The first U.S.-Japan insurance agreement was signed on October 11, 1994, and was concluded under the United States-Japan Framework Agreement. In negotiating the insurance agreement, the U.S. government sought to establish that deregulation of the large primary sector of the Japanese insurance market, where U.S. firms had experienced only limited success, would be required before deregulation of the smaller third sector, where foreign companies have a substantial presence, would occur. According to the Office of the U.S. Trade Representative (USTR), while the third sector accounted for roughly 5 percent of the total Japanese insurance market in Japanese fiscal year 1997, foreign market share for this sector was over 40 percent—much higher than in the traditional, primary insurance market. U.S. government and industry officials believed that the lack of U.S. company success in the larger primary sector was the result of a heavily regulated environment that did not allow for new market entry, product innovation, or price competition. In the 1994 agreement, the United States met its negotiating objective of establishing that primary sector deregulation would be required before third sector deregulation would occur. Under the agreement, Japan agreed to avoid “radical change” in the third sector until foreign insurance companies were granted a “reasonable period” to compete in a significantly deregulated primary sector market, although the terms “radical change” and “reasonable period” were not defined in the agreement. The agreement recognized that Japan was in the process of reforming its insurance sector, noting that the reform would be based on promoting competition and enhancing efficiency through deregulation and liberalization. Consistent with this reform initiative, the agreement included specific commitments by Japan to deregulate the primary sector. For example, the agreement provided that insurance companies would be afforded greater flexibility in establishing the price (rate) they would charge to customers for certain product lines. In addition, the agreement stated that Japan would expedite and simplify the application review process for the approval of insurance products and rates by gradually introducing expedited approval systems for certain products. Japan also agreed to make its regulatory process more transparent by, for example, publishing and making publicly available the standards that insurance regulators will apply in reviewing applications for approval of new insurance products. During subsequent negotiations in 1996, the two governments reached an interim understanding in September, in which Japan agreed to allow direct sales of automobile insurance to consumers by mail or telephone and established restrictions on sales by subsidiaries of large Japanese insurers of some third sector insurance products. The commitment to allow direct sales of automobile insurance is referred to in the final December 1996 agreement (discussed below), while third sector commitments were largely superseded by measures contained in the December 1996 agreement. The second agreement was signed on December 24, 1996. This agreement was negotiated in response to U.S. insurance company concerns that the Japanese government was preparing to allow large Japanese insurers increased access to the third sector through their subsidiaries in violation of the 1994 agreement. The 1996 agreement further defined restrictions on third sector entry by Japanese companies, and it clarified when these restrictions would be lifted by more explicitly linking them to substantial deregulation of Japan's larger, primary sector. Specifically, the agreement listed five deregulation criteria for the primary sector that would have to be met by July 1, 1998, in order to start a 2.5-year countdown toward opening the third sector no later than 2001. These criteria reflected specific deregulation commitments in the agreement, such as allowing for greater pricing flexibility for automobile insurance and applying a system to expedite marketing of additional products. The two governments recognized that if, on July 1, 1998, there were disagreement about whether the criteria had been met, each side would be able to act in accordance with its own view of whether the criteria had been met. The U.S. government has stated that, in the case of disagreement over implementation, it can invoke various trade remedies. On July 1, 1998, USTR announced that, in its view, Japan had not fully implemented key agreement commitments including two of the five primary sector deregulation criteria. As a result, USTR did not (and still does not) support initiation of the 2.5-year countdown to open the third sector to increased competition in 2001. The Japanese government stated that it believed it had fully implemented all commitments, including the five primary sector deregulation criteria. Thus, in its view the 2.5-year “clock” began on July 1, 1998, and restrictions on the ability of large Japanese insurance companies to operate in the third sector will be lifted on January 1, 2001. The agreement also contains a commitment by Japan to take steps to increase the number of staff responsible for processing insurance applications. In 1998, Japan enacted legal and regulatory changes that affected the insurance industry: Japan reorganized its financial regulatory system and created the Financial Supervisory Agency (FSA). Responsibility for licensing, application processing, surveillance, and inspection of the insurance industry was shifted from the Ministry