OLIS‐Seminar 2013/10

Why Risk Management?
an outline of the importance ofOperational Risk Management
and Risk culture
Tsuneto Yamauchi
FIAJ
Advisor of Samsun Life Insurance1This presentation is intended solely for educational purposes and presents
information of a general nature. It is not intended to guide or determine any
specific individual situation and persons should consult qualified professionals
b f
beforetakingt ki specificifi actions.
tiNeither
N ith theth presenter,t nor theth presenter'st ' employer,lnor the host organization of this seminar shall have any responsibility or liability
to any person or entity with respect to damages alleged to have been caused
directly or indirectly by the content of this presentation.

2

Risk management?
 The most important direction is the quantification of the risks.
The person charged in risk management team, I was a risk management leaderof small insurance company, even in such a small insurance company, we arerequested to calculate the possibility or likelihood of the risks, mitigation
measuresea u e anda its
i numericalu e i a eeffects,
e , aand thee magnitude
ag i u e oof thee risksiiif theyey
occurred.
 And we have to see some cash flow of the risk stream and using the risk free rate
to calculate the ppresent values of them.
1. Risk identification
2. Quantification of likelihood and magnitude of the risks
3. Risk mitigations
4. Reporting
If we do these tasks with no guidelines, it must be not easy tasks. In
I some case, thelocal government proposes the procedures or a set of assumptions. The other case,if the company has his parents company, the parents company suggests the set ofassumptions.
ti
3

Risk management?
 Our task may be finished the parameters given by the local government orparents companies.
companies But it is a very doubtful for risk evaluation.
1. There are no direction about the un‐quantified risks.
Mosto iimportant
po a uun‐quantified
qua i ie risk
i wasa reputational
epu a io a risk.
i IIf iit happened,appe e ,companies go under suddenly. The reputational risk is a sudden death risk.
And we have another big un‐quantified risk. We can call it personal risk. It isveryy hard to evaluate. Especially,py the evaluation of the qqualityy of the toppexecutives is a hard task.
2. Origins of the risk free rates were from many sources.
A chef of the risk management leader using the sophisticated mathematics
orchestrates them to risk free rates. We do not say “it is manipulated”, but inmany case it comes from black box. Sometimes, the proposed risk free rates
were too high to use in the Japanese market.
3. For the risk management, transparency is the most important item.
But, sometimes we have to make the local arrangement to the proposedparameters. But, in many cases, we use the proposed parameters directly.
U
Usuallyll theirth i no explanations
l
ti
about
b t theth backgroundb k
d off theth parameters.
t4

Today’s Agenda
The quantification is the worldwide trend of the risk management.
We cannot refuse this trend. But today I want to try to partially refuse thisworldwide trend.
trend I agree to say that the quantification is important,important but it is notenough for the risk management to end up with the quantification of these risks.
We cannot stop there. We have to study the un‐quantificational risks for the truerisk management
management.
We are in the era of the Enterprise Risk Management (ERM).
It seems that the worldwide leaders of ERM want to quantify the ERM to the limit.
But what for the ERM? What the aim of ERM activities? Some guy said that ERM
will raise the corporate values. But I suppose this is one of the side effects.
Today’s agenda is Risk Management. I planed to speak about the worldwide trendof Risk Managementgand ERM,, ORSA and etc.
But I want to do some case studies of the real bankruptcies of insurance companies,
which happened almost 15 years ago in Japan.
I would like to explain the reasons of the bankruptcies.

5Rational Thinking
Rational Thinking
What is the rational thinking? If we do rational thinking in every moment, we will
be happy in the business world. However, in the life insurance business, the effectsof thee certainoe ai businessu i e ju
judgmentg e will
i bee eemerged
e ge iin thee next
e decade.
e a eIn this lecture, I would like to explain the 4 cases of real bankruptcies. It is historical
topic of almost 20 years ago in Japan, several Japanese life insurance companies
went under.
I believe that it must be good experience for you to know these bankruptcies tostudy the risk management.
Because the real risk management has to serve the decision making to avoid such a
crucial aspects.
You will find any rational thinking or mathematical studies are less meanings to
the real bankruptcy situation. But, the characteristics of the executive team must bemuch
h more importanti
t t if you faceftheth difficulty.
diffi lt
6

Mini Lecture of
Insurance
Mathematics andFinancePremium Calculation
Basic Cash Flows of Life Insurance Company

P
PremiumRevenue
i R
Claim PaymentoutgoygAdditionalA
i io a Cashas Flows
o s

Nett
N
Premium

Commercial
premiumpInterest gainRevenue
Expense  outgo

8

Short course of finance 1 Yen/Dollar＄1

100 Yen＄1.2

Interest

Appreciation of the Yen
In terms of Dollar

80 YenWrite‐down
100 Yen96円

9

Short course of finance 2 [interest and bond price]
The interest rate of one year zero coupon bond with face amount 100 is
calculated as follows;
If the current price is 90 then the interest rate = 100÷90－1=11.11%.
If the current price is 80 then the interest rate = 100÷80－1=25.00%.
Your company sells 2‐years endowment policy with the maturity benefit 100.
Assume the bond market interest rate = 25%. Your company
p y assumes thissituation will continue 2 years, therefore your company sells this endowment
policy with price 64 ＝100× (1/1.25)2. For the simplicity, death benefits are
ignored.
Your country provides 1 year bond only.
One yyear time,, the asset p
price of this insurance = 80. ((64×1.25＝80))
If the market price of the bond fall to 11.11%, your company faces to dangerous
situation. Why?
Because, you need 90 to get 100 for the maturity benefit, however you have only
10
80 as its value.

Short course of finance 3 [summary personal opinion]
For the life insurance industry,
The downward pphase of interest rate is always
y bad sign.
g

If you were in
i a JapaneseJ
lif insure,life
ith appreciation
thei ti off theth
Yen is always bad sign for your foreign bond.
The hedge cost can not be ignored.
ignoredThis means that a strategy of investing the money to thedomestic industry
y or to the ggovernment bond must be g
goodchoice.
I don’t care for the foreign stocks for the life insurancecompany’s investment strategy.
11

The nature of the assumptionsp
For Premium Calculations, we need

• A set of Assumptions• Expected mortality (or morbidity)• Expected interest rate
• Expected Loadings (Expenses)
H
However,
we ddon’t’t needd aOnes these are decided, we cannot change them. Fortune-teller as a consultant.

Actuaries are requested to havelong term views.
Even in tough economic times,
we have to have “soft landing”
measures.

assumptions

5 years

10 years

100 years
12Transition of
Economicindexes in Japan13

About SOA

What is an Actuary?
An actuary is a business professional who analyzes the financial consequences of risk.
Actuaries use mathematics, statistics and financial theory to study uncertain future events,
especially those of concern to insurance and pension programs.
programs They evaluate the likelihoodof those events, design creative ways to reduce the likelihood and decrease the impact ofadverse events that actually do occur.
Actuaries are an important part of the management team of the companies that employ
them. Their work requires a combination of strong analytical skills, business knowledge andunderstanding of human behavior to design and manage programs that control risk.
SOA members work in life insurance, retirement systems, health benefit systems, financial
and investment managementgand other emerging
g g areas of ppractice. The majority
j y ofactuaries work within the insurance industry, although a growing number of actuaries workin other fields.

http://www.soa.org/about/about‐what‐is‐an‐actuary.aspx

14About SOA

First ParagraphAn actuary is a business professional who analyzes the financial consequences of risk
risk.
Actuaries use mathematics, statistics and financial theory to study uncertain future events,
especially those of concern to insurance and pension programs.

