Japan’s Insurance Market

2014

Japan’s Insurance Market 2014
ContentsPage

To Our Clients
Tomoatsu Noguchi
President and Chief Executive, The Toa Reinsurance Company, Limited

1

1. Features of Japan’s Non-Life Insurance Market and Aioi Nissay Dowa
Insurance Co., Ltd.’s Midterm Management Strategy
Hisahito Suzuki
President, Representative Director
Aioi Nissay Dowa Insurance Co., Ltd.

2

2. Life Insurance Market in Japan
Ikuo Kudoh, F.I.A.J.
Deputy General Manager, Actuarial & Budgeting Dept.
Sumitomo Life Insurance Company

11

3. Convergence Capital and Its Influence on the Japan Non-Life(Re)Insurance Market
Jonathan OatleyManaging Director, Guy Carpenter

17

4. The Direction of Recent Amendments to the Insurance Business Law Related
to Insurance Sales Regulations
Itaru Adachi
Attorney at Law

22

5. Trends in Japan’s Non-Life Insurance Industry
Underwriting & Planning Department
The Toa Reinsurance Company, Limited

28

6. Trends in Japan’s Life Insurance Industry
Life Underwriting & Planning Department
The Toa Reinsurance Company, Limited

33

Supplemental Data: Results of Japanese Major Non-Life Insurance Groups (Company)
for Fiscal 2013, Ended March 31, 2014 (Non-Consolidated Basis)

40©2014 The Toa Reinsurance Company, Limited. All rights reserved. The contents may be reproduced only with the written permission of
The Toa Reinsurance Company, Limited.

To Our Clients
It gives me great pleasure to have the opportunity to welcome you to our brochure, Japan’s
Insurance Market 2014. It is encouraging to know that over the years our brochures have been wellreceived even beyond our own industry’s boundaries as a source of useful, up-to-date information about
Japan’s insurance market, as well as contributing to a wider interest in and understanding of ourdomestic market.
During fiscal 2013, the year ended March 31, 2014, the Japanese economy remained on amoderate recovery track as personal consumption was robust, reflecting improvement in the labormarket and rising personal income, while corporate earnings increased against the backdrop of thepositive impact of the Abe administration’s economic policies and more favorable export conditions.
In the non-life insurance industry in Japan, net premium income trended upward centering on
premiums from fire insurance and automotive insurance, supported by increases in the number of new
housing starts and automotive sales, while also benefiting from the revision of insurance premium rates
and insurance products.
In the life insurance industry in Japan, both the number and the amount of new policies trended
upward, reflecting brisk sales of medical insurance and whole life insurance. On the other hand,
although the number of policies in force increased in line with buoyant sales of new policies, there waslittle growth in the amount of policies in force, in view of the recent trend toward greater emphasis on
medical coverage and less emphasis on death protection.
In the reinsurance market, there was excess reinsurance capacity owing to the improved financial
condition of reinsurance companies and the large amount of capital flowing into the reinsurance
market. Thus, reinsurance premium rates softened, resulting in intensified competition among
reinsurers.
In these circumstances, in accordance with the Forward 2014 medium-term management plan
launched in 2012, the Toa Re Group implemented the initiatives described below to realize thecorporate vision articulated in the plan. Utilizing sophisticated expertise and intelligence (E&I), we
provide peace of mind with high-quality solutions and services with the goal of being a growing,profitable global reinsurance group trusted by all stakeholders.
By endeavoring to act as an exemplary reinsurance company, we are resolved to fulfill our mission:“Providing Peace of Mind.”
In conclusion, I hope that our brochure will provide a greater insight into the Japanese insurance
market and I would like to express my gratitude to all who kindly contributed so much time and effort
towards its making.

Tomoatsu Noguchi
President and Chief Executive
The Toa Reinsurance Company, Limited1

1.

Features of Japan’s Non-Life Insurance Market
and Aioi Nissay Dowa Insurance Co., Ltd.’s
Midterm Management Strategy
Hisahito Suzuki
President, Representative Director
Aioi Nissay Dowa Insurance Co., Ltd.

This article begins with an overview of the features and profitability of Japan’s nonlife insurance market, and then reviews the corporate reorganization of Japan’s non-life
insurance industry. Given these market and industry trends, the article then explains
the midterm management strategy of the MS&AD Group and Aioi Nissay Dowa
Insurance, and our initiatives to further enhance growth, earnings and soundness.

1. Japan’s Non-Life
Insurance Market
and Industry
Reorganization(1) Features of Japan’s Non-Life Insurance Market
Fiscal 2013 net premium income for the 27 non-life insurance companies that are
members of the General Insurance Association of Japan totaled ¥7,771.3 billion. The
size of this market has not changed significantly over the past decade.
Automobile-related insurance accounts for a major share by line of business. In
fiscal 2013, automobile insurance (48.4%) and compulsory automobile liability
insurance (12.8%) together accounted for around 60% of the overall non-life market,
in which number of automobile ownership and new vehicle sales would significantly
affect the scale of these markets. The next largest segment by volume was fire
insurance (14.8%), which is affected by the number of housing starts and corporate
spending trends. Next came casualty insurance such as liability insurance (11.9%),
accident and health insurance (8.8%), and marine and transport insurance (3.3%).
Table 1: Net Premium Income
Fiscal(Billions of yen)

2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013

Net premium 7,437.2 7,412.0 7,485.4 7,537.2 7,470.0 7,161.8 6,971.1 6,971.0 7,116.1 7,371.8 7,771.3
incomeSource: The General Insurance Association of Japan, Factbook

Table 2: Net Premium Income by Line of Business (Fiscal 2013)
LOB
Percentage

Compulsory
Automobile automobile
liability
48.4

12.8

(%)

Fire

Casualty

Accident& Health

Marine andtransport

14.8

11.9

8.8

3.3

Source: The General Insurance Association of Japan, Factbook

The profitability of the non-life insurance market has trended downward over the
past several years due to factors such as increases in the number of automobile
accidents and natural disasters. Consequently, the combined ratio exceeded 100%from fiscal 2008 through 2012.

2

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

Table 3: Loss Ratio, Operating Expense Ratio and Combined Ratio
Fiscal(%)

2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013

Loss ratio

55.3

63.6

60.6

62.0

62.8

66.6

68.1

67.5

83.4

70.4

64.1

Operatingexpense ratio
Combined
ratio

33.2

32.6

32.1

32.2

33.2

35.1

35.0

34.6

33.8

33.0

32.3

88.5

96.2

92.7

94.2

96.0 101.7 103.1 102.1 117.2 103.4

96.4

Source: Compiled by Aioi Nissay Dowa Insurance from data available on the General Insurance
Association of Japan website.

Improving these relatively low profitability circumstances requires enhancing the
profit from automobile insurance, which accounts for the largest share of the market.
This is a major priority for the entire non-life insurance industry. While raising rates,
non-life insurance companies have steadily improved profitability in ways such as
reviewing* the age-based rating scheme and introducing a new class rating scheme forpolicyholders who have had accidents.
* In 2009, the General Insurance Rating Organization of Japan (GIROJ) revised the reference loss
cost rate after a six-year interval. Given the greater risk profile of older drivers, the GIROJ also
introduced a rating system that reflects risk differentials for named insureds according to their age.
In addition, in 2011 the GIROJ revised the premium table applied to drivers who have had
accidents with a view to ensuring fair treatment of policyholders. With these changes in place, nonlife insurance companies implemented a succession of product revisions.

(2) Industry Reorganization
Issues such as new product development costs and intensified premiumcompetition brought on by ongoing deregulation from the second half of the 1990s
heightened the need to raise management efficiency by scale expansion, which resulted
in industry reorganization through mergers. The first round of reorganization in 2001
consolidated the 14 listed insurance companies into 8. Other factors that contributed
to the reorganization were the protracted stagnation of the Japanese economy after theend of the bubble economy in the early 1990s and the looming impact of the lowbirth rate and aging population.
Under these circumstances, additional mergers and acquisitions took place in the
non-life insurance industry, with the MS&AD Insurance Group and NKSJ Groupemerging in April 2010. Along with the Tokio Marine Group, the industry
consolidated into three mega non-life insurance groups that together account for morethan 90% of total non-life premium income in Japan.

31. Features of Japan’s Non-Life Insurance Market andAioi Nissay Dowa Insurance Co., Ltd.’s
Midterm Management Strategy

1999

2000

Premium
deregulation

2001

Insurance productdiversification

The Dai-Tokyo Fire
& Marine
Insurance Co., Ltd.

2002

Financial big bang
completed

2008

Further industry
consolidation &liberalization

2010

2013

Promotion of consumer
protection

Aioi Insurance
01.4 Co., Ltd.

The Chiyoda Fire
& Marine
Insurance Co., Ltd.

Aioi Nissay
Dowa
10.10 InsuranceCo., Ltd.
Nissay Dowa
01.4 General InsuranceCo., Ltd.

Nissay General
Insurance Co., Ltd.

The Sumitomo
Marine & Fire
Insurance Co., Ltd.

01.10
Mitsui Marine & Fire
Insurance Co., Ltd.

AdlickInsurance
Co., Ltd.

Mitsui Sumitomo
Insurance Co., Ltd.

Mitsui Seimei
General InsuranceCo., Ltd.

The Sumi-Sei
General InsuranceCo., Ltd.

03.11(Transfer of portfolio)
Koa Fire and Marine
Insurance Co., Ltd.

10.12
(Transfer of portfolio)

Nipponkoa
Insurance
01.4 Company,
LimitedThe Nippon Fire andMarine InsuranceCo., Ltd.

Dai-ichi Property& Casualty
Insurance Co., Ltd.
The Yasuda
Fire and Marine
Insurance
Company,
LimitedThe Nissan
Fire and Marine
Insurance Company,
Limited

02.7

02.4

NKSJ

Taiyo Fire &MarineInsurance Co., Ltd.

02.4

Sompo Japan
Insurance Inc.

The Yasuda Fire andMarine Insurance
Company, Limited
Taisei Fire &MarineInsurance
Company

02.12

Insurance Co., Ltd.
The Tokio
Marine &Fire InsuranceCo., Ltd.
The Nichido
Fire & Marine
Insurance
Co., Ltd.

Tokio Marine &04.10 Nichido Fire
Insurance Co., Ltd.

Source: Compiled by Aioi Nissay Dowa Insurance from data available in the General Insurance Association of Japan’s Factbook.

Tokio Marine

Nisshin Fire & Marine

4

11.6

MS&AD

The Dowa Fire &Marine InsuranceCo., Ltd.

