:(i) Proposing an appropriate portfolio(ii) Making a comparative proposal of financial products and services acrossindustries(iii) Post-sales follow-up(i) Proposing an appropriate portfolio
When selling financial products, it is not enough to simply sell new products;
the selling of financial products is predicated on putting together a portfolio(asset structure) appropriate for a given client.
For example, it is important when managing assets to put together a packageof assets by appropriately combining safe assets in the form of government
bonds and yen-denominated interest-bearing assets and riskier high-return
products, such as foreign currency-denominated investment trusts. Safe assets
alone will not generate sufficient returns and risky assets alone could result in a
substantial loss of principal.
When it comes to products offered by life insurance companies, it isimportant to provide balanced coverage in terms of medical coverage, long-termcare coverage, death coverage, and more.
(ii) Making a comparative proposal of financial products andservices across industries
Selling and recommending a foreign currency-denominated annuity, forexample, or any other savings-type product that is highly investment-oriented bycomparing it to a foreign currency-denominated investment trust or other similar
Chapter 5 241

financial products used to be considered ideal. From this perspective, “brief
explanatory documents (important information sheets)”, as described in 4 below,
came to be produced. I will discuss this point below.
Solicitation activities that straddle the divide between the insurance businessand the securities business in this way are possible only where the person in
charge is both a registered securities commission agency and an insurance
solicitor. This also applies to over-the-counter sales at banks and securities
companies.

(iii) Post-sales follow-up
Post-sales follow-up work is already being carried out by life insurancecompanies in the form of policy verification actions. As I noted in Chapter 4IV-3, verification actions entail the confirmation of insurance currently in force
as well as a check to see whether any event for which a claim should be paid has
occurred. Ideally, the age and life stage of the insured should also be confirmed
to see if appropriate proposals can be made accordingly.
What is at issue is the ex post facto principle of suitability. As mentioned in
Chapter 3-V-4(1), the principle of suitability is a regulation under the Financial
Instruments and Exchange Act that prohibits solicitation that is improper in lightof the client’s knowledge, experience, asset situation, and purpose of concluding
a contract for a financial instruments transaction.
A question here arises as to whether a client who holds a high-risk productshould continue to hold it once he or she becomes elderly. This point is limited
to the time of the sale of the product since the text of the law stipulates that“solicitation shall not be engaged in” for products that are non-conforming.
Leaving aside the provisions of the law, it would be desirable to see afinancial institution make some kind of effort in cases where an elderly client
has suffered from a decline in his or her cognitive functions while still inpossession of a high-risk product. It is expected that best practices on this point
will emerge in the future.
(2) Disclosing the client segment on which the product development
process is based
The development of a financial product normally involves a preliminary
investigation that is conducted to determine the segment to which it will be sold.
For example, a client segment consisting of persons who are willing to accept acertain level of foreign exchange risk in order to potentially secure a nice rate of242

return can be assumed for a foreign currency-denominated annuity plan. The
clients belonging to such a segment can be assumed to possess sufficient assets
and have some experience investing in shares and other such investment targets.

Best-interest rule in the United States

Column 33

In the United States, variable annuities and other life insurance products are
regulated as insurance products and as financial products as well.
A party handling financial products needs to be licensed as a securities company
or securities commission agency (broker-dealer; hereinafter securities companies
and securities commission agencies shall be collectively referred to as “BD
commission agencies”) or as an investment advisor.
An investment advisor collects fees from a client, which primarily consist of a
fixed-amount fee proportional to the client’s asset balance, and provides the clientwith investment advice in return. Investment advisors owe a fiduciary duty to theirclients.
On the other hand, a BD commission agency is mainly tasked with selling financial
products, such that the provisions of investment advice (trading recommendations)is allowed to the extent that it is incidental to the selling of financial products.
Compensation for a BD commission agency is received from a financial institution
or indirectly from a client largely in the form of a sales commission for eachtransaction (see the following figure).
Investment advisors and BD commission agents
Investment advisor