1) TheyTh
evaluatel t theth likelihood
lik lih d offthose events,,
2) design creative ways to

1. reduce the likelihood and1
2. decrease the impact of adverse
events thath actuallyll dod occur.

http://www.soa.org/about/about‐what‐is‐an‐actuary.aspx

15

10 years JGB Earning rate past 40 years

A

B

C

Which direction is most likely?

16

10 years JGB Earning rate past 40 years

A

B

C

Which direction is most likely?

17

10 years JGB Earning rate past 40 years

18

10 years JGB Earning rate past 40 years

19

10 years JGB Earning rate past 40 years
1980/48.888%
1990/107.786%

Implement of New
Insurance Business Law
1996

1987/6
3.969%

2003/6
0.548%
2012/70.836%

Many Bankruptcies

2000

2010

20

Year end values of stock (Nikkei Average) 1950～
A

B

C
Which direction is most
likely?

21

Year end values of stock (Nikkei Average) 1950～
1989/1238915.87 yenyImplement of New
Insurance Business
L
Law
1996

Many Bankruptcies

22

Yen Dollar exchange rate
Implement of New
Insurance Business Law
1996
1985/9Plaza
Agreement

Many Bankruptcies

23

Assumed Interest Rate for Premium and Valuation
6.25％

3.75％
2.75％

Many
y Failed C
Companies

5.00％

1.50％

24

Causality order ofBankruptcy ofJapanese LifeI su a ce companies
Insurance
co pa ies

Causality order of Bankruptcy of Japanese Life Insurancecompanies[Chapter One] Summery: Under the circumstance of the income dividendprincipal, there was a dividend competition; the premium rates were almost same,
therefore there were competition of dividend amount among the Japanese insurers.
To attain the high income gains, many companies invest to the foreign securities(mainly bonds). And the market of the foreign currency became the decline in thevalue
l off dollar,
d ll iti maded big
bi amount off exchangehlosses.
lBut
B theh highhi h stockk pricesicovered exchange losses.
[Detail]1
1.
Befo e 2000
Before2000, the premium
e iu rates
ate of Ja
Japanesea e e iinsuranceu a e firmsfiweree e alalmosto tsame. The level of the policyholders’ dividend was also almost same. And
over 90% of surplus had to be distributed to the policyholders’ dividend.
The idea of capital adequacy was not furnished in the insurancecompanies because the big life insurers were mutual companies.
2.
Under this circumstance, I mean the 90% dividend regulation, on top that ,the regulation restricted the dividend source should be the income gains
gains.
We cannot include the capital gains of stocks and foreign exchangetransaction to the regular dividend. Therefore, we needed to increase theincome gains to provide the competitive policyholders
policyholders’ dividend.
26

Causality order of Bankruptcy of Japanese Life Insurancecompanies[Chapter One]3.
In 1977, Japanese distribution yield became lower than the US distribution
yield. the US distribution yield raised 13% of annual rate.
4.
In 1980, Japanese foreign exchange regulation was changed. By thischange, basically, most of the constraints were removed; we can trade thef i securities
foreigni i ffreely.
l JapaneseJ
life
lif insurance
i
firms
fi
boughtbh a hugehamount of the US securities, especially the T‐Bonds.
5.
In 1975 the amount of balance of foreign securities was 3.4 billion yen in
Ja a e e life iinsurers’
Japaneseu e ’ aasset,
et but it bebecamea e 11 ttrillion
illio yeyen at the eendd of 1988
1988.
Only 13 years, the amount was more than 3200 times of 1975 amounts.
6.
But then in US, they were suffered from the trade deficit with Japan. US
government wanted to resolve the situation.
situation At first
first, they forced to change
the balance of US – Japanese currency exchange rates. This is called “Plaza
Agreement”, because this treatment was made in the Plaza Hotel in New
York This agreement decided the trend of strong Yen.
York.
Yen

27

Overseas investment
The transition of the portion of the overseas assets among the investment assets

28

Overseas investment
The transition of the amount of the overseas assets (foreign bonds only)(Unit 100 million yen)29

Causality order of Bankruptcy of Japanese Life Insurancecompanies[Chapter One]
7.
Japanese Insurers invested to the high yield foreign securities. They got
the preferable income from them. But these earnings were dollar base, thismeans, for the policyholders’ dividend, they should exchange them to Yen.
But yen – dollar balance was changed after the Plaza Agreement. Japaneseiinsurers
were suffered
ff d ffrom theh hhuge exchangehllosses.
Following Table shows the exchange losses;
1985
940 billion yen
1986
1 trillion
t illio yen
ye1987
1.5 trillion yen
1988
500 billion yen

30Causality order of Bankruptcy of Japanese Life Insurancecompanies[Chapter One]
8.
Even such a big exchange losses was emerged, they did not stop holding
foreign bonds. They competed about the policyholders’ dividend,
dividend needed the income gain, income gain were derived from thehigh yield foreign bonds, foreign bond had risks of exchange losses, but
thishi kindki d off losseslwere categorizedi d to theh speciali l gainsi andd losses,ltherefore these losses did not affect to the income gain, this meant thatthey could pay the competitive dividend to policyholders by the income
gains
ai ffromo foforeignei bobonds.
dTherefore they did not stop holding the foreign bonds.
Many people doubt why Japanese insurers did not use the hedge strategy.
Actually they did the hedging to the exchange risks
Actually,risks, but some cases they
had losses by the hedging cost. And they knew that they had more
effective financial support; it was their holding stocks.

31Causality order of Bankruptcy of Japanese Life Insurancecompanies[Chapter One]
9.
The Reason that the insurers were survived affected the damage of theexchange losses was the high stock value.
The graph shows the sharp rise of the stock market from 1984, finallyDecember1984, it marked 38915.87 yen (this is the Nikkey Average), thiswas theh top value
l off theh JJapanese stock
k marketk after
f the
h W
World
ld W
War IIII.
10.
The gain of sale is capital gain, the exchange losses are special losses, thismeant that these two items were canceled each other. These cancelations
did not
ot affectaffe t the income
i o e gain,
ai therefore,
the efo e insurers
i u e payay the dividend
di ide d fromfo
the interest payment of foreign assets.
11.
Above all, under the circumstance of the principle of income dividend, life
insurers chase the income gains
gains, they invested to the foreign assets to get
the high interest gains, but same time the investment environment waschanged caused by the Plaza Agreement, Japanese insurers were sufferedfrom the high Yens
Yens’ rate,
rate but the stock market marked the high indicators,
indicators
therefore the cancelation of these two items saved the Japanese insurers
even they paid the policyholders dividend using the interest gain from theforeign assets.
32

Year end values of stock (Nikkei Average) 1950～
1989/1238915.87 yenyImplement of New
Insurance Business
L
Law
1996

Many Bankruptcies

33

Causality order of Bankruptcy of Japanese Life Insurancecompanies[Chapter Two] Summery: The stock market crashed, Insurers could not cancel theexchange loss with the stock price. However, many insurers and economists had an
optimistic foresight that ten years time, the economical situation should become
normal again.
1.
In December 1989, the Nikkey Average marked 38915.87 Yen, it was thehihistoricali l hihighh valuel off theh TTokyok stock
k market.
k IIt was theh fi
finall d
day off theh1989. We had yearend vacations after that with the feeling of well‐being.
However, we have not seen the same escalation of the stock market since
1989 The Nikkey average
1989.
a e a e steepedtee ed down,
doin
i the middle
iddle of 1991 it had theaverage around 17000yen, this value was the below half of the top value.
While the fluctuation varied, whole average went down to 10000yen.
22.
Almost same occasionoccasion, the value of the Japanese Government Bonds
raised, the interest rates went down. Around 8 percent in 19 , but only 8
years time, it went down below 1 percent.
3
3.
There were many forecasts about the Japanese Economy.
Economy Many people
thought that the stock market and the other financial indicators might beback to the past level.
4.
After these wrong messages and activities, many insurers asset quality has
deteriorated.
34