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

2. Our Position
within the
MS&AD
Insurance Group

Overview of the MS&AD Insurance Group
The MS&AD Insurance Group was established in April 2010 through the
integration of Mitsui Sumitomo Insurance Co., Ltd., Aioi Insurance Co., Ltd., andNissay Dowa General Insurance Co., Ltd., with MS&AD Insurance Group Holdings,
Inc. as the Group’s holding company.

(Holding Company)
Domestic Non-Life Insurance Business

Overseas Business

Overseas Subsidiaries

Domestic Life Insurance Business

Financial Services Business
Risk Related Services Business

3. Aioi Nissay Dowa
Insurance’s Vision(Midterm
Management Plan
“AD Next
Challenge 2017”)(1) Term of Plan and Positioning
Aioi Nissay Dowa Insurance started its new midterm management plan, “ADNext Challenge 2017”, on April 1, 2014.
We will execute the plan over four years from fiscal 2014 through 2017. The firsttwo years will be Stage 1, during which we intend to transform our corporate structure
and restructure our operating fundamentals. The final two years will be Stage 2,
during which we intend to produce results as one of the Group’s core non-life
insurance companies.

(2) Fundamental Approach of the Midterm Management Plan
Our priority during Stage 1 will be rebuilding our growth strategy. We will
execute the shared Group initiative of reorganization by function and our companyspecific initiatives of corporate structural innovation and new channel structural
innovation to generate corporate resources in the form of personnel, expenses andcapital that we can allocate quickly in businesses in which we are strong and growing.
We will generate sustained growth in Stage 2 as a result of the initiatives in Stage 1.

5

1. Features of Japan’s Non-Life Insurance Market andAioi Nissay Dowa Insurance Co., Ltd.’s
Midterm Management Strategy

Generate resources through reorganization by function, corporate structural innovation and structural innovation in new
channels and invest them in growth businesses

Stage 1: Rebuild operating fundamentals
Stage 2: Achieve results

Generate sustained growth by working from improved fundamentals to achieve growth, earnings and soundness

Consolidate and reorganize overseas operations
Reorganize head office functions

Innovate sales & operational processes

Corporate
structural
innovation

Innovate personnel deployment and roles
Innovate organization
Reorganize next-generation channel fundamentals

Structural
innovation in
new channels

Initiatives to improve earnings (expand beyond automobiles)
Reform property expenses (IT & roadside assistance services)
Reform personnel expenses

Concentrate
resources

Rebuild
our strengths

Growthbusinesses

Improvecustomersatisfaction

Individualcompany
initiatives

Midterm product strategy(strengthen service and channel support)

Midterm claim service strategy(innovate claim payments, customer services, SC)

Administration&
IT infrastructure

Individualcompany
initiatives

Midterm administration strategy

Midterm systems strategy

ERM

Group initiatives

Risk appetite

Establish
ERM cycle

Plan linkage

Use risk appetite as a benchmark
in evaluating businesses

Formulatemanagement plan

Execute management plan

Achieve sustained growth (industry leader in profitability and combined ratio)

Share offices and sites

Reorganization
by function

Generate corporate resources

Reorganize local sales networks (transfers among Group companies)

Integrate system and hosts
Individual company initiatives

Innovate earnings structure

Joint Group initiatives

Rebuild growth strategy

Transfer and consolidate lines and channels

Monitor risk appetite(3) Specifics of the Midterm Management Plan
1 Reorganization of the MS&AD Group by Function

Reorganization by function is a shared MS&AD Group initiative. Its significanceand objectives in each area are as follows:• Reorganize marine, aviation and motor channels as well as local sales networks to give
the Group an aggregate number one position in each business segment and region;• Reorganize third sector insurance to achieve the number one position in non-life
owned life insurance operation by exercising comprehensive Group strengths;• Pursue Group efficiencies by sharing bases and reorganizing overseas businesses;
and• Enhance governance by the holding company by reorganizing head office functions.
2 Key Corporate Structural Innovation Initiatives• Sales framework innovation
We will consolidate ancillary sales operations, such as bookings at sales offices,
to main branch central administration departments in order for sales offices toconcentrate more on sales promotion.

6

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

• Role innovation
We will innovate roles and work processes for operations, sales divisions, claim
services divisions, and head office employees based on qualifications.
• Organizational innovation
We will review local operating frameworks in ways such as regrouping mainbranches and branches to fundamentally reform the organizations for claim
services, regional operating divisions and the head office.
3 Key New Channel Structural Innovation Initiatives

We will significantly enhance sales potential through new channel structural
innovation initiatives designed to create new sales networks, and improve andstrengthen internal administrative processes.
• Reinforce recruitment of potential professional insurance agents who will work
for Aioi Nissay Dowa Insurance until they establish their own agencies affiliatedwith the Group, and also enhance the sales capabilities of sales personnel• Reinforce internal administrative control processes at large agencies• Enhance agency quality to build an agency network that would get support from
customers
4 Rebuilding Domestic Growth Strategy
i. Direction for Rebuilding Domestic Growth Strategy
We will rebuild growth strategy in Japan by allocating corporate resources in theform of personnel, expenses and capital generated from the above 1 to 3 into fourmain areas, i.e., a) professional and motor channels; b) Toyota and Nippon Life
Insurance markets; c) wholesale market; and d) overseas automobile retail market.

Our goal is to build a powerful retail base that helps us stay closely attuned to communities. Guided by our targets and our risk appetite policies, we will structurally
innovate our channels by screening agencies to cull those that are low quality, growth or profitability, while deploying personnel to growth businesses.

RetailEnhance our professional and motor businesses

2

Enhance business in the Toyota market

3

Evolve the alliance with Nippon Life Insurance

4

Strengthen business in the wholesale market

5

Overseas automobile retail businessTotal service
Home & business

Wholesale

Concentration

Professional

1

Middle market, small and medium-sizedcompanies (including overseas support)

Regional financial
institutions

Relationship management
partnerships

Employee market

Large
corporations

Selection

Risk capacity(Quantify risk in risk categories)
Reorganization by function

Deploy personnel to growth markets

Resources incl. cost synergies

Corporate structural innovation

Structural innovation in channels

Achieve sustained growth

Toyota Group
dealerships

Motor

7

1. Features of Japan’s Non-Life Insurance Market andAioi Nissay Dowa Insurance Co., Ltd.’s
Midterm Management Strategy

ii. Toyota and Nippon Life Insurance Markets
Joint initiatives involving our business partners Toyota Motor Corporation andNippon Life Insurance Company that expand our insurance underwriting business are
the most significant advantage for us.
First we are generating sustained growth by expanding the insurance underwriting
business at Toyota automobile dealerships. This involves not only selling insurance toToyota customers who purchase new Toyota automobiles but also strengthening sales
to existing Toyota owners where we still have potential to expand.

Toyota Dealership Market
Toyota: Approx. 20.6 million vehicles*

Premium Income from the Toyota Market
Targeting sustained growth(Billions of yen)

232.9

250.0

+79.5 billion yen

Automobile insurance for
Toyota dealerships(company total)
Approx. 4.2 million
vehicles*Premium Income (Sales Basis)

Fiscal 2013:202.7 billion yen

30.2

200.0

153.4
150.0

14.4

23.1
16.9

20.0

23.3

26.3

24.7

27.7

27.8

29.4

Toyota Group
companies

25.0

23.2

Toyota Group

100.0
139.0 146.3

150.6 152.7

164.0 171.1 171.6 154.0

01

03

05

190.6
171.9 172.8 182.3

202.7 dealerships

50.0(Premium income from the
Toyota Group dealerships)
0.0*Aioi Nissay Dowa Insurance estimate

02

04

06

07

08

09

10

11

12

13

(Fiscal years)

Note: Premium income data on a sales basis

We also see the potential for growth in the Nippon Life Insurance policyholder
market, where we are generating sustained growth by accelerating unified initiatives
with Nippon Life Insurance to expand non-life insurance sales.

8The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

Nippon Life Insurance Policyholder Market
Nippon Life Insurance: Approx. 9.88 million
Incl. corporate customers:
Approx 220,000 companies

Premium Income from the Nippon Life Insurance Market
Targeting sustained growth(Billions of yen)

190.5

200.0

Wholesale Division partnerships(RM partnerships)+83.4 billion yen
150.0
107.1

Premium Income from the Nippon
Life Insurance Market

100.0

56.4

TS = Total service
RM = Relationship management

55.4

59.9

64.3

99.5

RM
partnerships

66.4

69.7

16.4

17.4

18.0

19.4

16.8

TS
partnerships

TS
solo

16.1

20.7

22.6

19.0

18.8

17.2

16.8

52.3

54.1

54.3

55.4

56.6

53.1

56.8

61.9

62.8

64.8

68.4

71.6

48.0

01

02

03

04

05

06

07

08

09

10

11

12

13

13.3

50.0

+

Partnerships with professional agencies(TS partnerships)

58.4

65.2

45.8

Fiscal 2013:190.5 billion yen
TS employee channel (TS solo)

85.3
63.0

92.3

0.0
(Fiscal years)

Note: Premium income data on a sales basis(4) Establishment of Enterprise Risk Management (ERM)
1 ERM Objectives

We are implementing ERM to reinforce integrated management of risks, capitaland returns so that we can appropriately and promptly address our various
management issues, such as transforming our business portfolio throughreorganization of functions, improving profitability, and dealing with natural disasters
and changes in the financial environment. With strong financial ground, we willrealize sustained growth and improve profitability and capital efficiency and enhance
our corporate value.
2 ERM Cycle

As one of the core companies of the MS&AD Group, Aioi Nissay Dowa
Insurance has established a similar ERM cycle to that the Group employs tounderstand risk quantitatively and qualitatively from a companywide perspective.
Armed with this knowledge, we are basing risk appetite on a well-controlled balanceamong risk, return and capital to enhance corporate value by working from our strong
financial basis to achieve sustained growth, improved profitability and capitalefficiency.