Investor
Fees

Investment services
Fiduciary duty isrecognized

AssetsBD commission
agencyInvestor

BD company

Commissions the buying
and selling of securities

Brokers trades

Incidental
investment advice

Commission
payments

Principle of suitability→ Best-interest rule

Assets

Chapter 5 243

To date, BD commission agencies have only been subject to the principle ofsuitability (obligation to solicit products that are compatible with the client’s assets,
income, investment objectives, and other such considerations) rather than afiduciary duty that would be imposed whenever transactions are recommended.
However, there were criticisms to the effect that a typical client would be hardpressed to figure out the difference between a situation in which a BD commission
agency recommends a transaction and a situation in which investment advice is given
by an investment advisor, such that there were calls to recognize that BD commission
agencies were also subject to the imposition of a fiduciary duty.
I will omit the details but, suffice it to say, the U.S. Department of Labor, which
has jurisdiction over corporate pensions, sought to introduce the concept of afiduciary duty for certain transactions. This effort came to an end when a federal
appeals court declared that this was invalid.
In its stead, the U.S. Securities and Exchange Commission (SEC) imposed the bestinterest rule on BD commission agencies; there must be compliance with this rule by
the end of June 2020.
The best-interest rule first requires that a BD commission agency “when making
a recommendation to an individual client, act in accordance with the client’s bestinterests as of the time of the recommendation without placing his or her own
interests above those of the client”. This obligation is fulfilled when the following
four obligations are satisfied:(i) Obligation to disclose: A BD commission agency shall disclose the factthat recommendations shall be made by him or her in his or her
capacity as a BD commission agency.
(ii) Duty of care: A duty to ensure that there are rational grounds forbelieving that a recommendation could be in the best interests of theclient.
(iii) Conflict-of-interest obligation: Ascertain and eliminate or contain anddisclose conflicts of interest.
(iv) Obligation to develop a compliance framework
At the end of the day, the point at issue concerns compensation and BD
commission agencies will continue to be permitted to receive compensation in theform of commission payments. According to the SEC, this is because (i) commissions
are more reasonable for a client who acquires a financial product on a one-time basis
and who then holds it indefinitely and (ii) investment advisors retain a minimum
amount of deposit assets, which could exclude small-amount investors from services
for the buying and selling of securities.

244

These days, however, rather than engage in the direct solicitation of insurance
through a sales agent, many life insurance companies solicit through asolicitation agency instead. In such a case, discrepancies could arise by offering
products targeting asset holders to the members of some other client segment.
Even in cases where sales agents engage in solicitation activities, it isconceivable that the sales division might carry out sales promotion activities
before fully ascertaining the intent of the product development division.
For this reason, a report should require the disclosure of the anticipated client
segment for which a financial product is developed and the provisions of
information to clients.

4 Brief explanatory documents (important information sheets)
Reports require the formulation of important information sheets as brief
explanatory documents. This is modeled in part on KIDs for PRIPs (keyinformation documents for packaged retail and insurance-based investment
products), which constitute brief explanatory documents for packaged financial
products in the EU, and Form CRS (customer or client relationship summary),
which is used in the United States.
The client-oriented principle originally required the provisions of
information on financial products and services to clients in an easy-tounderstand manner (Principle 5). The client-oriented principle requires theprovisions of specific details concerning conflicts of interest with clients, suchas fees (Principle 5 (Note 1)), the careful provisions of information on high-risk
products (Principle 5 (Note 4)), and the provisions of information to enable
comparisons to be made with other products and services of the same type
(Principle 5 (Note 5)).
In this connection, the Report indicated that important information sheets on
certain investment-type financial products be produced and provided to clientsin order to (i) facilitate comparisons with other products of the same type, (ii)clarify risks and costs, and (iii) provide important information for, among others,
the clarification of the solicitor’s position (to shed light on any possibility of aconflict of interest).
Figure 9 on the following page is an outline of the form shown in the Report.
It was decided that the amount of information would be subject to a cap to
produce a concise explanatory document to ensure that it would be easy for theclient to understand.
Chapter 5 245