of Finance (MOF) to FSA in June. Japan agreed to include most of the commitments contained in the 1996 agreement as part of its obligations in the World Trade Organization (WTO) financial services agreement. The WTO can therefore be a forum for resolving disputes related to these commitments. The commitments, which were codified in Japanese legislation that took effect on July 1, 1998, included deregulating the primary sector and restricting sales of certain third sector products by Japanese insurers. In our January 1999 survey, almost all of the U.S. companies (12 of 13) and brokers (2 of 3) operating in Japan reported that overall, the Japanese government had implemented the 1994 and 1996 agreements to a moderate or greater extent. Our analysis of company responses to our survey indicates that the Japanese government has implemented most of its commitments to improve transparency and procedural protections and deregulate the insurance market. Most of the companies (10 of 13) and brokers (2 of 3) reported that both agreements had enhanced their ability to compete in Japan, and a few companies attributed increased sales and market share to actions taken by Japan under the agreements. Companies, however, reported that a few of the agreements' commitments in the areas of transparency, deregulation, and third sector protections had not been fully implemented. The 1994 agreement included specific commitments by the Japanese government to provide greater regulatory transparency and improve application processing procedures. Our analysis of company responses to our survey indicates that most of these commitments have been implemented. For example, most companies (10 of 13) reported that they have been given meaningful access to insurance regulators. Further, 10 companies reported that they had received equal treatment in insurance industry groups. Ten companies also reported that they were not required to coordinate their applications with other insurance providers (which may be potential competitors) and that acceptance of their applications had not been conditioned or delayed based upon whether they consulted with other insurance providers, which had been experienced by some U.S. companies in the past. Our analysis of company responses to our survey indicates that Japan has implemented most of its deregulation commitments in the 1994 and 1996 agreements. Moreover, companies reported that several specific commitments had been fully implemented. As part of the 1996 agreement, the Japanese government agreed to meet five deregulation criteria: (1) processing applications for differentiated types of automobile insurance within a 90-day period, (2) further liberalizing commercial fire insurance, (3) expanding the “notification system,” (4) removing the requirement to use insurance rates calculated by rating organizations, and (5) processing applications within a 90-day period for differentiated products or rates. The first four criteria apply only to non-life insurers, while the fifth criterion applies to both life and non-life insurers. According to the agreement, once all of these criteria are met, the 2.5-year countdown toward opening the third sector to increased competition will begin. In our January 1999 survey, companies reported that the Japanese government had largely met the five primary sector deregulatory criteria. All but one of the U.S. non-life companies expressing an opinion reported that Japan had met the four criteria that apply only to non-life products (processing of differentiated auto insurance within 90 days, further liberalization of commercial fire insurance, expansion of the notification system, and removal of the requirement to use rating organization rates). This one company reported that expansion of the notification system was incomplete. Regarding the fifth criterion that requires approval of applications for differentiated products or rates within a standard 90-day processing period and applies to all insurance companies, over half of the companies (7 of 13), representing almost 60 percent of U.S. premiums in Japan, reported that the Japanese government had met this commitment. This view is consistent with our survey data on application processing, which showed that of all approved applications submitted by U.S. insurance companies since completion of the 1996 agreement, 95 percent were approved within 90 days of submission, while 5 percent took more than 90 days to receive approval (though this information is insufficient for determining whether these last cases constitute violations of the agreement). In addition, the 1994 and 1996 agreements included commitments by the Japanese government to improve the distribution of insurance products through the approval of a direct response system (for example, marketing over the telephone) for automobile insurance and the licensing of brokers. We found that the Japanese government implemented these commitments. Most companies reported that the overall deregulatory actions taken by Japan to implement both the 1994 and 1996 agreements had a generally positive effect on their ability to compete in Japan, and several cited specific examples of being able to introduce new products or rates that they viewed as beneficial. For instance, one non-life insurer reported that obtaining approval to offer a differentiated type of automobile insurance had a very positive effect on its ability to compete in Japan. Also, two companies viewed the increased liberalization of commercial fire insurance and the expanded notification system as positive.