91. Features of Japan’s Non-Life Insurance Market andAioi Nissay Dowa Insurance Co., Ltd.’s
Midterm Management Strategy

MS&AD Group ERM Summary

Expanding Corporate Value
Work from a Sound Base to Achieve Sustained Growth and Improve Profitability and Capital Efficiency

rnSoundnesstu

CapitalBalance

Re

Executemanagement
plan&

Formulate countermeasuresand improvementssk

Monitor risk
appetiteconditions

Return(Profit)Ri(Management PDCA)

Risk Appetite
Linkage with Plan

ERM Cycle

Risk appetite and resource deployment with a well controlled balanceamong risk, return and capital

E f Capf i c ita
ien lcy

Use risk
appetite as abenchmark in
evaluating businesses

Understandrisks and theircharacteristics(risk profile)

Risk

Formulate Management Plan

(5) Strategic Challenges Based on Risk Appetite Policy
1 Reinsurance Strategy

Diversifying both domestic and overseas underwriting risks is one of the keys in
our risk appetite policy. We will therefore strengthen our reinsurance strategy such as
controlling domestic natural catastrophic risks by maintaining appropriate retention
and cession while carefully expanding profit focused overseas inward reinsurance.
Ensuring sound risk control, we will generate better returns on risk by diversifying
underwriting risks.
2 Overseas Automobile Retail Business

Our focused commitment of resources to the overseas automobile retail businesswill generate growth and expand returns on risk. Representative initiatives involve
transferring authority to local operations to raise organizational flexibility andefficiency, and raising the efficiency of overseas operations largely by taking effective
advantage of the reorganization of functions. We will also invest to increase thenumber of countries in which we do business to establish the foundation for profitable
operations.
3 Natural Disaster Risk Management

We will address the rising risk of natural disasters by balancing risk and return
while maintaining conservative reinsurance coverage and sustaining increased
provisions to the contingency reserve to ensure a sufficient risk buffer.
In closing, we will steadily implement our midterm management strategy andfurther strengthen growth, earnings and soundness for the MS&AD Group and Aioi
Nissay Dowa Insurance, so that we can increase the MS&AD Group’s corporate value.
102.

Life Insurance Market in Japan
Ikuo Kudoh, F.I.A.J.
Deputy General Manager, Actuarial & Budgeting Dept.
Sumitomo Life Insurance Company

The needs of consumers in Japan’s life insurance market are evolving as a result ofchanges in social structure. This article discusses circumstances in the focus areas ofnursing care, medical care and savings.

1. Environment
Surrounding theJapanese Life
Insurance Industry(1) Public and Private Healthcare Insurance Programs
Social security system in Japan adopts what is called “universal insurance andpension coverage” policy and it is compulsory for every citizen in Japan to participate
in the public social healthcare insurance program. This program serves to decrease theburden of payment for medical treatment borne by individual patients, sharing thecost derived from illness and injury on a societal level and, furthermore, assuring anequal opportunity for everyone to receive high quality advanced medical treatment.
Also, there is a ceiling for the amount of monthly payment for medical treatment
borne by individuals according to their ages and income levels. This makes it possible
to keep the payment of individual participants below the ceiling amount for any
medical treatment as long as the treatment is within the coverage under the program,regardless of the actual amount of treatment expenses.
In this regard, the medical and health insurance provided by the private insurers
in Japan typically compensates the damages for the self-borne medical costs exceeding
the ceiling amount and non-covered costs under the program, for example, travelling
and living expenses related to treatment or hospitalization, loss in income due to longterm hospitalization or expenses for “advanced medical treatment” which are notrecoverable under the program. The sum insured in the private medical and healthinsurance is typically determined as a fixed amount.

(2) Population and Households
Japan has been experiencing a lowering birth rate and aging demographic, andfacing a declining population. The beginning of a declining trend in the working age
population (age 15 to 64) was already identified back in 1996, and the nation’s overall
population has been on a downward trend since 2005. As of October 1, 2013, thetotal population in Japan was 127.3 million, of which the number of people aged 65
or over against total population (population aging rate) was 25.1%.
In the future, the number of people in the over 65 years old group, especially the“over 75 years old” group is expected to grow, while the population of the “30 to 49
years old” group is anticipated to decline, indicating a potential shrinkage in thedomestic private consumption.

11

2. Life Insurance Market in Japan

Figure 1: Changes in Population by Age Group(Figures as of October 1, each calendar year)
Source: “Estimated Population of Japan” National Institute of Population and Social Security
Research, “Population Census” the Ministry of Internal Affairs and Communications

Amid a trend in declining population, there has been a change in the compositionof a family as well. A “typical family” used to comprise “parents and two children” –four in total. Currently, the number of “single-person families” has shown a rising
trend and its proportion of the total has been increasing; notably it has been thelargest group of family type since 2007. In the future, the number of “single-personfamilies” is expected to increase further as the number of unmarried persons aged 50
or over significantly grows.
Figure 2: Number of Private Households by Family Type

(Figures as of October 1, each calendar year)
Note: Members of the above households do not include nursing home residents and similar status
persons. The households comprising three families or other types of households are included
in “Others.”
Source: “Population Statistics,” National Institute of Population and Social Security Research

12

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

2. Changes in Life
Insurance Market
in Japan(1) Aging Population
The total population of Japan is decreasing, while the proportion of the total
relating to people aged 60 or over continues to increase. As the people in that age
group are likely to be more concerned with risks associated with longevity rather thandeath, insurance products targeting elderly people, such as whole life medical
insurance, are expected to be more popular in the market. In anticipation of thecoming of an aging society, there are growing needs for more credible and value added
customer services.

(2) Young Generation is Reluctant to Buy Life Insurance in Japan
It is notable that the number of life insurance policyholders, especially in theyoung age group, has been on a declining trend. Several reasons for this reluctancecould be considered, including: (1) As the security level in the office or the work place,such as the ID check at the entrance, have been tightened, it has become moredifficult for individual sales agents to access the young people who will be potential
customers; (2) Diversity in lifestyle leads more young people to be unmarried oryoung families to remain childless; and (3) A worsening environment in terms ofdisposable income makes the purchase of life insurance less affordable.
Figure 3: Changes in Insurance Premiums by Age Group of the Household* Head
* Two or More Person Households, Workers’ Households(Calendar years)
Source: “Family Income and Expenditure Survey,” the Ministry of Internal Affairs andCommunications13

2. Life Insurance Market in Japan(3) Distribution Channels
Historically, the majority of life insurance products were sold by sales agents tiedwith a single life insurance company. However, a growing number of products are now
being sold through new channels including bancassurance, insurance outlets andInternet, thereby providing those who are seeking to purchase insurance policies withmore diversified channels.
In terms of the distribution channels through which consumers took out
insurance policies, as the most recent survey underlines, consumers can choose
insurance from a wider range of channels than in the past. However, the tied agent
channel remained the largest distribution channel in Japan as nearly 70% ofconsumers still purchased policies through this channel.
Figure 4: Sales Channels for Most Recent Contracts

Source: “National Survey on Life Insurance,” Japan Institute of Life Insurance

14

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

3. The Prospects of
the Life InsuranceMarketPotential Growth Areas (Nursing Care (Long Term Care), Medical
Insurance and Savings for Longevity)
In Japan, total premium income of life insurers was 37.1 trillion yen and “basic
profits” reached 3.2 trillion yen for the period ended March 2013. That represents theunderlying profitability of the life insurers for the year.
(Trillions of yen)
2008

2009

2010

2011

2012

Premium income

Fiscal

34.0

34.1

34.4

36.2

37.1

Basic profits*

2.1

2.8

2.6

3.0

3.2

Source: The Life Insurance Association of Japan, “Life Insurance Fact Book”* Basic profits: a popular performance indicator of profits or losses of life insurance companies forcore insurance businesses, excluding capital gains/losses and extraordinary gains/losses.

In view of a lowering birth rate and an aging population, together with thegrowing number of single-person families arising from the diversification of lifestyles,
the pure protection market such as term life is anticipated to decline. Meanwhile theimportance of the life insurance market is expected to grow further, centered in theareas of nursing care (LTC), medical insurance and savings for longevity.

(1) Nursing Care (LTC)
The beneficiaries of the public nursing care services are obliged to pay 10% of total
service fees in Japan. In practice, taking care for the elderly often requires several additionalcosts other than nursing care service fees, such as ordinary living expenses, loss of family
income due to necessary care leave, the alteration of dwelling house to enhance barrier-freeaccessibility and the meal delivery service fees. The actual cost of “total nursing careexpenses” after considering the compensation from the public nursing care insurance has tobe funded by those who require nursing care and needs to be prepared by “self-effort”, forexample, to purchase private nursing care insurance. Looking ahead, this “self-effort”
portion is inevitably likely to grow with the aging population.

(2) Medical Insurance
According to data on the medical insurance market, insurance policies in force asof the end of fiscal 2012 stood at 69 million, with the average daily hospitalization
benefit per policy amounting to 5,921 yen. Considering that the estimation(Sumitomo Life estimates) of the average self-borne payment necessary for
hospitalization would be 13,000 yen per day, the above hospitalization benefits perpolicy do not contribute to even half of the necessary amount, indicating that this area
has great growth potential for insurers.

15

2. Life Insurance Market in Japan(3) Savings
According to the “Flow of Funds Accounts Statistics” conducted by the Bank of Japan, the balanceof personal financial assets as of the end of fiscal 2012 was approximately 1,500 trillion yen. Amongthese assets, the balance of cash and deposits stood at 849 trillion yen, representing approximately 60%of the total. Although one should keep in mind that these assets include sole proprietors’ funds allocatedfor business use, some portion of these savings are very likely to be switched to pensions or otherinsurance products as the need to manage longevity risk grows in later life.
As discussed above, the aging of society and other factors have brought unprecedented
circumstances to Japan’s life insurance market. Considering the high penetration rate of life insurance inJapan, some believe that the room for growth in the death protection segment is limited. However,growth is expected in the areas of nursing care, medical care and savings because customers’ needs have
evolved as a result of changes in the structure of society. Life insurance companies that accurately
identify these evolving needs can create opportunities to expand their business by providing products
and services.
Japan is not the only country with an aging population, which is an issue that will have an impact
in many countries around the world. Current and future changes in Japan’s life insurance market andhow Japan’s life insurance companies deal with them will have various implications for global insurance
industry.