Figure 9

Illustration of important information sheets

Financiers
1. Basic information on the company• Company name…
2. Handled products (Types of financial products that the company can offer clients are
as follows.)• Deposits, domestic shares, insurance (without investment risk), insurance (withinvestment risk) …
3. Product line-up concept (Our product-selection concept is as follows.) …
4. Complaints and consultation office
Individual products
1. Description of the product (We have been commissioned by a fund-forming
company to solicit sales of the product to clients.)• Names and types of financial products, fund-forming company (investmentcompany), sales consignor, …
2. Risks and investment performance (The yen-denominated principal for the productis not guaranteed; there is a risk of loss associated with the product.)• Details of the risk of incurring a loss…
3. Expenses (Expenses will be incurred when purchasing or holding the product.)• Expenses to be paid at the time of acquisition, expenses to be paid on an ongoingbasis…
4. Conditions for conversion and cancelation (Conversion or cancelation of the productcould be disadvantageous for you.)• Deadline for redeeming the product, amount of cancelation fee to be borne by theclient…
5. Possibility of any conflict between the interests of the company and the interests ofthe client• Obtaining sales commission from the fund-forming company…
6. Taxation outline…
7. Other reference information (Carefully read the following documents before
concluding the contract.)• Pre-contract documents, prospectus
Source: Excerpted from “Report of the Market Working Group: Towards progress in the area of clientoriented business operations”, Financial System Council (August 5, 2019)

246

Incidentally, the selling of financial products is already accompanied by theissuance of prospectuses and the statutory delivery of pre-contract documents.
Important information sheets partially overlap such documents in terms ofincluded contents.
Accordingly, it has been decided that, if the contents of a product are
explained using important information sheets, pre-contract documents and theprospectus can be provided simply by posting them online and sharing an URL
link to access them. If requested by the client, these documents would need to
be provided in paper form.

Form CRS in the United States

Column 34

The SEC in the United States introduced the Form CRS rule to go along with thebest-interest rule. This rule became a model for the important information sheets as
noted above. The Form CRS rule applies not just to BD commission agencies but also
to investment advisors. Enacted concurrently with the best-interest rule, the Form
CRS rule refers to a form that constitutes an important information-providing
document for ensuring compliance with the best-interest rule. You will need to notethat the provisions of Form CRS alone does not amount to satisfaction of the bestinterest rule.
Form CRS is limited to two pages or four pages if the operations of both aninvestment advisor and a BD commission agency are being carried out. Form CRS
must be provided whenever the opening of an account or financial product trading
is recommended, an order is executed, or an account is opened.
The contents thereof are limited to (i) introductory text, (ii) the relationship withthe client and provided services, (iii) fees, costs, conflicts of interest, and principles
of conduct, (iv) a history of disposition by the authorities, and (v) a description ofwhere additional information can be obtained.
Rather than limiting the amount of content, the form includes language
encouraging the client to make inquiries as needed.

5 Coping with a super-aging society
As mentioned in I above, Japan is becoming a super-aging society and is
expected to continue to undergo aging in the years to come. In addition,
approximately two-thirds of household financial assets are held by households
whose members are aged 60 years or over, such that dealing with elderly people
Chapter 5 247

is an exceedingly important management challenge for financial institutions.
Life insurance companies are also required to not just adapt to our superaging society but also proactively make contributions. The Report makes
recommendations primarily regarding the following points.