Causality order of Bankruptcy of Japanese Life Insurance companies[Chapter Three] Summary: Single Premium Endowment and Premium Loan
Annuity, these were sold in the mid 1980s, they had hard time to achieve the credit
rate of the product.
1.
The sales department, as its nature, chases the sales result. They want tomake sales bigger than past years. In the end of 1980s and beginning of
1990s,, theyy started to sell the saving
g products.
p
It made big
g phenomenaptomoney shift to the life insurers.
They started to sell the single premium endowment, or single payment
annuities with bank loans.
2.
One of the bankrupt companies, Nissan life, in the middle of 1990, thetotal asset became twice of its last year.
3.
Case of the Nissan Life, in 1988 they sold 8% credited rate products, itmade big sales, in 1990, JGB marked 8% of its distributed yield, therefore
the company decided to continue to sell the product, this would be risky
but rational decision because the JGB marked 8%, this meant the otherb d marked
bonds
k d muchh hihigherh iinteresttt rates.
t
However, the interest rates felt down in 1990s, finally they could notafford the suitable assets to sustain the contracts. They sold the junk bonds.
Finally it became nonperforming assets.
Finally,
assets4.
In 1994, Nissan Life became the over deficits, in 1997, government ordered35
to stop the business.

Causality order of Bankruptcy of Japanese Life Insurancecompanies[Chapter Four] Summary: Bad quality of the top management of the runoff
companies
There is a good study of the qualification of the managing directors written by Dr.
Uemura, the tile is “The failure without management Truths behind the Seiho crisisin the Heisei era “.
U i thisUsing
hi splendid
l did study,
d we will
ill examine
i theh following
f ll i 4 companies
i as theh casestudies.
Nissan Life
Chiyoda Life
Daihyaku Life
Kyoei Life36

Causality order of Bankruptcy of Japanese Life Insurancecompanies[Chapter Five] Summary: Own Asset Regulation
There was a less attention to the owned capital when the bankruptcies happened.
The dominated thought was the surplus should be distributed to the policyholders.
Currently, we have the regulations of the RBC or Solvency Margin, we arerequested of having the certain amount of the own asset.
1
1.
N
New
I
InsurancebbusinessiL
Law was implemented
i l
d on 1996,
1996 thishi ledl d thehfundamental thought of the solvency margin2.
Some person said that this implementation boosted the several companies’
ba k u t iebankruptcies.
3.
However, by this regulation led the thought of importance of own asset
and the control of the policyholders dividend.
44.
In the past,
past 90% of the surplus should be paid as policyholders
policyholders’ dividend,
dividend
now a day it is 20% in the regulation. It is a great difference between theage of bankruptcy and 2013.

37

Causality order of Bankruptcy of Japanese Life Insurancecompanies[Summary]
Proper 6 causes of life firms
firms’ bankruptcy in Japan1.
90% rules (over 90% of surplus should be distributed topolicyholders,pyit was stated in the regulation)g)2.
Principle of income dividend (source of the dividend
should be limited to the income gains)
3
3.
sharp
h
d
depreciationi ti off interesti t
t ratet
4.
produced big amount of sales of saving product55.
Lack of the regulation for the own assets
6.
under quipped of top executives

38

The failures of Life
Insurance Companies ofJapan

Case Studies

Japanese bankruptcy cases

Going Bankrupt

CompletingpgLiquidation

Amount ofnegative
g
net
worth
(billion yen)

Assumed rate

Nissan

/
97/04

97/10
/

302.9

Unknown

2.75％
％

Toho

99/06

00/03

650.0

4.79％

1.50％

Daihyaku
y

00/05

01/04

317.7

4.46％

1.00％

Taisho

00/08

01/03

36.5

4.05％

1.00％

Chioyda

00/10

01/04

595.0

3.70％

1.50％

Kyoei

00/10

01/04

689.5

4.00％

1.75％

Tokyo

01/03

01/10

73.1

4.20％

2.60％

beforebfaverage

after
ft
upper

In the following presentation, “The failure without management
Truths behind the Seiho crisis in the Heisei era” by Dr. Nobuyasu Uemura will bequoted in parts of this presentation. Hereinafter, I’ll call this book as [Uemura]
40

Single Premium Endowment Insurance

Maturityy Benefitt

Death BenefitSing
gle Premiium
PolicyCommencement

Theree areThea e noo midterm
idte
premium payments. The
company will pay the death
benefit in the case of
insured’s death or it’ll pay
the maturity benefit in thecase of insured’s
insured s alive at thematurity of the policy.

Termination

41

Annuity Insurance Loan

Bank
Agent
ConsumerC= policyholder

Insurer
Burden of over 8% of the returns for the advancespremiums and policyholders’ dividend

42

Case
C
1
N
NissanLife
Lf
Rapid expansion of business scale was
fatal

The case of Nissan LifeA
Annuityit Insurance
I
L
Loan : 1987 ‐ 1988

Bank
Agent
ConsumerC= policyholder

Insurer
Burden of over 8% of the returns for the advancespremiums and policyholders’ dividend

44

Nissan Life
The transition of the amount of assets
Nissan LifeAll Insurers

FY

Total asset(billion)

Year to year

FY

Total asset(billion)

Year to year

1985

368.0

19.1%

1985

53,870.6

17.8%

86

444.1

20.7%

86

65,317.2

21.2%

87

696.4

56.8%

87

79,268.4

21.4%

88

1,323.0

90.0%

88

97,082.8

22.5%

89

1,627.0

23.0%

89

117,343.9

20.9%

90

1 855 5
1,855.5

14 0%
14.0%

90

131 618 8
131,618.8

12 2%
12.2%

91

1,944.3

4.8%

91

143,234.1

8.8%

92

2,028.5

4.3%

92

156,011.1

8.9%

93

2,102.9

3.7%

93

169,122.1

8.4%

94

2,146.1

2.1%

94

177,965.5

5.2%[Uemura]p91

45

10 years JGB Earning rate past 40 years
1980/48.888%
1990/107.786%

1987/6
3.969%(1988)
Double the
Total Asset

Implementation of the
New Insurance Business
Law 1996

2003/6
0.548%
2012/70.836%

46

Year end values of stock (Nikkei Average) 1950～
1989/238915.87yenyImplementation of the
New Insurance
B i
Business
Law
L
1996

(1988)
Double the
Total Asset
A et
Many Bankruptcies

47

Nissan Life
Asset Allocation of Nissan LifeEnd of FY1986

End of FY1989

Amount(billion yen)

Constituent
ratio (%)

Amount(billion yen)

Constituent
ratio (%)