16

1. A Global
Perspective

Jonathan OatleyManaging Director, Guy Carpenter

Dedicated capital in the reinsurance sector reached near record levels at the end of2013 having risen to 322 billion U.S. dollars. Guy Carpenter estimates this to beapproximately 8% in excess of normal capital levels given historical underwriting
trends. Of particular note within this number was the 10 billion U.S. dollars ofalternative, or “convergence,” capital that made its way onto reinsurers’ balance sheets
in 2013. We look here at the growing influence of alternative capital in the reinsurance
sector, its impact on the Japan non-life (re)insurance market and offer some pointers
for the future.
Capacity emanating from alternative markets now accounts for approximately 50
billion U.S. dollars, some 15% of global property catastrophe reinsurance limit.
Figure 1 illustrates how alternative capacity as a percentage of global property
catastrophe limit has almost doubled since 2008 as cedents have increasingly utilised
catastrophe bonds, industry loss warranty (ILW) products and collateralized
reinsurance (including retrocessional reinsurance placed on this basis) to deliver a cost
efficient source of risk transfer.
Figure 1: Alternative Capacity as a Percentage of Global Property Catastrophe
Reinsurance Limit
16%

Proportion of Alternative Capacity

3.

Convergence Capital and Its Influence on
the Japan Non-Life (Re)Insurance Market

14%
12%
10%
8%
6%
4%
2%
0%
2008

2009

Source: Guy Carpenter

2010

2011

2012

2013

(Years ended December)

The impact of this new alternative capital has been most acute in the property
catastrophe market – and to a sizeable extent, the retro market – as investors have been
attracted by the segment’s uncorrelated returns and relatively attractive yields. The
U.S. property catastrophe reinsurance market in particular has seen material pricereductions driven by the increased competition.
In 2014, we have begun to see evidence of alternative capital providers extending
their influence into other spheres of the reinsurance market. For instance, third-party
capital backed reinsurers seeking to move into longer-tail lines have emerged,
demonstrating a growing willingness on the part of investors to explore casualty lines.
This new capacity is likely to benefit cedents with more negotiating leverage and,ultimately, improved pricing, structure and coverage – just as it has done in the U.S.
property catastrophe space.
In addition to seeking out opportunities in new classes, we have also seen
increased appetite for the alternative capital to diversify their reinsurance portfolios
geographically. To date, whilst this has been evidenced more in the retro and17

3. Convergence Capital and Its Influence on
the Japan Non-Life (Re)Insurance Market

catastrophe bond arenas than in the traditional UNL market, the growing level ofinterest is unmistakeable.
Pension funds have been a major contributor to the growth in new capital. Theirfocus on relatively remote peak peril catastrophe risk has contributed in driving strong
growth in the catastrophe bond market during 2013, with issuance reaching a record
high of 7.1 billion U.S. dollars, surpassing the previous peak of 2007. Risk capital
outstanding also reached an all-time high of 18.6 billion U.S. dollars last year (seeFigure 2). Some of the capacity previously deployed via ILWs has shifted into
indemnity based products due to their reduced pricing and increased availability.
Figure 2: 144A Catastrophe Bond Issuance and Capital Outstanding – 1997 to Year End 2013
(Millions of U.S. dollars)

20,00018,576.9

Risk Capital Issued

18,000

Risk Capital Outstanding

Risk Capital Amount

16,00014,024.2

14,00014,835.7
12,043.6

12,00012,185.0

12,508.8

12,139.1

10,0008,541.6

8,000

5,852.9

6,000
4,040.4

4,000
2,000

7,083.0

6,996.3

633.0

846.1

984.8

1997

1998

1999

1,139.0 966.9

1,219.5

2000

2002

1,729.8

4,904.2

4,693.4

4,600.3
2,729.2

1,991.1

3,391.7

4,108.8

1,142.8

0
2001

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Guy Carpenter

Indeed, the growth in alternative capital has in some instances resulted in ILS
catastrophe risk pricing decoupling from price expectations in the traditional
reinsurance market, with ILS products in some cases offering the most competitive
terms for reinsurance buyers. Lower cost of capital assumptions for alternative capitalproviders has enabled the ILS market to provide very competitive pricing for certain
peak risks. Strong appetite for U.S. hurricane catastrophe bonds during 2013
tightened spreads in the secondary market by an average of approximately 45% on aweighted notional basis since issuance in 2012. Despite the significant decrease in ILS
pricing over the last 12 months, investor demand continues to be robust.
Impressive as the growth in alternative capacity has been, this should be viewed in
the context of the proportion of pension fund capital currently being allocated toreinsurance. Pension funds alone are worth around 30 trillion U.S. dollars (see figure3). Based on Guy Carpenter’s analysis of possible capital allocation percentages to the(re)insurance space in consultation with sector experts, a maximum of 900 billion
U.S. dollars of this amount could potentially be available for insurance-linked
investments. This figure is, of course, much greater than required in the current
market, demonstrating the existing convergence-driven supply excess and helping to
explain the move into alternative classes and geographies.
18

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

Figure 3: Pension Fund Capital under Management and Allocations into Reinsurance

Global Pension Fund Assets under Management:g
U.S.$30$ trillion

Portion potentially available
for allocation to
insurance-linked
investments:
U.S.$900 billion (estimated)

Global property
catastrophe limit:>U.S.$300 billion
Collateralized limit:
15% of global
property cat limit

Source: Guy Carpenter, JP Morgan Asset Management

When we weigh up the size of the current global catastrophe reinsurance market(Guy Carpenter estimates this to be approximately 300 billion U.S. dollars) and take
into account the fact that pension funds have so far made very small investments inreinsurance relative to their overall size, it is evident that a modest increase in pension
fund participation in the property reinsurance segment could have a significantly
greater impact than has been seen to date.

2. Japan Non-Life
ReinsuranceMarket at
April 1, 2014

Just two years after one of the most challenging of treaty renewals, following theGreat East Japan Earthquake of March 2011 and Thailand Floods of November 2011,
the market experienced a seismic shift in the balance of supply and demand. Key
factors of influence on the supply side were reinsurers with strong balance sheets and adesire to grow, abundant capacity – in the main due to foreign exchange depreciationof the Japanese yen and the availability of cheap and broad retrocession cover, therelatively high starting position of Japanese pricing compared to historical levels, and areasonably benign loss environment in the global market. At the same time, there werea number of factors driving reduced demand on the part of buyers, most notably the
recent mergers and acquisitions in the Japanese non-life insurance market, cedents
themselves with improved balance sheets, instances of corporate restructuring, and the
combination of perils in catastrophe covers.

193. Convergence Capital and Its Influence on
the Japan Non-Life (Re)Insurance Market

The consequence of this culmination of factors was a highly competitiveenvironment, prompting reinsurers to defiantly defend the shares that they did hold,with a significant softening of terms and conditions inevitably following. Frenziedcompetition for market share led to considerable over-placement on many covers.
Oversupply of capacity for catastrophe lines was at its greatest for many years, despite
efforts to control offerings to the market.
In summary, on the property side, Japanese reinsurance buyers generally enjoyedsignificant price and cost reductions in most main lines, allowing them to achieve oreven exceed pre-renewal targets. In earthquake lines, abundant capacity was available
from traditional reinsurers who remained eager to write this class, both as earthquake
standalone or as part of the increasing amount of combined peril excess of loss
purchased by non-life companies. In general, stand-alone capacity reduced in the nonlife sector but increased in the mutual segment. Earthquake excess of loss pricing
reduced across all portions of the market, with earthquake pro rata commission rates
generally returning to pre-Tohoku levels or higher. Improved balance sheets for majorbuyers reduced the pressure to buy top end windstorm capacity covers and some of thepurchases made in recent years were discontinued, allowing this capacity to be
redeployed elsewhere. As with earthquake, windstorm rates fell across all segments ofthe market. Pricing of Japanese wind peril returned to near-historic lows.
In the context of pricing and capacity targets being comfortably met, Japanesebuyers continued to favour their long-term, traditional reinsurance partners, many ofwhom had paid losses from the Great East Japan Earthquake and Thailand Floods.
New reinsurers and those wishing to expand were generally frustrated in theirambitions. The direct impact of alternative capital providers in Japan therefore
remained quite limited for 2014. Ultimately, Japanese buyers did not need to explore
new or alternative capital; they were readily able to achieve the required pricing andcapacity with known suppliers.
However, while the direct impact of alternative capital was not necessarily overtly
witnessed, there remained a clear sense that traditional reinsurers were in some way
responding to the potential of this sector of the market. Traditional players, who had
been increasingly “feeling the heat” of the alternative capacity in the U.S. property
catastrophe markets in particular, appeared keen to demonstrate the value of theirproduct and proven continuity.
It could also be argued that the presence and activities of alternative capital in the
retro market have served to increase the availability and reduce the cost of retro,
thereby indirectly benefiting Japanese buyers. However, with so many softening factors
at play, the real impact here may be considered marginal.
It is in the catastrophe bond arena where we have perhaps seen the greatest
influence of alternative capital in Japan to date. Recent catastrophe bond activity andthe considerable interest generated in competitively priced, yen denominated andindemnity-based products can be taken as clear evidence of this new willingness towrite peak zone catastrophe risk outside of the United States.
In summary though the total amount of Japanese property catastrophe limit
written by alternative capacity remains appreciably less than this globally
representative 15% figure.
20

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

3. The Road ahead
and Questions We
Should Ask

The global reinsurance market has undoubtedly undergone dramatic changeover the past 24 months, with a significant influx of convergence capital frominstitutional investors seeking access to the reinsurance space. Increased
responsiveness and innovation by traditional reinsurers have also accompanied
this influx of third-party capital. Whilst there may be limited evidence of any
meaningful impact on the Japanese non-life market to date, we cannot conclude
that this will continue to be the case in the foreseeable future.
There are several key questions that we may wish to ask with the Japanese(re)insurance market in mind.
Should we question the permanence of this new capital? The current
pension fund allocation to the reinsurance space is fairly modest. Our
observations suggest that the capital supporting the convergence capacity is
increasingly stable institutional money that has spent years evaluating thecatastrophe risk asset class and made a long-term commitment to reinsurance.
The answer would appear then to be no – although it will be wise to maintain aclose watch on its activities and responsiveness to market dynamics.
What if a large catastrophe event should occur? Based on limited pastexperience, indications are that investors have typically remained in markets, oreven grown participations, as pricing has adjusted in response to loss activity.
However, it is important to raise a note of caution, as only time will tell us how
alternative capital reacts to losses.
What if investment returns elsewhere improve? Although some allocations toreinsurance may exit once investment returns in other comparable asset classes
pick up, the commitment to the sector from such a broad range of institutional
investors suggests this to be a permanent asset allocation strategy.
Finally, how might this impact Japanese reinsurance renewals going forward?
Investors are likely to continue or even increase their allocations to reinsurance
in the coming years, seeking further class of business and geographical spread.
Given the relatively low penetration that this alternative sector currently enjoys
in Japan, it appears reasonable to predict that investors will continue to target
peak zone Japanese earthquake and windstorm exposure. This will likely give rise
to further excess reinsurance capacity being available for Japanese catastropherisk, further tilting the supply-demand equilibrium in the favour of the Japanesereinsurance buyer should they choose to open the door to this new capacity.