(1) Flexibility in financial institutions
With this perspective, this recommendation is made primarily with over-thecounter transactions at banks in mind. More elderly persons with impaired
cognitive decision-making ability or family members acting on their behalf visit
bank branches in person.
However, if a person with impaired cognitive decision-making ability
withdraws deposits, takes out a policyholder loan offered by a life insurancecompany, or withdraws dividends without understanding the implications ofsuch actions, such actions would be rendered invalid. In such a case, there is arisk that the bank or insurance company might make a double payment. Out ofconcern for such a situation, financial institutions are expected to take rigid
measures by refusing to engage in transactions with elderly persons or havingtransactions subject to the appointment of an adult guardian. The Report
recommends that transactions be conducted flexibly with the principal person oran agent of the principal person if the payee of the money is clearly ascertained.
(2) Fortifying links between financial institutions and welfare-relatedorganizations
An adult guardian can be appointed to act on behalf of someone who
permanently lacks the capacity to make decisions. The appointment of an adultguardian was often triggered by transactions with a financial institution.
A financial institution should ideally cooperate with a local social welfare
council or comprehensive community support center to exchange information,
including information on ways to deal with elderly persons with impaired
cognitive decision-making ability and information on formulating advice forclients on which organizations should be contacted for assistance.
A financial institution cannot provide personal information directly to suchorganizations but can contribute to community oversight by encouraging clients
to visit them instead.
(3) Consolidating and reducing best practices
The Report touches on products for the elderly, prior efforts to prepare for248the impairment of cognitive decision-making ability, counseling services for theelderly, and follow-up services to be offered subsequent to the sale of financial
products. I covered products for the elderly and follow-up services earlier. In
this section, I will talk about prior efforts to prepare for the impairment ofcognitive decision-making ability.
As mentioned earlier, there is a system at life insurance companies formaking designated proxy claims for insurance money and benefit payments.
Under this system, a family member or another individual designated in advance
may make a claim on behalf of the policyholder when an event occurs thatprevents the policyholder from making a claim on his or her own behalf for asevere disability insurance benefit to be paid in the event that he or she as theinsured falls into a prescribed state of disability or hospitalization benefit.
In recent years, life insurance companies that have set up a policyholder
proxy system have also emerged. Under this system, the proxy can act on behalfof the policyholder to cancel a policy, reduce the amount of coverage provided
under the policy, request a policyholder loan, or carry out other such actions.
In addition, the Report also calls for “the use of digital technology to enableclients to be flexibly served” and “the development of a system to allow forinquiries to determine whether or not a financial agreement is in force”.

Chapter 5 249

IV. Life insurance companies adapting to a digital society(insurtech)
In this section, I will explore technological innovations adopted by life
insurance companies and solicitation agencies in line with advancements in ICT.

1 General remarks
In Japan, fintech has been garnering attention since around 2015. A
portmanteau combining finance with technology, fintech refers specifically tofinancial innovations based on the use of information and communications
technology (ICT).
Familiar examples consist of innovations in terms of payment methods, suchas those that work with QR codes and those that involve fund transfers. Other
examples include household accounting software and robot advisors that provide
investment advice.
As noted in II above, insurtech is a portmanteau combining insurance withtechnology and is a type of fintech.
The precise scope of what insurtech refers to does not appear to be definitely
established. In this section, I will introduce this term broadly from the standpointof the innovations that we see taking place in the life insurance industry thanks
to the application of ICT.

AI technology

Column 35

Further revolutionizing the application of ICT technology in practice is theevolution of artificial intelligence (“AI”). The concept of AI technology itself had
already emerged in the 1950s but people assumed back then that it would take theform of a general-purpose approach to AI that could be employed to carry out
various functions. This general-purpose approach to AI was intended as a way to
perform jobs and engage in housekeeping functions for people with just a single
program.
These days, development work is underway in the area of specialized AI and wehave already seen machines prevailing over top professional competitors in matchesof go and shogi. AI is being introduced to all sorts of businesses. To illustrate, it has
been reported in the news that there are plans to incorporate AI into the process ofunderwriting life insurance policies.

