FALIA News

No.33 (Nov.2001)
How Terrorism in the U.S. on September 11, 2001
affected aviation insurance
On the abovementioned subject, we made an inquiry to The Marine and Fire Insurance Association and they responded to the inquiry as follows on October 22,2001:

1.Changes in underwriting conditions and premium rates
* Major aviation insurance underwriters notified airline companies of each country of the cancellation of existing war risk riders and changes in underwriting conditions including increase of premium rates on riders concerning war and terror risks, and lowering of ceiling for claims payable as of September 26.
*Similarly, Japanese non-life insurance companies proposed to Japanese airline companies on cancellation of existing war risk riders and changes in underwriting conditions.
*The changes of underwriting conditions were as follows:
(1)The ceiling of claims payable on third party liability coverage caused by war or terrorism shall be lowered from 2 billion dollars down to 50 million dollars.
(2)Premium rates shall be raised by 1.25 dollars per passenger.
*Later, a contract in which ceiling will be lifted to 150 million with additional premium of 0.35 dollars was introduced and then a contract in which ceiling will be lifted to 1 billion dollars with additional premium of 1.5 dollars.
*Japan Air Lines and other companies made an announcement saying that they will charge 5 dollars for international flights from October 22 and 500 yen for domestic flights from November 1 per passenger as special charges against a rise in aviation insurance premiums and cost for antiterrorism and hijacking measures.


2. Note
(1)Support to Airline Industry
*On September 21, U.S. Congress decided to provide 15 billion dollars to support airline industry for subsidizing the additional premiums for the 180 days from now and providing coverage for liability damage by war and terrorism exceeding 100 million dollars.
*U.K. government prepared a system which provides a financial support to the airline industry for 30 days which resembles Pool Re as a temporary measure which is expected to play its role before domestic airline companies can prepare insurance coverage after the underwriting conditions of aviation insurance are changed. German government took a measure to cover up to 40 billion marks for 4 weeks.
*Japanese government made a decision to give a guarantee for the difference of amount of loss and amount of claims payable with a ceiling of 2 billion dollars for a case in which a domestic airline company encounters terrorism within six months from October 2.
(2)
*Lloyds and War Risk Rating Committee of London International Underwriting Association decided a raise of reinsurance premiums on war risks of hull and cargo.
Following this decision, all domestic non-life insurance companies notified clients of a raise of premium rates from September 24(September 25 Tokyo Time)
*For hull insurance, seven now countries or regions were added to existing twelve territories defined risky including middle east and Iraq. Premium rates were also raised to 0.25. As for cargo insurance, premiums were doubled from 0.0275 to 0.05.
(3)Overseas Travelers' Personal Accidnet Insurance
*Non-life insurance companies had declared that risks on revenge terrorism would not be covered, as U.S. started to attack Afghanistan. However, on October 9, some companies announced that they would not include risks on terrorism as risks not covered with an exception of Afghanistan. Hearing this information, other companies followed suit.


No.32 (April.2000)
A Cold Wind is Blowing through the Japanese Insurance Industry

1. The Collapse of Nissan Life

In trying to settle the accounts for the fiscal year ending on March 31, 1997, the management of Japan's Nissan Mutual Life Insurance Co. judged that it was not possible to close the books in a normal way. On April 25, the Board of Directors decided to discontinue the company's business and reported this decision to the Ministry of Finance (MOF).
MOF ordered Nissan to suspend its normal business operations and designated the Life Insurance Association of Japan (LIAJ) as insurance trustee to administer the business and to manage assets and liabilities for the time being and draw up a possible future plan for the protection of existing policyholders.
On June 26, 1997, the LIAJ established Aoba Life Insurance Company with equity capital of 1 billion yen. On October 1, Aoba Life took over all the insurance policies and the assets and liabilities of Nissan Life, with a total deficit of 323 billion yen. Financial aid from the Policyholder Protection Fund supported by the life insurance industry was granted to Nissan Life in the amount of 200 billion yen including the investment in capital of Aoba Life. The remaining deficit of 123 billion yen was capitalized as inaugural goodwill for Aoba, with the expectation that it would be amortized using future profits from the new company's operations.
In transferring the insurance policies from Nissan Life to Aoba Life, the amounts of reserves and premium rates were not touched. But the future assumed interest rates were almost all lowered to 2.75 percent for individual business, and future benefits guaranteed were changed accordingly. It was agreed that after passing all businesses to Aoba Life, Nissan Life would undergo liquidation procedures. In October and November 1997, a "Notice of Completion of Transfer of Insurance Policies And Details of Changes of Contractual Terms" was mailed to all policyholders. On top of the change of assumed interest rates, special surrender charges were introduced, starting at 15 percent for fiscal year 1997 and decreasing by 2 percentage points every year thereafter, reaching 3% in FY 2003. There will be no such charges from FY 2004 on.