21

4.
1. Foreword

2. Amendments to
the Insurance
Business Law

22

The Direction of Recent Amendments to theInsurance Business Law Related to Insurance
Sales Regulations
Itaru Adachi
Attorney at Law

All insurance companies, whether financial institutions that sell insurance over thecounter or other businesses that market insurance, have always been acutely aware of
the state of regulations that govern approaches to selling insurance and soliciting
membership in organizations that provide insurance. This paper generally refers to allsuch activities as insurance sales.
Nevertheless, the Revised Insurance Business Law1 that was enacted by the 2014
ordinary session of Japan’s National Diet (the 186th Diet) is expected to broadly
impact all businesses associated with insurance sales.
This paper discusses recent trends in the amendment of the Insurance Business
Law that are relevant to insurance sales regulations. Please note that all opinions inthis paper are those of the writer.

(1) Overview of Proposed Amendments to the Insurance Business Law
On March 14, 2014, the Cabinet decided on the Draft Proposal of Amendments
to the Insurance Business Law. This draft proposal was submitted to the 186th Dietand passed on May 23, 2014.
The Revised Insurance Business Law is based on a report2 titled “New Insurance
Products/Services and Solicitation Rules” (the Report) issued publicly on June 7, 2013by the “Working Group on the Provision of Insurance Products/Services” of the
Financial Services Administration’s Financial System Council. The amendments follow
five themes: 1) establishment of basic rules for selling insurance; 2) upgrading of
regulations governing insurance sales representatives; 3) regulatory easing related tooverseas operations; 4) regulatory easing related to insurance brokers; and 5)
regulatory easing to enable customer services aligned with actual conditions.
All of these themes are likely to affect insurance businesses, but the impact on
insurance sales operations of numbers 1) and 2) above would be particularly
pronounced. This paper will therefore focus on discussing these two themes for theamendment of the Insurance Business Law.
As a review of the rules for selling insurance, the Report covered “Restructuring/
clarification of the scope of applicability of solicitation rules.” It restructured andclarified the basic concept of insurance sales by restructuring and clarifying theinterpretation of the scope of applicability of the Insurance Business Law to address
new insurance solicitation processes such as the emergence of comparison websites andprospective client introduction services. Items that are not included in the latest
amendments to the Insurance Business Law may well be addressed by revision of theComprehensive Guidelines for Supervision of Insurance Companies (the “Insurance
Supervision Guidelines”).

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

Concerned with “New insurance products/services,” the Report covered “sales of
new insurance products” (fertility treatment insurance and insurance under which
policyholders can receive goods/services from partner companies through cashlessprocedures), “expansion of operational scope of insurance company groups” (lifting of
the ban on operation of nursery schools by insurance companies), and “greater
utilization of concerted activity systems.” Although these items were among those notincluded in the amendments to the Insurance Business Law, “expansion of operational
scope of insurance company groups” may well be accomplished through futurerevision of the enforcement order for the Insurance Business Law.

(2) Establishment of Basic Rules for Insurance Sales
1 Introduction of the Obligation to Ascertain Customer

Wishes and Requirements
The existing Insurance Business Law does not specifically stipulate an obligation
to ascertain customer wishes and requirements. In practice, however, the Insurance
Supervision Guidelines already call for insurance providers to uphold the principle ofsuitability at the time of sale by requiring them to prepare an “intention confirmation
document” for submission to customers to confirm their true intentions and needs.
In contrast, the Revised Insurance Business Law creates a legal obligation tounderstand customer needs at the time of sale and propose insurance plans that meetthem. This obligation is called “the obligation to ascertain customer intentions” below.
According to the Revised Insurance Business Law, “officers, employees and sales
representatives of domestic and foreign insurance companies and insurance brokers”(“insurance sales representatives” below) must do the following to satisfy the
obligation to ascertain customer intentions:
1. Ascertain customer intentions;
2. Propose an insurance policy that meets customer intentions, and explain thecontent of the policy; and3. Provide an opportunity when concluding the policy for customers to
confirm that the content of the insurance policy matches their intentions.
These three items also require evidence from this process that the customer is expressly
able to understand the reason for purchasing the policy.
However, the Revised Insurance Business Law does not specify methods formeeting these three obligations when selling insurance. Each salesperson must
therefore use their creativity and ingenuity to meet their obligation. However, futurerevisions to the Insurance Supervision Guidelines will likely indicate standards thatmust be met and examples of specific means for doing so.
Fulfilling the obligation to ascertain customer intentions will not be all thatdifficult if the customer’s intentions are clear from the beginning. However, customer
intentions are often unclear throughout the sales process. Given the obligation toascertain customer intentions, sales representatives will need to use their creativity andingenuity to supplement existing sales materials and other resources.
Of note, the obligation to ascertain customer intentions extends to soliciting
membership in an organization that provides insurance as well as outright insurance
sales. This is discussed in 3 below.
23

4. The Direction of Recent Amendments to theInsurance Business Law Related to Insurance
Sales Regulations

Introduction of the Obligation to Provide Information
The existing Insurance Business Law regulates the provision of information whenselling insurance in ways such as prohibiting misrepresentation and obligating
explanation of important matters when explaining insurance to customers; prohibiting
false disclosure; prohibiting failure to explain disadvantages when selling alternative
policies; prohibiting misleading comparisons with other insurance; prohibiting
categorical judgments; and prohibiting misrepresentation of material issues.
Among these regulations, “important matters” are described within the obligation
to explain them as information that insurance companies and insurance sales
representatives are obligated to provide to customers (policyholders and insured
persons). These “important matters” are generally understood3 to be “matters thatsignificantly affect the decision whether or not to conclude an insurance policy,” butsuffice it to say that the wording is hardly clear and unambiguous.
At the same time, the Insurance Supervision Guidelines stipulate an obligation to
explain the content of the “policy summary” and “information that should be brought tothe consumer’s attention.” Current sales practices allow4 sales representatives to fulfill thisobligation through means such as providing written documents, policy guides and policy
provisions, which are considered to be prima facie explanation of “important matters.”
In this context, the Revised Insurance Business Law creates a legal obligation
when selling insurance to provide product and related information necessary for thecustomer to decide if a policy is suitable (the “obligation to provide information”).
A Cabinet Office Ordinance (Insurance Business Law Enforcement Order) will
presumably specify the content and delivery of the information that is subject to the
obligation to provide information, so specific details are not yet clear. However, theitems included in the “policy summary” and “information that should be brought tothe consumer’s attention” will likely be retained in the obligation to provide
information. The obligation to provide information may also include information
about important ancillary services such as roadside assistance and direct payment
services, as well as information that is relevant to comparison sales, such as the scopeof products compared and the reasons for recommending particular products.
The method for providing information for highly individualized and specialized
insurance such as insurance that covers business risks and for insurance that carries
small premiums will likely be based on factors such as customer knowledge rather thana standardized method.
Also, soliciting membership in an organization that provides insurance as well as
insurance sales will carry the obligation to provide information, which will be coveredin 3 below.
224

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

3 Soliciting Membership in an Organization That Provides Insurance

According to the existing Insurance Business Law, soliciting membership in an
organization that provides insurance is treated differently5 than selling insurance.
Essentially, therefore, the existing Insurance Business Law imposes the regulations forproviding information on the sale of insurance covered in 2 above, but does not
impose them6 on soliciting membership in an organization that provides insurance.
In contrast, the Revised Insurance Business Law in principle7 imposes the sameobligation to understand customer intentions and provide information on soliciting
membership in an organization that it imposes on selling insurance.

(3) Upgraded Regulations for Sales Representatives
1 Introduction of the Obligation to Develop and Reinforce Insurance

Sales Systems
The existing Insurance Business Law imposes an obligation on insurancecompanies to develop and reinforce relevant systems, but does not impose thisobligation on insurance sales representatives, including insurance agencies. The
existing Insurance Business Law already calls for direct examination of insurance sales
representatives, but the plans for developing and reinforcing systems at insurance
agencies only call for insurance companies to provide instruction and management foragency sales representatives.
In contrast, the Revised Insurance Business Law retains the existing regulations
that obligate insurance companies to instruct insurance sales representatives and adds alegal obligation for insurance sales representatives to develop and reinforce theirsystems (the “obligation to develop and reinforce relevant systems”) according to thesize and characteristics of their business to properly conduct insurance sales.
A Cabinet Office Ordinance (Insurance Business Law Enforcement Order)
defines the obligation to develop and reinforce relevant systems of insurance sales
representatives, just as it does the similar obligation of insurance companies. However,the Revised Insurance Business Law stipulates the following five points for the
obligation to develop and reinforce relevant systems (numbers one through threeparallel the obligation to develop and reinforce relevant systems of insurancecompanies):
1. Explanation of important matters to customers during the insurance sales
process;
2. Proper handling of customer information acquired through the insurance
sales process;3. Ensuring that the relevant insurance sales obligations are fulfilled when athird party handles the insurance sales process;4. Disclosure of the items being compared when engaging in comparison sales
involving two or more insurance companies or similar organizations; and5. In the case of a franchisor, formulation and proper implementation ofpolicies for supervising the insurance sales operations of its franchisees(insurance salesperson supervision).

25

4. The Direction of Recent Amendments to theInsurance Business Law Related to Insurance
Sales Regulations

Considering these points, the Cabinet Office Ordinance (Insurance Business Law
Enforcement Order) and the Insurance Supervision Guidelines are likely to require
insurance sales businesses to formulate internal rules and regulations, provide training,
conduct internal audits and otherwise comply according to their size andcharacteristics.8
2 Authority for Obtaining Reports from and Onsite Examination of Subcontracted

Sales Representatives
The existing Insurance Business Law clearly specifies the authority of insurancecompanies for obtaining reports from and conducting onsite examinations of theirsubcontracted sales organizations, but does not do so for insurance sales organizations
including insurance agencies that are subcontracting sales.
In contrast, the Revised Insurance Business Law clearly specifies9 the authority of
insurance sales representatives for obtaining reports from and conducting onsite
examinations of their subcontracted sales organizations.