250

The evolution of AI has been boosted significantly by machine learning and more
recently by deep learning, which first came on the scene in the 2000s. Machinelearning is a process whereby a program is made to learn data and then perform
various tasks, such as identification, classification, and prediction, on the basis ofwhat is learned. Traditional machine learning had been predicated on the provisionsof instructions by humans to allow the program to know what characteristics to use
as criteria (feature values) in order to, for example, identify graphic symbols.
However, deep learning has made it possible for AI itself to develop its own
assessment criteria and make decisions accordingly while it processes substantial
volumes of information without requiring the provisions of characteristic criteria byhumans. With deep learning, you can do more than just, for example, input numbers
and have the results properly discerned; you can also have images of dogs
differentiated from images of cats. In the area of automated driving, deep learning
has rendered environmental recognition of road conditions in your immediatesurrounding and the movements of people and cars in your vicinity possible.

2 Online life insurance company
I would like to point to online life insurance company as an example of theuse of ICT. An online-only life insurance company launched operations for the
first time in 2008 at a time when the term insurtech was unknown.
I believe that it was later when you could also submit applications anddisclosures rather than just obtain estimates online that marked the beginning ofwhat we know as insurtech.
In recent years, we have seen life insurance companies with sales agents andagency networks emerge to provide life insurance for which the process of taking
out policies is completed online in addition to life insurance companies thatspecialize in online operations.
Companies that have also developed chat bot features that use AI to respondto inquiries – albeit text-based ones – from clients and that otherwise provide
unmanned client services have also entered the market.
Furthermore, robot advisors are also being harnessed to propose
recommended products whenever clients answer simple questions online.
While the sales performance of online life insurance companies is improving
thanks in part to COVID-19, whether or not these developments take root will
likely depend on future initiatives to enable companies to provide a wide rangeof products capable of meeting the needs of consumers.

Chapter 5 251

3 Information innovations in the solicitation of insurance
While not recognized as an element of insurtech, information terminals usedby sales agents and the employees of agencies to engage in the solicitation of
insurance are evolving by leaps and bounds. Along with providing financial
planning features that allow for the calculation of necessary coverage amounts,
these information terminals can also generate written proposals and more.
In addition, there are companies that have also digitized application forms
and enabled the application process to be completed by affixing a signature to
the application as it appears on a tablet.
Of course, the first premium amount can be paid with a credit card or othercashless option, thereby obviating the need for cash to be prepared by thepolicyholder.
Moreover, the ability to change your address or carry out other maintenanceprocedures or make a benefit claim through a terminal or otherwise online has
become commonplace.
Some companies provide these services through an app that can offer otheradvantages, such as free health consultations.
4 Insurtech products
As mentioned in Column 32 in II above, products are now being offered thatprovide for yearly premium discounts. For these products, a wearable device isused to measure the amount of physical activity performed by the insured as wellas their heart rate and other variables; measurement results are then converted
into points, the status of which is used for discount calculation purposes.
justInCase Inc., a small-amount, short-term insurance provider, also offers a
product that it calls Warikan Cancer Insurance. With this product, policyholders
at a given point in time (excluding persons with cancer) pay on a deferred basis(cost splitting) the sum of insurance money payable to persons with cancer andthe operating costs of the small-amount, short-term insurance provider divided
according to age group.
This way of sharing the burden of paid insurance money and benefits amonga group of policyholders is known as P2P (peer-to-peer) insurance.
There is an example of a plan in China in which a digital platform provider(Alibaba Group) provides a lump-sum payment to anyone who contracts cancer
or a serious illness, whereby the burden of these lump-sum payments and any
administrative fees are shared among participants; this plan is known as “mutual252

aid treasure”. There are already more than 100 million enrollees in this plan. Itshould be noted, however, that the Chinese authorities have certified that thisplan does not constitute insurance.
Insurtech is an option for bicycle insurance, pet insurance, insurance to cover
household belongings, and more. A wide variety of products are offered in the
non-life insurance sector. Indeed, insurtech appears to be more advanced in the
non-life insurance sector than it is in the life insurance sector.