Total assets

444 1
444.1

100 0
100.0

1627 01627.0

100 0
100.0

Cash anddeposits

34.8

7.8

122.7

7.5

Money trust

13 8
13.8

31
3.1

111 1
111.1

68
6.8

Bonds

57.8

13.0

176.1

10.8

Stocks

77 5
77.5

17 5
17.5

350 1
350.1

21 5
21.5

Foreign securities

58.1

13.1

340.8

20.9

Other securities

3.7

0.8

7.1

0.4

Loans

164.6

37.1

422.6

26.0

Real estate andmovables

22.3

5.0

58.7

3.6

[Uemura]p94

48

JGB and Nissan Life
(1976) Mr. Yazaki
President(1987) Start the Annuity Loan
Mr. Sakamoto to be the President(1994) practically in a state of negative net worth
Mr.Ｙonemoto (Actuary) took over the president(1997) Business suspension order(1988)
Double the
Total Asset

49

Nissan LifeA head office staffer of that time says,• A head office staffer of that time says,y “In 1987 ((when Sakamoto
became president), our finance division and actuary divisionconsidered the payment of an annual 8% yield as a problem, but they
could not restrain the sales division…
• We had many discussions on the advisability of expanding assets sofast. At around the time when the total assets topped ¥1 trillion (in1988), an actuary informally gave a warning to the management. The
warning fell
f ll on deaf
d f ears…
• All the information that reached President Sakamoto was ‘things are
all right because ________’ or something like that.”• In
I an interview
i t i
with
ith Nikkei
Nikk i BusinessB i
as mentionedtid earlier,li Yazaki
Y kisaid, “I felt things were rather imbalanced, but we had come too far togo back...”[Uemura]p92

50

Nissan Life
Steps taken after the external environment worsened• When the investment environment deteriorated in the 1990s, theheavy burden of paying guaranteed yields came to the fore.
• Earlier, when the company leaned toward stock investment while its
assets were expanding, it purchased stocks at high prices. These
stocks now incurred capital losses and valuation losses, making it
difficult for the company to make a good showing when settlingaccounts.
• In
I fiscalfl 1991, theh company earnedd aboutb¥30 billionb ll
in theh threehtypes
of profit while its valuation loss on securities reached ¥90.3 billion
and the current profit shrank to a thirtieth of the previous year’s level.
• The
Th value
l off individual
i di id l annuity
it contracts
t t as a percentaget
off thethpolicy reserve was above 50%.
• Most of such contracts had a high assumed interest rate and a highinterest rate for those who made advance payment
payment.
• Even after individual annuity products became less salable in the
1990s, the policy reserve continued to build up.
[Uemura]p94

51

Nissan Life
Steps taken after the external environment worsened• Meanwhile, latent stock p
profits were depleted.
p
When settlinggaccounts in fiscal 1991, the company cut dividends, booked a profit
on sale of real estate and lowered the policy reserve level.
• The company reported an interest profit on the surface, but its
interest and dividend income was inflated by derivative‐containing
products designed to make a good showing when closing the books.
• The actual earning power was less than what it appeared to be. The
company recordd showshthat
h “foreignfsecurities” increasedd sharplyh l infiscal 1991 and “other securities” grew noticeably in fiscal 1993.
• Part of these securities were products designed to make a decent
showingh i att theth termt
end.
d “(Nissan“(Ni
MutualM t l Life)
Lif ) initially
i iti ll earnedd highhi hyields from Nikkei Average‐linked bonds purchased in the early
1990s, but their forecast of the stock market turned out wrong and theprincipal was eroded in the end
end…
• Investment in derivatives using foreign bonds caused more losses.
These were products whose yields were initially high but werereduced over time,
time ” according to an analysis given in the weekly
Economist dated June 17, 1997.
[Uemura]p95

52

Nissan LifeIn the 1990s, the company found itself falling into difficulties
 In the 1990s, the company found itself falling into difficulties.
 However, “the president didn’t take the leadership in starting efforts
to reconstruct business.
 He
H justj t toldt ld othersthtto ‘do‘d something
thi aboutb t it’ andd did nott actt on hi
his
own initiative…
 When we received a notice from the Ministry of Finance pointing out
our problem and an order to take remedial action,action and informed thepresident about the matter, he just said ‘we cannot possibly do such athing.’ He saw the problem not as something the company should address
but as a disaster that fell upon him…
 He was not like a manager but was rather like someone merely
holding an honorary post
post. The principle of competition did not workin a mutual company of that time. One who stayed in thisenvironment for decades would end up as a manager like that,” saysa former head office staffer.
[Uemura]p97

53

Nissan Life
Final
President Sakamoto resigned in July 1994, and actuary Hiroshi
Yonemoto took over as president. At this point of time, Nissan MutualLife was practically in a state of negative net worth. It was not as if the
new president
id t could
ld dod something
thi aboutb t it.
it[Uemura]p97

54

Case
C
2
Daihyaku Life
Fettered byy low earnings
g structureDaihyaku Life
Back ground Daihyaku Mutual Life was a Kawasaki family‐affiliatedfamily affiliated company
company.
Everyone who served as its president was a member of the Kawasaki
family until Fukuchi became president in 1987.
 Daijiro
aiji o Kawasakia a a i ((who
o was
a p
presidente i e fromo 1965 too 1973)) wasa knowno
as a person who restored prosperity to the family business. Daihyaku
Mutual Life came to be called “a pioneer in new‐type insurance”
pwhen he was president.
 After retiring as president, he remained a director until 1987 andretained influence over management. “His son Shinjiro was working
at the company. He was seen as a future president from the time hejoined the company.
 The management team had to keep Daijiro always in mind when
making decisions. They could not make bold decisions such as ‘giving
up saving insurance’ or ‘selling off bank shares,’” says a head office
staffer at that time.

[Uemura]p130

56

Daihyaku Life
Back Ground (continue) The company began to expand its scale of operation around 1987
1987,
according to a head office staffer at that time.
 Some people in the company said, “We are shifting from savings tolife
i e iinsurance,u a e, soo wee need
ee noto ge
get upupset
e when
e ou
our p
place
a eo
on theeranking list of insurers in terms of total assets drops.” Some people
close to Daijiro, known as the person who restored prosperity to his
familyy business, strongly
g y insisted that “it is necessary,y after all, to
expand the size of assets by selling savings‐type products.”
 Accordingly, the company promoted sales of individual annuity
insurance combined with a bank loan and single‐premium
endowment insurance.
 “It is not that we promoted sales of single‐premium products. To be
more accurate, the products sold much more than we had expected,”says anotherh headh d office
ffstaffer
ff at thath time.

[Uemura]p130

57

Daihyaku Life
Back Ground (continue)
 Amongg DaihyakuyMutual Life managersgincludingg Fukuchi(president (from 1987 to 1996) ), there were few who exercised strong
leadership in the company.
 “A warning was issued in the company from time to time. But a life
insurer’s business management was not very visible and it wasdifficult for some officers to share their concerns with others. They
would end up going along with a majority view. The managementd d not hdidhave a strong willll to exercise authority,”hsays a headh d office
ffstaffer at that time.

[Uemura]p130

58

Daihyaku Life
Back Ground (continue) The managementgmade one planpafter another to changeg the low‐
profit structure, but had no system for analyzing the results of change
and modifying the plan accordingly.
 “An easy‐going atmosphere pervaded the place…. Whenever we sat
down to discussion, the same old themes such as “expand sales ofprotection‐type products,” “reduce costs” and “sell shares” came up.
But we did not discuss whether the idea was feasible or not. As soon
as we got downdto work,k the
h idead would
ld turn out unrealistic,”laccording to several head office staffers.
 As the company enjoyed a large interest profit and a large unrealized
profitfit ffrom shareholdings
h h ldiup untiltil ththe 1980
1980s, ffailure
iltto achieve
himanagerial objectives did not matter and no one was held
responsible.

