The proximate cause of death at Chiyoda was a dreaded financial ailment called negative yield spread. That's insurance jargon for a very simple problem. There is no way for smaller play- ers like Chiyoda, whose bankruptcy was announced by its president, Reiji Yoneyama, to survive the contagion. Right now, the biggest concern is that a couple of additional insurance company failures will trigger a vicious circle of policy cancellations, shrinking premium incomes, and market jitters that will push portfolio returns even lower. But the hole may be too big to fill.
Trouble is, insurers are huge investors in the Japanese bond market already.
And rising interest rates will knock the stuffing out of current bond prices. So insurers would take a haircut on their existing bond portfolios before benefiting from higher returns later. Insurance companies are also suffering from some bad bets in international markets. Their U.S. Treasury holdings were savaged when the dollar collapsed against the yen in the mid-1990s. This year, their European bond and stock holdings have been whacked by the decline of the euro.