5 The brokering of financial services
There is a type of business involving electronic payment agency’s work. The
operators of this type of business are a type of fintech company that connects toa bank’s system to inquire as to the balance of an account in the name of a clientof the bank or issue remittance instructions to the bank at the behest of a client.
A bill to permit such a company to act as an intermediary for bank deposits,
financial products, and insurance products passed during an ordinary session of
the Diet in 2020.
Previously, a license to operate as a banking agency was needed to mediatebank deposits, registration as a financial products broker was needed to mediate
financial products, and registration as an insurance solicitor was needed tomediate insurance products. A so-called affiliated company system was in place
whereby a banking agency would be subject to the guidance and supervision ofa bank, a financial products broker would be subject to the guidance andsupervision of a financial products distributor, and an insurance solicitor would
be subject to the guidance and supervision of an insurance company.
Thanks to the recent enactment of the relevant statute (as an amendment to
the Act on Sales, etc. of Financial Instruments), a financial institution can now
sell these financial products by registering as a financial services broker on an
independent basis (Figure 10 on the following page).
The business of such an institution does not always need to be carried out
online but a financial services broker will naturally be allowed to operate anelectronic payment agency’s business (Figure 11 on the following page).

Chapter 5 253

Figure 10

Current legal system for the brokering of financial products

Broker/intermediary (current law)
Banking agency (license)
Insurance solicitor (registration)
Financial products broker(registration)

Money lender (registration)

Figure 11

Affiliated financial
institution
Guidance andsupervision
Guidance andsupervision
Guidance andsupervisionBank
Insurancecompany
Securities
company

Guidance andsupervision

MoneylenderNew legal system for financial intermediary services

Financial services broker (registration)

Partner financial
institution

Deposit brokerage services

Bank

Insurance brokerage services

Insurancecompany

Securities brokerage services

Securities
company

Money lending brokerage
services

Moneylender

6 ICT for administrative services
ICT is also being applied to an increasing degree to allow insurancecompanies to carry out administrative work. Since 2014, Nippon Life Insurance
has been applying Robotic Process Automation (RPA) to its administrative work.
RPA refers to software that enables the automation of routine tasks normally
performed on computers by human beings.
Going by the nickname Nissay Robomi is software that carries out
administrative work for products sold on an over-the-counter basis at financial
254

institutions. It has been reported that this software handles all administrative
work, including the acceptance of new applications, maintenance procedures,and payment functions with a workforce of less than 25 employees and manages
to properly take on a workload equal to 20% of over-the-counter sales
administration.
Users themselves are now able to develop RPA themselves. Routine
operations, such as work to enter the contents of application forms filled out byhand into a core system, can be carried out faster than what humans are capableof and at any hour of the day.
Such examples of RPA are currently being harnessed for operations
departments as well and have been helping to streamline operations and allow
them to be performed at a higher level.

Chapter 5 255

V. Moves by life insurance companies during COVID-19
This section is the final section. In this section, I will describe the responseby life insurance companies to COVID-19, which constitutes the biggest
challenge facing our industry as of the time of the writing of this book.

1 Special treatment with respect to payments of insurance money andbenefits
Amid the worldwide outbreak of COVID-19 in 2020, even those who tested
positive in Japan had to recover at home or be treated in a hotel rented by a local
prefectural government if they were either asymptomatic or mildly ill. With thisapproach, it became problematic as to whether one was considered to havebecome hospitalized for the purpose of receiving a hospitalization benefit undera private health insurance plan. Policy provisions define hospitalization asentering a hospital or medical clinic for the primary purpose of receiving
treatment under the supervision of medical doctors and other healthcare workers
in the event that it is not possible to receive medical treatment at home orelsewhere.
However, the payment of hospitalization benefits due to the treatment of thereceipt of care at home or in a hotel as being equivalent to hospitalization becamea universal practice in the industry in response to COVID-19.
In addition, some life insurance companies have treated deaths due to
COVID-19 as being eligible for payment of benefits under an accidental death
insurance rider (a rider that pays out insurance money in the event of a deathcaused by an accident rather than an illness).
2 Extending the premium payment grace period
The treatment of policies as immediately lapsing when the premium payment
deadline and corresponding grace period have passed was suspended in the wakeof the Great East Japan Earthquake and other comparable disasters. The
premium payment grace period was also extended by up to six months in
response to the outbreak of COVID-19. If a client found it difficult to make apayment by the end of September 2020, his or her payment deadline was further
extended to the end of April 2021.
There were apparently many life insurance companies that also waived
256interest amounts owing on new policyholder loans in order to meet the need forfunds on the part of policyholders.