How was Nissan different?
People will wonder why Nissan Life experienced financial difficulties unlike other companies in the same industry.
Firstly, the market interest rates became so low that the investment yield insurance companies could earn became far lower than the interest rates assumed in premium calculation and reserve valuation. This negative spread was universal throughout the life insurance industry, but Nissan's situation was aggravated by the fact that it aggressively sold savings-oriented products such as individual annuities with single premiums or advance payment of all premiums at the time of contract, with guaranteed rates. Many local banks offered personal loans to clients to take advantage of these savings plans. Thus Nissan sold business at such a rate that the company's assets grew unexpectedly fast.
Nissan's management soon noticed that the company could not find any form of investment that would cover the cost of their funds. The company placed a fairly large share of its assets in stocks, real estate, and foreign securities. The losses on such investments caused its financial position to become even worse. The company's lapse and surrender rates also deteriorated.
Dissatisfied with the situation, some of Nissan's existing policyholders chose to surrender their policies for cash, but many others left their policies unchanged.

Into French ownership
On November 30, 1999, the LIAJ concluded a contract to sell all of the shares in Aoba Life to a French company, Artemis, at a price of 25 billion yen.
Artemis's new management team has started to run the company from the beginning of February 2000. Observers are hopeful that the change of ownership from LIAJ to Artemis will be beneficial to all concerned: policyholders, existing company staff, the Japanese life insurance industry, and Artemis itself.


2. The Collapse of Toho Life

In February 1998, Toho Mutual Life Insurance Co. agreed to sell its life insurance sales operations to a U.S. non-bank financial institution, GE Capital Services Co., which established a new life insurance company, GE Edison Life, with equity capital of 1,019 million yen. Following this sale, Toho Life tried hard to rebuild itself and to conserve and manage its existing business.
With the closing of accounts for fiscal year 1998 (ending March 1999), however, it was found that Toho Life's liabilities exceeded its assets. On June 4, 1999, the Financial Supervisory Agency ordered Toho Life to suspend a part of its normal business operations and asked the Life Insurance Association of Japan (LIAJ) to look after the company.
It was up to the LIAJ to select a company that would undertake the task of caring for existing policyholders. Naturally GE Edison Life was a candidate for this task because it had been doing business using the sales facilities acquired from Toho Life. Eventually, on December 17, 1999, the LIAJ formally announced that it had reached an agreement with GE Edison for the latter to take over Toho's existing business.
According to the agreement on the transfer of business to GE Edison, Toho Life's net assets were evaluated as a negative figure of about 650 billion yen as of the end of September 1999. It was agreed that the reserves of almost all existing policyholders would be reduced by 10“; also, the assumed rate of interest was lowered to 1.5 percent from the previous average of 4.75 percent. Excluding the amount recoverable through these measures, around 600 billion yen was still needed.
It was decided that the Life Insurance Policyholders Protection Corp., an institution supported by the life insurance industry, was to make a donation of approximately 360 billion yen to Toho Life. The remaining amount of about 240 billion yen was to be handled as "goodwill" on the asset side of the balance sheet, which would have to be amortized using future profits.
It was also decided that the amounts of future benefits for policyholders would have to be lowered in line with the reduction of reserves and revision of the assumed rate of interest. Depending on the type of policy and the contractual timing, the decrease of benefits might be substantial. However, it was provided that death claims and hospitalization benefits were guaranteed to be paid in full for claims occurring through March 2001. A schedule of special surrender charges was imposed for policy surrenders within the following eight years. The largest charge, imposed initially, was set at 15 percent.
Toho held a general meeting of representative policyholders on January 14, 2000, and made a decision to transfer the business to GE Edison Life on the above-described basis.
The procedures for the transfer of business to GE Edison were to be completed by March 1, with normal policyholder services such as claim payments to commence from middle of March.
The amount of the donation provided by the Life Insurance
Policyholders Corp. on March 1 this year ended up rising to approximately 380 billion yenCsomewhat more than the figure of about 360 billion yen planned under the original transfer agreementDThe reason for the increase was the rise in the amount that had to be covered due to losses on sales of foreign bonds and other assets being disposed of and negative yield spreads incurred in the period since September last yearD