[Uemura]p130

59

Daihyaku Life
Steps taken after business turned worse The problem of the profit
profit‐earning
earning structure came to the surface in the
1990s when the investment environment worsened so much that thecompany was no longer able to earn an interest profit.
 Thee company
o pa y began
ega too sufferu e a negative
ega i e spreadp ea ini fiscali a 1992. Theesum of the expense profits and the mortality profits was not large
enough to cover the interest losses in and after fiscal 1993. In this year,pg
gains from the sale of securities came close to ¥100 billion.
capital In fiscal 1994, the company suffered a large valuation loss from adrop in stock prices as well as three types of loss, and posted the firstcurrent loss in postwar years. It broke into the reserve under Article
86 and lowered the required policy reserve level from the one basedon the net premium method to the one based on a five‐year Zillmer
method.

[Uemura]p124

60

Daihyaku Life
Steps taken after business turned worse The members of the management team were not particularly alarmed.
alarmed“The budget division once presented the results of its future cash
flow analysis to the management, pointing out that ‘the company willnoto stayay aafloat
oa aaccordingo i g too severale e a scenarios’e a io aand thata ‘theree e iis a 20%%
to 30% chance that the company will go bust.’ Half of the members
did not take the matter seriously, saying ‘when such a scenario
becomes reality,y JapanJ p itself would be in a mess,’” says
y a staff memberof the actuarial division.
 After reporting red‐ink results, the company announced a three‐year
plan in April 1995 in which it set out to improve services forindividual policyholders and rebuild the system for sales to corporateclients in order to increase the total amount of policies in force. “We
tried but were unable to cut costs as much as we wanted to. The sales
division complained, ‘We can’t do business if costs are cut down tothis level,’” says a head office staffer at that time.

[Uemura]p124

61

Daihyaku Life
Final

 The profit‐earning structure was weak, business results depended
heavily on stock prices and the latent stock profits were almost
depleted. “Even when Nissan Mutual Life failed in April 1997, ourpeople talked as if ‘it was something that occurred to Nissan (and had
nothing to do with us),us) ’” says the head office staffer
staffer.
 Daihyaku Mutual Life fell into a crisis not because it had a major
specific problem, but rather because various smoldering factors
erupted all at once. The bad loan problem “waswas not fatal
fatal” (according
to a head office staffer at that time) and there was no manager whose
arbitrary behavior caused a problem.
 The managementgteam was not q
quick to recognize
gthis problemp
while
Daihyaku Mutual Life’s business was deteriorating, and therefore
failed to take remedial action. The company had the task of reducing
strategicallygy held shares, but made little p
progressgin this regard.
g
“(The
(
company was) slow to take notice and take action after the bubble
period. It was not that a big problem brought down the company, butvarious factors came together at once to finish it off,” says a head
office staffer at that time.
[Uemura]p121 ‐ 124

62

Case
C
3
Ch d Life
ChiyodaLf
Investments and loans during
g onlyy two and ahalf years proved fatal

Chiyoda Life
The transition of the amount of assetsyLife
ChiyodaAll Insurers

FY

Total asset(billion)

Year to year

FY

Total asset(billion)

Year to year

1990

5,154.4

14.1

1990

131,618.8

12.2%

91

5,621.4

9.1

91

143,234.1

8.8%

92

5,982.9

6.4

92

156,011.1

8.9%

93

6,316.6

5.6

93

169,122.1

8.4%

94

6,396.3

1.3

94

177,965.5

5.2%

95

6 442 5
6,442.5

07
0.7

95

187 492 5
187,492.5

5 4%
5.4%

96

5,816.3‐9.7

96

188,659.0

0.6%

97

5,028.2‐13.5

97

190,111.0

0.8%

98

4,359.9‐13.3

98

191,768.4

0.9%

99

3,501.9‐19.7

99

190,032.9‐0.9%[植村]148頁から引用

64

JGB and Chiyoda Life
(1982) Mr. Kanzaki became President setting up a target of “returning toa major insurer.”(1993) Industry wide report on bad loans, Chiyoda
Mutual Life
Life’ss bad loan amount was a staggering ¥231.6¥231 6billion.
(1996) S&P released the ratings. The company
was rated “B,” the lowest among the eight
insurers. Chiyoda
h d Mutuall Lifef bbecametargeted by the media as the “life insurer likely
to fail next.”
Mr. Ｙoneyama became President.

Inteernal rep
port
was leakedw(2000) Conducted financial
reinsurance transactions and filed
for corporate rehabilitation
proceedings.
di65

Chiyoda Life
Back Ground Before World War II, ChiyodayLife was one of the five big
g companies
pof JapanJ p Life
insurance industry.
 But this position was taken over Sumitomo Life and the other companies.
 “Regain lost ground” this was the motto of president Kanzaki (1982)
 Chiyoda Life sold high return saving products,
products and chose the high risk ‐ high returninvestment strategy.
 Same department controlled the front and back operations of investment.
 ChiyodayLife was requiredq
to have “finances that could contribute to sales results” inthe late 1980 and therefore often made investments and loans in return for contracts
entered into by corporate customers. This was called “unified activities of sales andfinance departments.”
 As a result of stock purchases made in response to requests from the corporate sales
department, the balance of stocks as of the end of fiscal 1989 tripled from the level asof the end of fiscal 1986.
 ChiyodayLife couldn’t accelerate its sell‐off of these stocks even after its businessdeteriorated and became saddled with latent stock losses worth more than ¥100
billion, starting at the end of fiscal 1997.

[Uemura]p139

66

Chiyoda Life
Sold the saving products,
 Among
g those insurance p
policies, single
g premiumpendowment policypy happenedpp
to have various maturities (an insurer usually sold 5‐year and 10‐year maturity
products), and 6‐year maturity endowment insurance started attracting a lot of
attention as a tax‐saving product at a certain point in time with customers
lining up in front of branch counters to buy the insurance
insurance, according to parties
concerned.
 Head office staffers at that time say, “Media advertised the insurance on theirown” “This was the first and last time that we saw customers standing
g in line
in front of sales windows to buy our insurance products.”
 Department heads or those in higher positions at that time were desperate to“regain lost ground.” “Since Kanzaki became president, our major
performance indicators such as insurance
insurance‐in‐force,in force total asset and premium
revenue had recovered, and external parties started calling us one of the ‘eight
life insurers,’” says a staff member in the planning department.
 Kanzaki was very
y popularp pamong
g sales p
personnel. However, “the insurer’s
comeback as a major player happened to coincide with the beginning of the
bubble economy, which probably resulted in significant impact on thecompany,” according to another staff member in the planning department.