(4) Enforcement Timeline
The basic rules for insurance sales as per (2) above and the regulations fordeveloping and reinforcing sales representative organizations as per (3) above that arecomponents of the Revised Insurance Business Law will be enforced within two yearsof the official announcement date (June 30, 2014) by Government Ordinance (Orderfor Enforcement of the Insurance Business Law).
The expected goal for amending the Insurance Supervision Guidelines inconnection with the Revised Insurance Business Law is approximately six months
from the official announcement date.
Notes: 1. Please refer to the Financial Services Agency (FSA) website (http://www.fsa.go.jp/
common/diet/) for the text of the law.
2. Please refer to the FSA website (http://www.fsa.go.jp/news/24/singi/20130611-2/01.pdf )for the text of the report. An overview of the report is available in the manuscript “Outlineof the Report of the Working Group on the Provision of Insurance Products/Services”(NBL1006, Page 13).
3. Yamashita, Tomonobu. “Insurance Business Law,” page 169 and others.
4. Please refer to “Interim Summary of Issues on Sales and Solicitation of Insurance Products
in accordance with Suitability Rule” by The Study Team on Insurance Product Sales andSolicitation, July 8, 2005, Note 11 on page 7.
5. The Insurance Business Law defines “insurance solicitation” as “agent or intermediary forconclusion of an insurance contract” (Insurance Business Law, Article 2, Paragraph 26).
Please refer to “Overview of Public Comments and Financial Services Agency Views on‘Proposal for Partial Amendment of the Insurance Business Law Enforcement Order,
Proposal for Related Financial Services Agency Notification Proposal, and Proposal for
Partial Revision of the Enforcement Order for Banks’” contained in the “Result ofCollection of Opinions on ‘Proposal for Partial Amendment of the Insurance Business Law
Enforcement Order, Proposal for Related Financial Services Agency Notification Proposal,
and Proposal for Partial Revision of the Enforcement Order for Banks’,” FSA, December
21, 2007, page 26, “Other,” number 4, and other sources.

26

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

6. Exceptions apply to the use of group policies with the intent to circumvent
measures to preclude harmful outcomes. Please refer to the above “Financial
Services Agency Views,” page 26, “Other,” number 4, and other sources.
7. Exceptions are i) when parties with a special relationship as defined by Cabinet
Ordinance induce relevant group insurance policyholders and relevant insurance
policyholders to become members; and ii) when it can be reasonably expected as
specified by Cabinet Ordinance that a relevant policyholder will properly provide
required information to a person joining an insurance policy for relevant groupinsurance. Specific details are delineated by a Cabinet Ordinance (Insurance Law
Enforcement Order). However, the “parties with a special relationship defined by
Cabinet Ordinance” in i) are assumed to be those commissioned by the groupserving as the policyholder, and “when it can be reasonably expected as specified by
Cabinet Ordinance that a relevant policyholder will properly provide required
information” in ii) is assumed to refer to a group to which the organization
classification standards apply.
8. Examples relevant to the issue of size of business include the use of benchmarks
such as whether the company is a sole proprietorship or has numerous branches andemployees. Examples relevant to the issue of business characteristics include the useof benchmarks such as whether the company is doing business in accordance withmanagement and instruction from an insurance company, whether it is conducting
comparison sales involving two or more insurance companies, and whether it isproviding instruction or other services to sales representatives and so is conducting
operations independently of management and instruction from an insurancecompany.
9. In addition to the above, there is debate about the provision of books and records(Revised Insurance Business Law Article 303) and submission of business reports(Revised Insurance Business Law Article 304) related to certain sales representatives.

27

5.
1. Trends in BusinessResults of Non-Life
Insurance
Companies for
Fiscal 2013

Trends in Japan’s Non-Life Insurance Industry
Underwriting & Planning Department
The Toa Reinsurance Company, Limited

In fiscal 2013, the twenty-seven non-life insurers comprising the members of theGeneral Insurance Association of Japan reported total net income of 214.3 billion yen,
up 47.2 billion yen from the previous fiscal year, partially due to improved profits in
automobile insurance, the effect of the weaker yen and higher stock prices, and solid
overseas operations. Although heavy snowfall in February 2014 had a certain impact
on all insurers,* all three mega groups achieved record net profits.
Net premium income in all lines of business increased to 7,771.3 billion yen, up
399.5 billion yen from the previous fiscal year, mainly owing to the effect of revised
products and premium rates for automobile insurance and higher sales volume
resulting from solid new car sales.
On the other hand, net claims paid declined to 4,560.3 billion yen, down 214.6
billion yen from the previous fiscal year despite the effect of the heavy snowfall. The
loss ratio improved by 6.3% to 64.1 %.
Operating and general administrative expenses related to insurance underwriting
increased by 21.8 billion yen to 1,168.4 billion yen. However, the net expense ratio
fell by 0.7% to 32.3%.
The combined ratio improved by 7% to 96.4%.
As a result of the above, ordinary profits for the non-life insurers increased by
36.8 billion yen from the previous year to 414.6 billion yen. A breakdown of these
profits suggests that the strong business results in the current fiscal year were driven bya large increase in returns on asset investments as well as the strong underwriting
profits (up 85.7 billion yen from the previous year).
As their financial statements indicate that they face certain limits on growth indomestic operations, the existing trend is expected to persist in that non-life insurers
will aim to shift to a business structure in which overseas operations and life insurance
business become revenue sources.
* Effect of Heavy Snowfall in February 2014
According to the announcement by the General Insurance Association of Japan, the recordbreaking heavy snowfall experienced in the Kanto region in February 2014 caused the industry as awhole to pay insurance claims of 253.6 billion yen (as of April 30, 2014), a historic high forinsurance claims paid out for a snowfall. Among past natural disasters excluding the Great East
Japan Earthquake, the amount paid is the fourth largest on record.
The huge insurance claim payments made were due to the snowfall occurring in areas where
people generally have less interest in preparing for a heavy snowfall. In many cases, insurance
claims were paid under fire insurance and automobile insurance contracts due to damage tobuildings such as roofs and garages broken by the weight of the snow. Discontinued factories andother factors also pushed up insurance claim payments.

28

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

2. Trends in Non-Life
Insurance Industry(1) Industry Consolidation in Insurance and Mutual Aid Businesses
The non-life insurance market is now oligopolistic in Japan, with the three mega
non-life insurance groups (Tokio Marine Group, MS&AD Group and NKSJ Group)
accounting for 86.4% of total net premium income across the whole industry as of theend of March 2014.
Among the three mega groups, in the NKSJ Group, the merger of Sompo Japan
Insurance Inc. and Nipponkoa Insurance Co., Ltd. is scheduled to occur on
September 1, 2014. These two insurers started joint operations in April 2013 and haveincreased their operational efficiency. The merger will make the new company thelargest non-life insurance company in Japan in terms of non-consolidated premiumincome, with net premium income amounting to 2,082.1 billion yen (the sum of
figures appearing in the two merging companies’ non-consolidated financial
statements for the year ended March 2014).
MS&AD Holdings started implementing full functional consolidation within thegroup in April 2014 as the second phase of its business merger. This consolidation is
aimed at clarifying the business missions of Mitsui Sumitomo Insurance Company,
Limited and Aioi Nissay Dowa Insurance Co., Ltd., the core non-life insurers within
the group, and at optimizing their functions to create synergy. The group eventuallyplans to reduce costs by about 50 billion yen (from 2011) through such functional
consolidation, system integration, etc.
Tokio Marine & Nichido Fire Insurance Co., Ltd. reached an agreement with the
National Mutual Insurance Federation of Agricultural Cooperatives (JA Kyosai) on
comprehensive business cooperation in May 2013. As part of this move, in March
2014, the two parties agreed on basic cooperation-related matters in areas involving
agricultural risk; they will publicize the establishment of a center specializing in
examining indemnities and services related to agricultural risk, and will continue toexplore the potential for an extensive service offering across the board between themutual aid and insurance businesses.
Among other insurers outside the three mega non-life insurance groups, Fuji Fireand Marine Insurance Company, Limited and AIU Insurance Company, Ltd. –insurance companies under the umbrella of the AIG Japan Group – announced in July
2013 that they would implement a business merger after combining in the second halfof 2015.
As discussed above, non-life insurers are looking to invest in growth areas
including life insurance business and overseas operations, and to increase their profits
by raising operational efficiency through mergers and business cooperation aimed at
cutting costs.

29

5. Trends in Japan’s Non-Life Insurance Industry(2) Expanding Overseas BusinessAt a time when there is little prospect of significant market expansion in Japandue to an ever-decreasing birthrate and the aging population, non-life insurancecompanies are seeking to expand their business bases in emerging countries with
rapidly increasing populations and high economic growth. In particular, the threemega groups are actively implementing business cooperation and engaging in M&A
transactions with local insurance companies, regarding overseas operations as a driverof growth in these groups.
Overseas premium income among these groups has developed as follows. The
figures indicate that non-life insurance companies have further accelerated the growthof their overseas operations over the past few years. In particular, Tokio Marine
Holdings generated net premium income exceeding 1,000 billion yen in fiscal 2013,
partially due to the effect of the weaker yen. Overseas insurance operations account for
63.7% of net income at Tokio Marine Holdings, 21.3% at MS&AD Holdings, and26.1% in the NKSJ Group (based on figures reported in financial statements for the
fiscal year ended March 2014). In addition to expanding their life insurance business,the source of non-life insurance companies’ profits has also changed significantly.
Figure 1: Trends in Overseas Net Premium Income among the Three Mega Groups(Percentage of overseas net premium income
among the three mega groups)(Billions of yen)

1,600
1,400
1,200

20%

Tokio Marine Holdings
MS&AD Holdings
NKSJ Holdings (sum of non-consolidated figures)
Overseas net premium income/Net premium income
Total for the three companies*

18%
16%
14%

1,000

12%

800

10%
8%

600

6%
400
4%
200
0

2%
2009

2010

2011
(Fiscal years)

2012

2013

* Based on aggregated figures appearing in the financial statements of these non-life insurance groups

30

0%The Toa Reinsurance Company, Limited — Japan’s
apan’s Insurance M
Marketarrke
ket 20
ket
201
2014
014
14

Table 1: Major Overseas Operations in the Three Mega Groups (from 2013 to 2014)

3. Trends in Products
and Regulation

Date

Name of Company

Overseas Operations

April 2013

Tokio Marine Holdings

Converted its investee Nile General Takaful
Company S.A.E. into a subsidiary (Egypt)

December 2013

Tokio Marine Holdings

Reorganized the framework of its European
operations (established an intermediate holding
company by transferring stocks within the group)

December 2013

MS&AD Holdings

Converted an Australian management company
into an insurance company to open a local
subsidiary

February 2014

Tokio Marine Holdings

Tokio Marine Kiln invested in a U.S. agency

April 2014NKSJ Holdings

Opened a representative office in South Africa

April 2014

Tokio Marine Holdings

Ob t a i n e d a p p rova l t o c h a n g e a r a n g e o fbusinesses belonging to a Chinese subsidiary

April 2014NKSJ Holdings

Ob t a i n e d a p p rova l t o c h a n g e a r a n g e o fbusinesses belonging to a Chinese subsidiary

May 2014

NKSJ Holdings

Completed acquisition of Canopius Group
Limited stock

May 2014

MS&AD Holdings

Ob t a i n e d a p p rova l t o c h a n g e a r a n g e o fbusinesses belonging to a Chinese subsidiary

May 2014

Tokio Marine Holdings

Invested in CITIC (China)(1) Effect of the Consumption Tax Rate Hike
In Japan, with its rapidly decreasing birthrate and aging population, theconsumption and local consumption tax rates were hiked to 8% in April 2014 andwill be raised further to 10% in October 2015 to ensure a source of revenue isavailable to pay for social security. The hike to 10% is subject to improving economic
conditions.
Partially due to the consumption tax rate hike, major non-life insurancecompanies are set to increase their automobile insurance premiums by about 2% after
this autumn. According to an estimate made by the General Insurance Association ofJapan, raising the consumption tax rate to 10% would force the insurance industry as
a whole to bear an additional financial burden of about 180 billion yen.