Causes of the collapse
The major reason that Toho Life got into such financial difficulties was that it sold savings-oriented products with very high assumed interest rates too aggressively during the period of the "bubble economy"; this caused rapid growth in costly assets. After the collapse of the bubble economy, the value of assets declined as Japan entered a prolonged period of exceptionally low interest rates.


3. Foreign Life Insurers Enter Japanese Market through Acquisitions

The business of the two failed Japanese life insurance companies, Nissan Life and Toho Life was taken over by foreign-owned companies, but in addition to these two cases, since last year a number of foreign insurers have moved into the Japanese life insurance market through acquisitions of companies . Below we outline these acquisitions.

(1) Manulife acquires business of Daihyaku Life
On February 9, 1999, Manulife FinancialCCanadafs largest life insurerC agreed with Japanfs Daihyaku Life to establish a joint venture life insurance company in Japan. On March 1, a specially called meeting of Daihyakufs Board of Representative Policyholders agreed to sell the goodwill of the companyfs sales operations to this joint venture at the end of March for 60 billion yen. The joint venture, called Manulife Century Life, started operations on April 1, 1999. The Canadian insurer is in control of it, owning 90% of the ordinary shares. Also on April 1, Daihyaku Life made a new start as a company specializing in the maintenance and administration of existing life insurance policies.

(2) Aetna makes Heiwa Life a wholly owned subsidiary
On November 18, 1999, Aetna International agreed with Heiwa Life to acquire 33% of the latterfs outstanding shares. (Aetna is one of Americafs major insurance groups; Aetna International is a subsidiary of Aetna Inc., a health insurance and financial services company.) The American company subsequently made a tender offer for Heiwa Life shares, and as of February 14, 2000, when the offer closed, it had acquired 92.3% of the outstanding shares. It thus obtained total control of the Japanese insurer, enabling it to develop a full-fledged presence in the Japanese market. The company is to change its name to Aetna Heiwa Life Insurance Co., Ltd., effective April 1 this year. Also, at the end of March its capital is to be increased by 4.1 billion yen to 5 billion yen. And in June it will introduce a new sales setup based on Aetnafs know-how.

(3) Nippon Dantai becomes AXA affiliate
On November 29, 1999, the major French financial and insurance group AXA announced that it had acquired an equity stake in Nippon Dantai Life, making the latter an effective subsidiary. By the end of March 2000 AXA and Nippon Dantai are to jointly establish a holding company, which will wholly own Nippon Dantai and AXA Life, AXAfs existing Japanese subsidiary (established in 1994). In order to clear up the latent losses on Nippon Dantaifs foreign bond holdings and other problem assets, AXA will provide an injection of capital on the order of 200 billion yen through the holding company by the end of March; in this way it will acquire ownership of 90% of the outstanding shares of the holding company and control its management.

(4) Winterthur acquires Nicos Life
On January 12, 2000, Winterthur Life, which is the group and individual life insurance arm of the leading Swiss insurer Winterthur, announced that it was entering the Japanese life insurance market by acquiring Nicos Life. Nippon Shinpan, the present parent company, will sell all of Nicos Lifefs outstanding shares to Winterthur Life by the end of March for 17.35 billion yen.
Nicos Life was previously a subsidiary of a major American life insurer, Equitable. In 1991 Nippon Shinpan acquired 70% of the companyfs shares from Equitable, and it purchased the remaining 30% from the American insurer in 1997. But Nicos Life has not done well with its investments, and sales of variable insurance, its main product, have been sluggish; the company is said to have accumulated losses of about 20 billion yen.
The gNicos Lifeh name and trademark will continue to be used for the time being.