[Uemua]p139

67

Chiyoda Life
Increasing the liability of Group Annuity<FY 1986>
ChiyodaAll
companies
combined

Individual
insurance

63.1%

Individual
annuityGroup
insurance<FY 1989><FY 1995>

ChiyodaAll
companies
combined

ChiyodaAll
companies
combined

74.8%

56.0%

67.0%

41.9%

55.8%

3.5%

2.9%

7.8%

6.8%

8.2%

9.5%

0.5%

1.2%

0.3%

1.1%

0.3%

0.4%

Group
32.7%
20.2%
35.6%
24.2%
49.3%
33.2%
annuityThi tableThist bl showshtheth componentt off theth premiumireserves byb theth kindki d off products.
d t
The portion of “Group Annuity” increased every year.
(Source) “Life Insurance Statistics”[Uemua]p139

68

Chiyoda Life
This product component requested the high returninvestment strategy
 While selling a large volume of high‐yield, high‐dividend savings‐type products inthe late 1980s, “the company increasingly leaned toward loans to real estate‐
related companiespand nonbanks, stock investment, and other risky
y investment
instruments such as tokkin specified money trust and structured bonds to securehigh‐yields” (quoted from the insurer’s rehabilitation plan).
 During a two‐and‐a‐half‐year period from 1988 through 1990, the company
executed a substantial number of large‐lot
large lot problematic deals including those with
the Yokoi group, Aichi, Matsumotoyu Shoji, Aijishi and GGS Co.
 Looking back, many say, “These things all happened just in a short period oftime” “We suddenly realized that it was too late.” Those close to President Kanzaki largely got involved in investments and loansthat turned nonperforming later. Several head office staffers at that time say,“Kanzaki was not a type of person who directed someone to do something or
made proposals on his own”
own ….
 “He was not a sort of person who could act arbitrarily on his own authority. In thefirst place, he was not able to do anything on his own”…. “These investments andloans were largely executed by people called ‘President Kanzaki’s right‐hand men’including Mr. A in charge of financial affairs, Mr. B in charge of sales and Mr. C incharge of real estate deals.”[Uemura]p139

69

Chiyoda Life
Mr. A, improper personnel change Of those people, Mr. A, who was put in charge of financial affairs in 1987, appears
to have played a significant role.
 Many head office staffers at that time say, “Kanzaki made a big mistake inpersonnel changes (staff deployment). That is, his mistake was to put Mr. A incharge of financial affairs”
affairs …. “While
While assets were surging
surging, Mr
Mr. A was assigned thetask of managing financial affairs and injected massive funds into problematic
deals. Several years later, most of such deals turned nonperforming.”
 Mr. A, who took charge of financial affairs, made his mark after Kanzaki becamepresident, but had no experience in finance at all, according to staff in the planningand financial affairs departments at that time.
 He advocated “aggressive finance (positively speaking)” after pushing away an
executive in charge of financial affairs,
affairs his predecessor,
predecessor and taking power.
power He wasa self‐confident person and apparently didn’t think that others would deceive him.
As a result, he executed fishy deals introduced by young employees in thecorporate insurance department one after another.
 Mr. A is said to have started directly meeting men cashing in on the bubble
economy later, but in reality, “he was more like being deceived by these men”
(according to a staff member in the financial affairs department).

[Uemura]p139

70

Chiyoda Life
Nobody could stop Mr. A
•

•

•

•

•

All of the personnel in the financial affairs department initially participated in meetings on
Chiyoda’s asset management policy, but “the number of participants gradually dropped toreduce criticism, leading to the system in which a person brought his plan directly to Mr. A”,
says a staff member in the planning department.
The ppress also reports,p, “The head of the financial affairs department,p, a close allyy to thepresident, went to the president’s office beforehand and decided on everything. Managing
directors all just agreed with what Mr. A said at a meeting because they knew that everything
would be over if they raised any objection” (the evening edition of The Yomiuri Shimbun,
dated January 10
10, 2001)
2001), thus supporting what the previously
previously‐mentioned
mentioned staff member
testifies.
“I didn’t know what Mr. A and several others were actually doing even though I was also in
the financial affairs department,” says a staff member in the financial affairs department. “Inmanya y cases,a e President
P e ide t Ka
Kanzakiaki learned
lea ed about deal
deals only
o ly afte
after they weree e alalreadyeady eexecuted.
e uted He
stepped in sales activities, but when it came to financial matters, he apparently thought that it
would be OK to just rely on Mr. A,” says a head office staffer at that time.
A staff member in the financial affairs department admits, “After all, nobody could stop what
Mr. A did. Employees within the department who expressed their opinions to Mr. A weretransferred to other departments or removed from their positions.
We had traditionally had few employees going against their bosses. None of us interferedwith Mr. A because we knew that he was supportedppbyy President Kanzaki and saw several
people ousted after actually raising objections.”[Uemura]p142

71

Chiyoda LifeManagement Change: Credit uncertainty and outflow of policies in force
 While the insurer’s latent stock profit recovered to ¥200 billion with the rebound of thestock market in fiscal 1995, its deteriorating financial standing became well known tothe public, triggering withdrawals of group annuity contracts. When U.S. affiliatedrating agency S&P released the ratings of major eight life insurers in January 1996, thecompany was rated “BB,” the lowest among the eight insurers
insurers.
 After Nissan Mutual Life went under in April 1997, Chiyoda Mutual Life becametargeted by the media as the “life insurer likely to fail next.” Moreover, policy
cancellations further rose amid growing concerns over the financial system. “Each time
the burned‐out site of Hotel New Japan was covered by TV as an icon of a risky life
insurer, a large number of contracts were withdrawn. Major insurers also spread
harmful rumors against the company when marketing their products. The mass media
obtained stories about the insurer from the information leak incident
incident, and theircoverage had significant impact on the company’s business,” according to head office
staffers at that time.
 However, the management is said to have shown no clear policy. In 1996, Yoneyama
assumed the company’s presidency, while Kanzaki stepped down and became
Chairman. A head office staffer at that time says, “Grasping the whole picture of thefinancial condition of the company after he became president, Yoneyama said, ‘I havenever thought that our financial standing is as bad as what II’veve just found
found.” However,
Howeverhe didn’t show any plan to consolidate the company’s operations yet.

[Uemura]p142

72

Chiyoda Life
Finnal While the prices of shares held by the insurer again plunged, full‐fledged tie‐up
negotiations with a foreign company resumed in the second half of fiscal 1999. Amid
extremely severe external environments, “we found its business results worsened every
time data was updated,” according to a staff member in the planning department.
 After all,
all the company failed to form a partnership with the foreign company partly
because it was unable to obtain additional financial assistance from close financial
institutions.
 It filed for corporate rehabilitation proceedings with Tokyo District Court on October 9,
2000. A head office staffer at that time explains the background leading to the failure in
negotiations, saying, “In the tie‐up negotiations, the foreign company sought to eventually form allianceswith financial institutions close to us
us, along with a partnership with usus. Therealignment of the financial sector upset the plan.”[Uemura]p14273

Chiyoda Life
Actuary During the time when Kanzaki served as president, a business monitoring
function within the insurer didn’t work well. Actuaries, experts in actuarial science,
were no exception.
 Actuaries were not considered as important within the Chiyoda at that time. The
Chiyoda Life did not have an independent actuarial department as othercompanies did and its actuarial division was put within the planning department.
This is a piece of evidence suggesting that the actuarial operations were not valued
within the insurer.
 “We were called ‘mere calculators’ by the management. They apparently thoughtthat actuaries were ‘only needed to satisfy the requirement set forth under the
Insurance Business Law’ and that ‘the monitoring by the regulatory authorities
would be enoughenough,’” says a staff member in the planning department.
department
 The management is said to “have talked about their actuaries as convenient, but
unreliable people,” according to a head office staffer at that time.
 The company’s actuaries are said to have lost the management’s trust as a result of
failing to well respond to inquiries made by the Ministry of Finance in the 1970s,
when the insurer was struggling with a business slump. “In the 1980s, the numberof actuaries was small for the company’s size and its actuaries especially had little
power against the sales department
department,” many staff members in the planningdepartment admit.