31

5. Trends in Japan’s Non-Life Insurance Industry(2) Sophistication of ERM Promoted by the Regulatory Authorities
In the revised Insurance Core Principles (ICPs) adopted by the International
Association of Insurance Supervisors (IAIS) in October 2011, one provision
introduced requires the authorities to supervise insurance companies and groups toensure they implement enterprise risk management (ERM) and own risk and solvency
assessment (ORSA) practices. The Japanese Financial Service Agency in February
2014 revised its Comprehensive Guidelines for the Supervision of Insurance
Companies and the Insurance Inspection Manual.
The revision introduced notable changes in areas such as enterprise risk
management, which was treated as a component of financial health in the existingsupervisory guideline, being seen as a separate item. Annual Supervisory Policies for
Insurance Company for Program Year 2013 – which the Agency published on
September 6, 2013 – indicates that “the promotion of more sophisticated risk
management” is a priority area. The policy goes on to clarify that in “the promotion ofenterprise risk management,” the Agency will examine the introduction of ORSA
reports. Given this, the aforementioned revision is based on this policy and isconsidered one of the actions leading toward the introduction of ORSA reports.
Additionally, in major activities concerning international insurance regulations,particularly the passage of a bill concerning Solvency II at the European Parliament inMarch 2014, the introduction of economic value-based solvency regulations andinsurance supervisory accounting given developments at the International AccountingStandards Board (IASB) are under parallel consideration in Japan, with regulations
and a supervisory system being put together to encourage insurance companies toadopt more sophisticated risk management practices.

32

6.
1. General Topics
related to the Life
Insurance Market

Trends in Japan’s Life Insurance Industry
Life Underwriting & Planning Department
The Toa Reinsurance Company, Limited

Effect of the Consumption Tax Rate HikeIn April 2014, the consumption tax rate was increased to 8%, the first rise in 17
years (the last hike from 3% to 5% was implemented in 1997).
The goal of the consumption tax rate hike is to ensure a source of revenue isavailable to meet increased social security costs resulting from a falling birth rate andan aging population. Although the purpose of the consumption tax rate hike is toensure a source of revenue is available to meet social security costs, it had not been
implemented until now because of concerns about its effect on the long-standing
deflationary economy.
The government expects that the economy will slow down temporarily due toreaction to a last-minute surge in demand associated with the tax rate hike, though it
will recover on a fiscal year basis underpinned by solid domestic demand. Private
research agencies have also made projections largely similar to those of thegovernment.
It can be said that the tax rate hike will have no direct effect on life insurance,
because premiums paid and insurance claims received by life insurance policy holders
are not subject to consumption tax.
However, the life insurance industry may be indirectly affected by the hikethrough declining demand for life insurance and a deteriorating asset investment
environment if a decline in consumer spending and real estate investment resulting
from the tax rate hike is not temporary and causes a recession.
At present, the hike is having no noticeable effect on the life insurance industry.
The government is keeping to its policy of raising the consumption tax rate again to
10% in October 2015. Therefore, life insurance companies appear to be taking
measures to hold on to customers and achieve good returns on investment.

2. Overview ofBusiness Results for
Fiscal 2013

The fiscal 2013 business results for 43 life insurance companies were as follows:• Total Amount of New Business
The total insured amount of new business declined for both individual life andhealth and individual annuity due to the effect of higher premiums for insurance
products on which the assumed interest rate was reduced because of the standard
prospective yield reduction implemented in April 2013. It decreased by 6.3% from theprevious fiscal year to 66.8 trillion yen for individual life and health, while it decreased
by 6.5% to 8 trillion yen for individual annuity.
• Total Amount of In-force Business
The total insured amount of in-force business for individual life and health declined
to 857.5 trillion yen, down 0.5% from the previous fiscal year, as it declined amongmajor life insurance companies while remaining steady among subsidiaries of non-life33

6. Trends in Japan’s Life Insurance Industry

insurance companies and foreign life insurance companies. For individual annuity, it
increased for the eleventh consecutive year to 103.8 trillion yen, up 0.3% from theprevious fiscal year, mainly due to steady growth among major life insurance companies.
• Annualized Premiums
The total of annualized premiums from new business decreased to 2.7 trillion
yen, down 6.1% from the previous fiscal year, as a result of the decrease in individuallife and health and individual annuity. As for in-force business, annualized premiums
totaled 24.4 trillion yen, up 2.6% from the previous fiscal year, due to the increase inindividual life and health, despite the decrease in individual annuity.
• Premium Revenues / Total Assets
Total premium revenues declined to 35.8 trillion yen, down 6.0% from theprevious fiscal year, due to the effect of higher premiums for insurance products on
which the assumed interest rate was reduced because of the standard prospective yield
reduction implemented in April 2013. Total assets rose to 350.6 trillion yen, up 1.6%
from the previous fiscal year, due to a rise in the value of investment assets.

3. Trends in the Life
Insurance Industry(1) Major Life Insurance Companies Introduce the Japanese
Approach to Business in Asia
Major Japanese life insurance companies are starting to explore new products andsales channels in Asia.
Over the past few years, major Japanese life insurance companies have actively
invested in and purchased life insurance companies in Asia. At the end of last year
Dai-ichi Life Insurance Company invested in the Indonesian firm Panin Life, andMeiji Yasuda Life Insurance Company invested in Thai Life. In May 2014, Sumitomo
Life Insurance Company purchased a 40% stake in a life insurance subsidiary of Bank
Negara Indonesia. Nippon Life Insurance Company is expected to purchase a 20%
stake in Indonesian firm Sequis Life within this year.
Amid such a vibrant Asian M&A scene, a key issue emerging in the overseas
strategy of major life insurance companies is transmission of know-how accumulated
in Japan to local life insurance companies to generate larger revenues from overseas
operations.
For example, in July, Dai-ichi Life will offer variable insurance for which
insurance value will depend on investment performance in Vietnam. After acquiring a
local life insurance company in 2007, the insurer had mainly offered savings-typeendowment insurance there. Going forward, however, it aims to gain customers in
middle- and high-income groups, seeking new investments by expanding its productlineup. It also established an asset management subsidiary in February prior to sellingthe variable insurance.

34

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

Sumitomo Life, which last year invested in the largest Vietnamese insurer Bao
Viet Holdings, will also offer a full range of insurance products over the counter inbanks. The insurer will provide training programs for bank clerks and know-how on
the development of exclusive products to make its bancassurance channel as large as its
existing main channel, its sales staff.
Japanese life insurers are making new product offerings in Asia to gain local
market share with original products and services, making the best use of their features.
Asian life insurance markets are at a developing stage akin to the high-growth
period experienced in Japan. While mortality insurance has yet to fully penetrate themarket, Japanese life insurance companies are expected to gradually apply theexperience they have gained in Japan and their know-how to local markets, with theview that insurance needs similar to those in Japan will increase with income and theaging of the population.

(2) Consolidation in the Japanese Market
We are seeing the consolidation of life insurance companies progress throughacquisitions and mergers.
Orix Corporation has decided to purchase Hartford Life Insurance K.K. which is
the Japanese subsidiary of major U.S. life insurance company, Hartford Financial
Services Group, Inc. After the acquisition, Orix will merge the insurance company
with its affiliate Orix Life Insurance Corporation. The acquisition is expected to closeby summer, and the merger will be implemented after fall 2015.
Orix, which has maintained its policy of expanding its insurance business, isstrengthening its fiscal base and growing new business through the planned merger.
NKSJ Holdings has decided to sell Sompo Japan DIY Life Insurance Co., Ltd., agroup subsidiary engaged in online and mail-order sales of cheaper insurance
products, to Dai-ichi Life. The group intends to increase management resource
efficiency by integrating its life insurance business with its affiliate NKSJ Himawari
Life Insurance, Inc.
Meanwhile, Dai-ichi Life will offer cheaper insurance products through the newcompany formed after the acquisition of Sompo Japan DIY Life. The insurer said thatthe acquisition was aimed at meeting various customer needs. At the same time, it will
convert Dai-ichi Frontier Life into a wholly owned subsidiary and construct acomprehensive group-wide lineup covering cheaper products to savings-related
products.
During discussions on the global introduction of stringent capital controls toinsurance companies, one issue that has arisen is foreign life insurance companies
selling and contracting their operations in Japan. Consolidation may become an
accelerating trend in Japanese markets going forward.

35

6. Trends in Japan’s Life Insurance Industry(3) Life Insurance Companies Increasing Investment in Risk Assets
Life insurance companies are increasing the amount invested in relatively highrisk assets such as foreign bonds, equities and real estate.
The main investment activities of the major life insurance companies are as follows:
Nippon Life:

Following the increase of 450 billion yen in fiscal 2013, further
increase of foreign bonds not hedged against foreign exchange risk
in fiscal 2014;

Sumitomo Life:

Investments and loans worth 100 billion yen in growth sectors
including energy and medical and nursing care over the next
three years;

Meiji Yasuda Life: Increasing allocation of funds to high-return assets such as Japaneseand foreign stocks and foreign bonds from the current 30%;
Dai-ichi Life:

Actively investing in real estate such as sites for rental
condominiums and photovoltaic power plants.