3 Resuming face-to-face sales
The spread of COVID-19 also had a huge impact on life insurance companies.
This was because employees were required to engage in telework and it became
difficult for executives and employees involved with sales and administrative
duties to report for work but also because engaging in face-to-face sales work
especially in channels in which sales agents and agencies played a key rolebecame challenging.
In response to a declaration of a state of emergency issued in April 2020, life
insurance companies all chose to voluntarily refrain from engaging in face-toface sales activities. After this state of emergency was lifted in May of the same
year, face-to-face sales resumed with the use of masks and hand sanitizers incases where the consent of the client was obtained.
In life insurance sales, interactions with clients occur over and over again asclients are found, needs are confirmed, and products are proposed. It may bedifficult to arrange a face-to-face meeting every time. In this connection, there
are non-face-to-face approaches that are based on the use of telephone calls,
email messages, social networking services, and direct messaging services.
Situations will arise in which face-to-face meetings cannot be avoided inorder to confirm client needs or explain products that encompass a wide rangeof coverage options. However, it is important to use non-face-to-face measureseffectively in order to reduce the number of times face-to-face meetings are held
and the required duration of each face-to-face meeting as much as possible.
While it seems likely that COVID-19 will cause online sales to reach greater
heights, it is believed that the Internet is not yet capable of replacing the advice
and careful explanation of products given by persons selling insurance to addressclient needs.
Whether persons selling insurance will become proficient in effectively
utilizing remote tools to sell products is a huge challenge for life insurancecompanies.
In addition, there is also the issue of how to compensate sales agents who arelimited to engaging in face-to-face sales activities and are consequently unable
to improve their sales performance. On this point, it should be noted that there
are many life insurance companies that guarantee a certain amount of salary forsales agents who are affected in this way.
Chapter 5 257

In conclusion
At the time I was authoring this book, COVID-19 was continuing to spreadworldwide, and it seemed like the world was changing from what it was likebefore COVID-19 struck. Vaccines were not yet widely available, and we werebeing bombarded by wave after wave of infections. COVID-19 forced us toaccelerate the adoption of remote ways of working and the digitalization of ouroperations. We have also seen governments make moves to minimize proceduresthat require the affixing of personal seals as much as possible.
These changes are irreversible. Combined with the ongoing march of digitaltechnology, all signs seem to suggest that living and working without being inclose contact with others are becoming a societal norm.
Whether this crisis can be treated as an opportunity is also a question withwhich life insurance companies are grappling.
I believe that the key lies in digital transformation (DX). We need to ask
whether new value can be created through digital means and what kinds of newvalue can emerge. Rather than think of DX as something to be achieved bybuilding up visions of the future, it might be better to envisage DX as a process
whereby innovative technologies and business models appear at certain
junctures to give rise to sweeping disruptive changes seemingly at once. It would
seem that such disruptive changes have not yet occurred in the life insurance
industry, such that no clear indications of DX in this area can be discerned.
I wrote this book in a time of great historical change and, in order to preventthe contents of this book from becoming quickly irrelevant, have sought toinclude the latest developments while being mindful of traditional businesspractices in our industry. I wish for nothing more than for this book to be at least
somewhat informative and helpful to readers.

April 2021
Noboru Matsuzawa

259

All rights reserved. No part of this publication may be
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Public Interest Incorporated Foundation
Oriental Life Insurance Cultural Development Center
The Prudential Tower 9F, 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 is originally published by The Hoken Mainichi Shinbun Co., Ltd., in 2021. With the consent
of the authors and the publisher, OLICD Center translated the book into English in 2023