[Uemura]p156

74

Case
C
4
K
Kyoei
L
Life
f
“Managerialgvacuum” caused failureKyoei Life
The transition of the amount of assets
y
Life
Kyoei

All Insurers

FY

Total asset(billion)

Year to year

FY

Total asset(billion)

Year to year

1985

1,212.4

20.5

1985

53,870.6

17.8%

86

1,603.7

24.0

86

65,317.2

21.2%

87

1,899.6

26.3

87

79,268.4

21.4%

88

2,460.1

29.5

88

97,082.8

22.5%

89

3,000.9

22.0

89

117,343.9

20.9%

90

3 534 33,534.3

16 7
16.7

90

131 618 8
131,618.8

12 2%
12.2%

91

3,934.3

12.3

91

143,234.1

8.8%

92

4,480.4

13.9

92

156,011.1

8.9%

93

5,064.1

13.0

93

169,122.1

8.4%

94

5,435.7

7.3

94

177,965.5

5.2%[Uemura]p161

76

Kyoei Life Kyoei Life did not get involved in high‐risk real estate investment andloans during the bubble period.
 Its managers and people close to them did not go to extremes.
 What proved fatal was a large negative spread incurred each year as
the company
p y sold single‐premiumg pendowment insurance from thelatter half of the 1980s to the 1990s.
 Kyoei Life initially took an independent path, but it later followed thep of other insurers and began
g aggressively
gg
y sellingg single‐gfootsteps
premium endowment insurance.
 The company continued to sell it until the mid‐1990s, even after its
rivals stopped doing so.
 Failure in asset management made things worse. In the latter half ofthe 1990s the company rushed to high‐risk securities investment in abid to shore up the three types of profit, but ended up with a large
l
loss
each
h year.

[Uemura]15677

Kyoei Life Kyoei Life sold protection‐type products through groups with which it
had formed partnerships. With this unique business model, the company
a hie ed growth.
achievedo th Assumed interest rate was 3.75%, lower than other insurers. “Ourcompany was constantly looking for a niche market…. Other companies
said that ‘Kyoei
Kyoei Life
Life’ss insurance is hard to understand,’”understand, said the head
office staffer at that time.
 In the mid‐1980s, “The sales staff began demanding, ‘let us sell single‐
premium endowment insurance (like other companies).
pp
 ’ Kawai, who had been reluctant to sell this insurance, changed his policy
in 1987. The company belatedly started aggressively selling this productand raised the assumed interest rate to 5.5%, about the same as offered byotherth companies,”i ” say theth actuarialt
i l staff
t ff att th
thatt titime. IIn thi
this connection,ti
there were conflicting witness accounts. One said, “We started with a low
assumed interest rate but various things pressured us into raising it to thelevel of other companies.
companies ”
 Another said, “The actuary at that time recommended raising theassumed interest rate and even brought in an actuary from anothercompanyp y to persuadepKawai.”[Uemura]p159

78

Kyoei Life “Mr. Kawai had become old and lost his youthful energy by thesecond half of the 1980s.
 He retired from the director
director’ss post in 1992. Even after his retirement,
the management was unable to make decisions without consulting Mr.
Kawai. Mr. Kawai should not have been fit to make proper judgment
at that time,, but the managers
gwere unable to g
get togethergandaddress important issues of the company as they were supposed todo.
 Even when Mr. Kawai was close to death, the managers went to thehospital where he stayed to seek his approval,” says a head office
staffer at that time.
 Another head office staffer says, “In the mid‐1990s, the managers
belatedly agreed that a change of generations was necessary and tried
to rejuvenate the board of directors in 1996.
 As previous members of the board remained with the company asadvisors,d iththe overallll situation
it ti changedhd littllittle…. F
From ththe llatter
tt h
half
lf offthe 1990s the board of directors frequently held a meeting but mostly
ended up with a weasel‐word resolution.”[Uemura]p159

79

Kyoei Life “Mr. Kawai thought he had retired from active duty in 1992. Whenhis successors asked him for advice, Mr. Kawai merely expressed his
feelings. Kyoei Life’sLife s managers interpreted Mr. Kawai’s
Kawai s words in any
way convenient to themselves….
 They made decisions based on their guess about Mr. Kawai’s
intentions. So theyy made an incredible blunder such as ggettingg a largegvolume of contracts that would instantly create a negative spread.
 Mr. Kawai himself should not have known that things were as bad as
this,” says an actuarial staffer at that time.

[Uemura]p159

80

Kyoei Life “The actuarial division started a future cash flow analysis around1990 at Kawai’s instructions.
 It became obvious that ‘disastrous
disastrous results
results’ lay ahead
ahead. However
However, in the
expectation that ‘the external environment will change in 10 years’
time,’ the company did not take drastic action such as discontinuingsales.
sales
 Kawai merely showed displeasure when this matter was brought to
his attention. He must have thought that, as the product had a 10‐year
maturity, things should improve during the life of the product,”
product,
according to the actuarial staff at that time.
 “In 1992 or so, even salespeople began to ask ‘is it all right to continue
to sell in this way?’y The executive in charge
g of sales (who(was one ofthose close to Kawai) opposed to the discontinuation of sales, andthere was no way to put a brake on the sales drive,” says an actuarial
staffer at that time.
 The chances are that the executive in charge of sales had a poor graspof the precise details of the company.

[Uemura]p162

81

Kyoei Life Kyoei Life was quite secretive about its own affairs and made sure that its
real situation was visible only to a few executives. A certain actuarial
staffer
taffe of the ti
timee says
ay that Kyoei Life wasa fa
far fromf o restraining
e t ai i the sales
ale ofsavings‐type products and sold a large volume of group survivor’s
insurance with high assumed interest rate in 1993 or so.
 The company finally stopped selling single
single‐premium
premium endowment
insurance in 1994, the year when it posted a current loss. “It was too late,”
said a head office staffer at that time.

[Uemura]p164

82

Kyoei Life
 Founder Kawai was an actuary and made judgment about anything bylooking at figures and going into details.
 The numerical data was prepared by another actuary—Mr.
actuary Mr B
B, Kawai’s
Kawai s protege.
protege
According to the parties concerned, Mr. B was described as “Kawai’s arms”
and “Kawai’s electronic calculator” from the early 1980s onward.
 From the mid‐1990s onward, anyone who made a future cash flow analysis
should have realized that the company was in a real mess. But it seems fromthe comments of the parties concerned that the actuary did not inform the
management of his findings.
 “Mr
Mr. B was secretive
secretive. He exercised control in such a way that the real situation
was visible only to a few executives. He was worried about the impact of
disclosure of the truth….
 Mr. B concealed the truth by saying that ‘this would be misleading for
nonprofessionals,’” according to the actuarial staff at that time. “The available
data did not reveal what was really going on. No explanation was given. I wasshocked when I learned the truth around 1998,” a head office staffer at thattime says.
says “MrMr. B was aware of the reality of the business from early on andmust have had real concerns. But he was no help (when it came to a tie‐up
with an outside partner),” says another member of the actuarial staff.