These active investments among life insurers are underpinned by two factors.
The first factor is that the risk-free government bond yield remains stable andlow at around 0.6%. In contrast, life insurance companies commit themselves toprovide a promised yield of around 1% for new life insurance policy holders. It isnatural for life insurers to allocate a portion of their assets to U.S. bonds, with the
10-year bond yield sitting just below 3%, and to real estate investments with an
expected yield of 3% or more.
The second factor is that the larger amount of life insurers’ equity capital helps
make it easier for them to take risk. The solid business results recorded for the year
ended March 2014 show that this factor is reflected in the reversal of the “negative
spread” phenomenon across the whole industry according to the decrease of existing
insurance policies with a high promised return over the past several years.
However, the recent increase in investment in risk assets among life insurers does
not mean immediate changes in their conventional asset investment policy, with afocus on government bonds.
As previously indicated by specialists, life insurers hold ultra-long duration
liabilities while owning assets with a duration shorter than their liabilities. There is nochange to the situation whereby for life insurers the issue is to resolve the mismatch
between assets and liabilities.
Furthermore, the greater investment in risk assets seen among life insurers inrecent years is based on the assumption that government bond yields will remain low
for the time being. For life insurers hoping to make progress in duration matching, it
is truly a case where they feel compelled to do something they would rather avoid.

36

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

(4) Dai-ichi Life Acquires a U.S. Life Insurance Company for
Approximately 580 Billion Yen
Dai-ichi Life is in the final stage of its purchase of Protective Life Corporation, amedium-sized U.S. life insurance company (premium income in 2013: approximately
3.0 billion U.S. dollar, ranking 36th in the United States).
The amount of the transaction will exceed 580 billion yen (at the exchange rateof 102 yen/U.S. dollar), the largest M&A transaction ever of a foreign company by aJapanese insurance company.
The transaction will enable the company to fully develop its overseas operations,which have previously focused on Asia. Its premium income from overseas operations
will double, accounting for more than 10% of total premium income of the company.
Overseas Operations of Dai-ichi LifeCountry

Year of Market Entry

Investment Ratio

Premium Income

Vietnam

2007

100%

9.2 billion yen

Thailand

2008

24%

41.8 billion yen

Australia

2008

100%

220.5 billion yen

India

2009

26%

12.6 billion yen

Indonesia

2013

40%

28.3 billion yen

To help finance the purchase, the company planned to issue up to 250 billion yen
in new shares through a public stock offering. It listed its shares on the Tokyo Stock
Exchange in 2010 and has since adopted a strategy of financing through stocks toaccelerate its overseas operations through M&A.
One trend apparent across the whole Japanese financial sector is to offset low
growth in the domestic market by expanding overseas business through M&Atransactions. It is expected that this transaction by Dai-ichi Life will further strengthen
this trend toward globalization, while the management skills of each company inglobal markets will be tested.

4. Developments in
Products(1) Japan Post Insurance Launches New Educational Insurance ProductOn April 2, 2014, Japan Post Insurance Co., Ltd. started offering the new
educational insurance product “Hajime no kampo.”
Educational insurance has traditionally been one of the core products for Japan
Post Insurance. The insurer had a more than a 70% share of total new business for thisproduct in 2001. However, its market share declined to somewhere in excess of 30%
in 2012, as the insurer’s products recently became less competitive with rival savingsrelated products beginning to attract significant demand.
Japan Post Insurance applied to the Financial Services Agency for approval of its
new product in September 2012 to strengthen the competitiveness of its educational37

6. Trends in Japan’s Life Insurance Industry

insurance. However, the problem of claim-payment failures, which came to light inNovember the same year, brought the approval process to a standstill. New productapproval was realized as a result of the FSA and the Ministry of Internal Affairs andCommunications (which is responsible for managing the Japan Post Group) accepting
measures such as inspections and strengthening customer dealings conducted by the
insurer after this problem was detected. This is a long-awaited new product offering
for Japan Post Insurance.
Additionally, the growth strategy of Japan Post Insurance is certainly having aneffect on the share price of its parent company Japan Post, which is aiming to list on
the stock exchange in spring 2015. Japan Post Insurance thus aims to strengthen sales
activity and increase sales of other insurance products utilizing the launch of the new
educational insurance product.
The Japan Post Insurance network of more than 20,000 postal offices nationwide
poses a significant threat to major life insurance companies. It would be fair to say
there is a degree of consternation about these Japan Post Insurance initiatives.

(2) Signs of Developing Competition in Insurance Premiums
Some major life insurance companies have reduced their premium rates.
The following insurance premium reductions have been made by major life
insurance companies:
Nippon Life:

Reduced premiums for core products combining mortality insurancewith medical insurance, etc., in April 2014. Especially to gain new
customers, ranges of reductions for customers in their 20s werearound 7%;

Dai-ichi Life:

Aims to establish a subsidiary dealing with cheaper medical
insurance during fiscal 2014 and to launch sales in the second half offiscal 2015;

Sumitomo Life: Began selling cheaper medical insurance via its subsidiary Medicare
Life Insurance and had more than 200,000 policies in force at end of
fiscal 2013.
These recent premium reductions have been implemented mainly because thestage has been set for positive sales measures to be taken as the financial position ofmajor insurers improves. In addition, the emergence of new sales channels has also had
an effect on premium reductions. Among these channels, “insurance shops,” where
customers can compare the details and prices of the products of several insurancecompanies according to their needs, have become more widespread over the past
several years. Major life insurance companies for which the core sales channel is theirsales staff cannot ignore such shops.
The Japanese market has been described as a mature market given the falling birthrate and the aging population. While online life insurers have also begun offering
cheaper products, price competition has not extended to the whole market and has

38

The Toa Reinsurance Company, Limited — Japan’s Insurance Market 2014

been limited until now. In this environment, such activities among major life
insurance companies accounting for the large share of the market may promote pricecompetition in the industry and affect future market share.

5. Developments inRegulation

Review of the Method for Calculating the Standard Prospective
Yield for Savings Products
In fiscal 2015, the FSA will revise the notice setting out the method for
calculating the “standard prospective yield,” a yield used for calculating the standard
policy reserve.
The standard prospective yield is to be used as a “reference” for the promised
yield, a yield employed for calculating insurance premiums. The revision will apply tosavings products including single-payment whole life insurance and individual annuity
insurance.
The revision is also designed to prepare for increasing long-term yields in future
given the BOJ’s inflation target of 2%.
Under the conventional method, the standard prospective yield is determined byreference to the lower of the average yields on 10-year government bonds for the last
three years and the last ten years. This method is problematic in that the standard
prospective yield has begun to rise long after the rise in interest rates.
The revision will thus change the frequency with which the standard prospective
yield is calculated from once a year to four times a year, and will mean that the average
yield for a shorter period be used by reference to the lower of the averages for the last
three months and the last twelve months.
The revision will allow insurance companies some flexibility in reviewing theirpromised yields on savings products and setting premium rates according to changes
in interest rates. Competition for private financial asset portfolios worth a total of
approximately 1,600 trillion yen, including time deposits and mutual funds, will also
become fiercer.

39

40

Ratio 5
Solvency Margin Ratio (%)

Ratio 4
Yield on Investments(Realised Gains / Losses) (%)
600.3
581.3

Fiscal 2013

Fiscal 2012

2.31

3.04

2.54

Fiscal 2013
Ratio 3
Yield on Investments (Income) (%) Fiscal 2012

Fiscal 2012

32.4

Fiscal 2012

3.95

2.36

32.0

Fiscal 2013

Ratio 2
Expense Ratio (%)

Fiscal 2013

2.55

73.4

649.1

754.0

1.81

3.08

34.1

34.5

70.4

65.0

Fiscal 2012

Ratio 1
Loss Ratio (%)

65.0

3,236,851

3,257,180

Fiscal 2013

6,098,017

Fiscal 2013

18,862

13,10725,85927,897

6,692(28,815)

726,151

691,799

1,103,234

1,144,629

Aioi Nissay Dowa

5,901,413

42,65758,047

Fiscal 2013

Fiscal 2012

65,366

101,998

Fiscal 2013

Fiscal 2012

(9,710)(7,326)

Fiscal 2013

Fiscal 2012

887,436

823,665

Fiscal 2013

Fiscal 2012

1,313,831

1,386,533

Fiscal 2012

Fiscal 2013

Mitsui
Sumitomo

MS & AD Holdings

665.3

685.4

3.84

3.61

2.19

2.45

31.0

30.2

68.7

63.0

8,292,198

8,374,225

58,65090,823

156,125

146,535

7,390(13,275)

1,185,621

1,137,545

1,869,681

1,966,380

Tokio Marine& Nichido

636.6

837.1

2.52

1.57

1.30

1.40

33.6

32.5

68.0

63.9

410,930

418,313

2,639

3,350

4,596

4,740

(1,145)

1,612

85,22778,536

138,766

137,286

NisshinTokio Marine Holdings

645.6

713.3

3.93

4.04

2.28

2.20

32.8

31.4

70.6

64.6

4,745,077

4,838,707

29,13727,35065,05868,079(25,704)(32,844)843,762822,285

1,327,361

1,413,818

SOMPO
JAPAN

562.6

782.2

2.10

2.28

1.33

1.50

34.6

35.8

63.3

59.4

880,805

857,372(11,067)

5,803(4,651)

17,019(12,321)

5,705

158,618

146,641

272,537

273,161

Fuji

767.2

815.1

3.86

3.46

2.11

2.91

28.9

23.2

108.0

91.4

474,907468,875

4,489

1,722

8,369

(372)

(2,935)(9,743)

141,644

134,786

131,203

147,420

Toa Re(Unit: Millions of yen, %)Sources: Each company’s financial statements of fiscal 2013

534.0

653.0

4.15

5.54

2.15

2.34

34.8

34.0

74.8

67.8

2,293,170

2,260,231

33,332

22,17364,58049,685

8,786(29,725)

436,647

413,767

638,863

668,375

NIPPONKOANKSJ Holdings

Results of Japanese Major Non-Life Insurance Groups (Company) for Fiscal 2013, Ended March 31, 2014
(Non-Consolidated Basis)

Fiscal 2012

Total Assets

Net Profit (Loss) for the Year

Ordinary Profit (Loss)

Underwriting Profit (Loss)

Net Claims Paid

Net Premiums Written

Supplemental Data:

Printed in Japan