No.31 (June.1999)
Dai-ichi and Sumitomo Launch new Schemes for Pension Business

On July 1 Dai-ichi Life started to accept business under its new plan for group pensions, providing for variability in the guaranteed rate of interest. The initial rate of interest was set at 0.6%. Meanwhile, in June Sumitomo Life introduced a group survival insurance product with a variable guaranteed rate aimed at the funding of retirement benefits and the management of pension assets; the initial rate was set at 2.0%. Under the traditional form of pension contract providing a fixed rate of interest, the insurer may find itself stuck with a negative rate spread when interest rates fall. To avoid this, both companies intend to make variable-rate plans the mainstay of their pension business from now on.
Under Dai-ichi's new product, the rate of interest for new contributions is to be set once a month, and contributions paid during that month will earn that fixed rate for five years. The rate is to be determined with reference to the yield on government bonds with five years remaining to maturity. The rate of 0.6% for July was set on the basis of the government bond yield as of June 10. This was 0.9 percentage point lower than the guaranteed rate on traditional pension plans. The rate will of course become more advantageous to customers if interest rates start to rise.
The Sumitomo product also provides for monthly setting of the guaranteed interest rate, but unlike regular group pension plans, under which the amount to be contributed is fixed, the new product allows the corporate client to adjust its payments into the plan flexibly in response to changes in the rate of interest. If it decides the rate is too low, it can refrain from making any payment at all that month. Each payment must be at least \100 million; once funds have been paid in, they will earn the same interest rate for three years.
Sumitomo Life judged that it could not hope to increase its intake of funds under the new plan unless the rate of interest were higher than on existing products, and so it set the rate at 2% for both June and July.
Both Dai-ichi and Sumitomo designed their new products with reference to the guaranteed investment contracts, or GICs, that are now the mainstay of the pension business for U.S. insurers. The long-term guaranteed interest rates under previous types of pension products represents an investment risk for insurers. Furthermore, if the guaranteed rate is lowered, as it was in April this year, the return on previously entrusted funds also moves down in tandem; this has caused corporate clients to become reluctant to entrust funds under such plans.

Coping with the Y2K problem

The year 2000 problem can be a serious matter for any business throughout the world.
At FALIA we have been making active efforts to ensure that we will not cause any inconvenience to our oversea friends in this connection.

No.30 (June.1999)
Nippon Life Scores Hit with New Insurance Accounts

On February 15, Prudential Life Insurance Company, Ltd., the Tokyo-based affiliate of top-ranking U.S. life insurer Prudential Insurance Company of America, launched sales of a dollar-denominated whole life insurance policy not requiring the use of a foreign-currency bank account. By using a set of riders providing for payment of premiums and benefits and handling of policy loan transactions in yen, customers can take advantage of the dollar-denominated policy without having to have a dollar-based bank account. This is a first in the Japanese market.
In April this year Nippon Life Insurance Company (Nissay) introduced a new system of Nissay insurance accounts, which it bills as a new style of insurance service for the twenty-first century. By early July, barely three months after the new service was launched, the number of accounts had already topped 1 million, a remarkable pace for any new financial product. The company expects to easily meet its goal of 3 million accounts by the end of the first year of their availability next March.
The new accounts provide unified management of all of the client's insurance business with Nissay, including both life and non-life insurance products. The insurer is staking its future success on this new setup as a way of holding onto its customers at a time when sales of new insurance policies are declining and the Japanese Big Bang program of financial deregulation is leading to intensified competition among institutions offering personal financial services.
One big attraction of the Nissay insurance account is that it offers savings of up to 27% on premiums for new policies. Also, customers will be notified every year of the number of policy dividend points they have accumulated, with a dividend payment to be made once every five years.