[Uemura]p170

83

Exercise 1

10 years JGB Earning rate past 40 years
1980/48.888%
1990/107.786%

Implement of New
Insurance Business Law
1996

1987/6
3.969%

2003/6
0.548%
2012/70.836%

Many Bankruptcies

2000

2010

85

Year end values of stock (Nikkei Average) 1950～
1989/1238915.87 yenyImplement of New
Insurance Business
L
Law
1996

Many Bankruptcies

86

Yen Dollar exchange rate
Implement of New
Insurance Business Law
1996
1985/9Plaza
Agreement

Many Bankruptcies

87

History of overseas investment
Before 1997, the source of the policyholders’ dividend was income gains
only, we could not pay the dividend from the gain on disposal.
 1977 Japanese distribution yield became lower than US.
 1980 Amendment of the Foreign Exchange and Foreign Trade
Co t ol Law
Control
La (fo(foreign
ei exchangee ha e law),la ) the tradingt adi became
be a e ffree.
ee 1981 US distribution yield rate went up to 13%.
 1985 Plaza Agreement, it led the steep appreciation of the Yen Whole Japanese life insurance industry, in 1975 the amount of foreign
bond was 3.4billion yen as its total, but it went to 11 trillion yen in
1988.
1988
 1985 It was exposed that big exchange losses 940 billion yen
 1986 exchange loss 1 trillion yen
 1987 exchange loss 1.5 trillion yen
 1988 exchange loss 500 billion yen
g loss was also appeared.
pp The hedge
88Overseas investment
The transition of the portion of the overseas assets among the investment assets

89

Overseas investment
The transition of the amount of the overseas assets (foreign bonds only)(Unit 100 million yen)90

Now, it’s your turn
Exchange Loss
 1985 It was exposed that big exchange losses 940 billion yen
 1986 exchange loss 1 trillion yen
 1987 exchange loss 1.5 trillion yen
 1988 exchange loss 500 billion yen
 The hedge
g loss was also appeared.
pp
Many people in those days had the following opinion in the middle 1990.
 We need the interest gain. (income dividend principle) The
h appraisall value
l off theh stocks
k would
ld cover theh exchangehlloss The Nikkei average reached its high mark in 1989
 Interest gain from the foreign bonds makes the huge exchange losses,b t thbutthese llosses would
ld beb offset
ff t byb gaini off disposaldil off holding
h ldi stocks.
t k Japanese government also boosted the overseas investment.
 It was a rational decision to invest to the foreign bonds or securities,
because the JGB’s
JGB s earning rate became lowlow.
 The same kind of strategy was adopted by the other insurers.
 There were pessimistic opinion that the current financial situation
leads the serious problem.
problem But many professional economists said
said,
“in ten years time, it will be regained”.
91How will you say to president?

We assume we were in the mid 1980s. You
were a young employee of a Japanese life
insurance company. You were an audience ofpresident speechspeech. The title of the speech is“future of our company.” President said “Wewill expand our sales of the single premium
endowment policies”, and he secured thefinancial soundness which was supported byhaving a strong showing of the stock market.
And finally it had a discussion.
discussion
Could you say to president “No, you arewrong your strategy will be failed
wrong,
failed”?
?
92

Exercise 2

About SOA

First ParagraphAn actuary is a business professional who analyzes the financial consequences of risk.
Actuaries use mathematics, statistics and financial theory to study uncertain future events,
especially those of concern to insurance and pension programs.

1)
2)

They evaluate the likelihood of those
events,design creative ways to
1. reduce the likelihood and2 decrease the impact of adverse events
2.
that actually do occur.

Using the above concept of Actuary, what would we
do for those failed insurers from the actuarial
viewpoints?
94

Developing the regulatory framework for Solvency II
Solvency I• Framework dates from 1980s• 14 Directives• ‘Prudent’ valuation of
liabilities reflect local
accounting practices
practices, nonnon‐harmonized valuation of TP• Simple ‘volume‐based’ capitalrequirementit• Asset risk managed byquantitative restrictions• Diverging supervisory
practices

Solvency II• Three pillar structure• A riskrisk‐based
based approach• Unified legislative basis forprudential regulation of
insurers & reinsurers• Employs Lamfalussy
arrangements (agreements)• Non‐zeroN
f il
failureregimei(explicit ruin provability)• Two capital requirements• Market consistent valuation• Importance of risk
managementg• Streamlined group supervision

Quoted from “ORSA The Heart of Solvency II” Groupe Consartatif Summer School EIOPA
https://eiopa.europa.eu/fileadmin/tx_dam/files/aboutceiops/Summer‐School‐ORSA‐The‐heart‐of‐SolvencyII.pdf

95

WHAT IS ORSAORSA (Own RISK and solvency Assessment)• is a process for a overall and holistic risk understanding, viewed fromthe management and/or supervisory body• provide
id a comprehensive
h i picturei
off theh companyʹsʹ risksi k• gives the supervisor insight into the level of quality of the management
and/or supervisory bodyʹs risk understanding• connects full risk picture with risk management system and internal
control system• is a p
process which capturesprisks longg time before they
y can bequantified• is a process which uses unquantifiable knowledge about risks• Is not a new ruled
ruled‐based
based solvency calculation• Is not a pre‐defined process. The undertaking needs to develop its own
efficient assessment process within the framework of ”self‐assessment”• Is not a process – key‐function
key function – which as a starting point can beoutsourced.
• Is not a process with one concrete number as output
Quoted from “ORSA The Heart of Solvency II” Groupe Consartatif Summer School EIOPA
https://eiopa.europa.eu/fileadmin/tx_dam/files/aboutceiops/Summer‐School‐ORSA‐The‐heart‐of‐SolvencyII.pdf

96

ORSA ‐ it all starts from the top
ORSA – it all start from the top• Are the persons effectively running the undertaking’s possibilities touse common sense and prudent thinking,• Are
A e the personse o effectively
effecti el runningi g the undertaking’s
de taki g’ means
ea to regain
egai acomprehensive overview over the undertaking’s risks and ”Overall
solvency need”• is
i a key-function
k f
ti off th
the persons effectively
ff ti l runningi th
the undertaking
d t ki• is a ongoing, task where one of the outcome is to keep the persons
effectively running the undertaking’s aware of the impact of own risks
on theth overallll solvencylneedd att all
ll ti
time
• is a ongoing task, where one of the outcomes is to identify strengths andweaknesses in governance and in the organization• is
i a decision-process
d i i
off h
how tot mitigate
iti t risks
i k b
by capital,
it l reinsurance,iorganizational actions and other risk mitigating activities• is a process which involves all persons effectively running theundertakingdki

Quoted from “ORSA The Heart of Solvency II” Groupe Consartatif Summer School EIOPA
https://eiopa.europa.eu/fileadmin/tx_dam/files/aboutceiops/Summer‐School‐ORSA‐The‐heart‐of‐SolvencyII.pdf

97Outstanding Issues
The importance of the reputational risks• Financial risks and other risks must be converged to the reputationalrisk.
• But no one knows if the quantification of this risks is the best way toexpress the reputational risks.
• Someone aspects say that the reputational risk is too late to handle in
the risk management.
• But for the next decade, we have to study the reputational risks first.

The improper person to the improper positions• Especially the executive position, the assignment of improper person
must be a risk.
• But it is very hard to declare that some person is in the improper
position after his occupation.
• We do not have the exact answers.

98Outstanding Issues
The next big issue is the role of the punishment
•
•
•
•

•

•
•

serious punishments sometimes make person to hide the true things.
but no punishment concludes the idle atmosphere in the work place.
This is also the big issue of the risk management.
For the rigorous risk management, we need to make certain
atmosphere in the company; someone recognize some misconduct, thenhe has to report the facts to the suitable person.
We have to make sure the role of the punishment.
Example• If he make a mistake by accidents, then he will not be punished.
• But he hides this mistake or he does not do appropriate actions
after the accidents, then he will be punished
Most important thing is the mistake shall be known by everybody, andthe mistake and its recovery shall be in the list of lessons to learn.
We have to share the information among everyboday.

99Thank you for your attention

100