No.29 (June.1999)
IBJ and Dai-ichi Life to Merge Asset Management Subsidiaries

On June 11 the Industrial Bank of Japan and the Dai-ichi Mutual Life Insurance Co. announced their agreement to merge their asset-management and investment-trust subsidiaries effective October 1 this year. The new company will also take over management of Dai-ichi Life's separate accounts for pension funds. With approximately \5.7 trillion of assets under management, the new company will be the fifth largest asset management company in Japan. The merger is to be carried out as part of the comprehensive alliance formed by the two institutions last autumn; the aim is to combine their sales resources and know-how in the area of investment.
The new company has been tentatively named DL-IBJ Asset Management Co., Ltd. It will combine the operations of IBJ NW Asset Management Co., IBJ Investment Trust Management Co., and Dai-ichi Life Asset Management Co. With the transfer of management of Dai-ichi life's special account funds, members of the insurer's investment staff, including fund managers, will also be transferred to the new company. It will have equity capital of \1.4 billion, with IBJ and Dai-ichi Life each holding 50%. Its first president will be Masao Tsuji, a former senior managing director of Dai-ichi Life, who is to become president of Dai-ichi Life Asset Management in the interim.
The combination of the two institutions' forces in this area is aimed at strengthening their position in the pension business, where the introduction of defined-contribution plans is expected to result in major changes and new opportunities. The new company will start with some \4.7 trillion in pension assets under management transferred from Dai-ichi Life's special accounts. The goal is to increase this to around \10 trillion, taking advantage of IBJ's relationships with major corporations and Dai-ichi's base of customers among individuals and smaller businesses.

No.28 (June.1999)
Supervisors Halt Operations of Toho Life

On June 4 Japan's Financial Supervisory Agency ordered a partial halt to the operations of Toho Mutual Life Insurance Co. The move was in response to a request for such an order under Article 241 of the Insurance Business Law; the company submitted the request to the agency after a board meeting on the same day had decided the company could not continue its business. On the following day the Financial Supervisory Agency designated the Life Insurance Association of Japan and others as insurance administrators.
The decision by Toho Mutual's board that the company could not continue its operations resulted from the refusal of its outside auditor (Tohmatsu) to endorse the company's financial statements for fiscal year 1998 (April 1998 to March 1999), making it impossible for the company's management to present them for approval at the annual meeting of policyholder representatives.
The auditing firm called for additional write-offs of \230 billion for unrealized losses and nonperforming assets. But if these write-offs were implemented, the company's liabilities would exceed its assets by \200 billion.
One major difference between the auditor's assessment and that of Toho's management concerned unrealized losses on stocks- more specifically, the possibility of recovering funds invested in stocks whose current market value is more than 50% below book value. Another big difference concerned the status of the insurer's lending to its affiliate Toho Lease.
At a press conference on June 4, Toho Mutual President Ridai Sakogawa declared, "The auditing company suddenly adopted a stricter approach to write-offs and reserves for the fiscal 1998 settlement of accounts. We asked for reasons, but didn't get a clear explanation."
In March last year, Toho Mutual entered into an agreement with GE Capital Corp. under which Toho assigned its insurance business to GE Capital Edison Life Insurance Co., a joint venture set up by the two companies. Under this arrangement, Toho Mutual was to receive \120 billion in payment for the transferred business and in financial reinsurance; it was also to receive profit distributions of \90 billion over a period of 10 years. As President Sakogawa explained, "Thanks to the tie-up, we had put together arrangements that would allow us gradually to deal with the issues facing our company, such as the handling of unrealized securities losses and amelioration of the chronic negative interest spreads on insurance policies, but the auditor wouldn't accept this."
If the company had announced its FY 1998 results without an auditor's endorsement, the result would probably have been confusion among policyholders, eventually forcing the company to halt operations. The fear was that the results would be unfair, because policyholders who surrendered their policies quickly could receive their refunds in full from Toho Mutual itself, but those who were not so quick might have to turn to the Life Insurance Policyholders Protection Corp. (established last December to protect customers of failed life insurance companies), which might well offer only reduced payments depending on the amount of funds left over. It was to avoid such inequity among policyholders that the Financial Supervisory Agency decided to order the halt of operations.
The FSA has appointed three insurance administrators: certified public auditor Mohachi Sugiyama, lawyer Akira Kosugi, and the Life Insurance Association of Japan. The LIAJ will put together a group of about 30 staffers from its member companies to investigate Toho Mutual's finances and formulate a plan for the transfer of its insurance policies. The FSA agrees that transferring the policies to another insurer is the best way of protecting policyholder's interests.

No.27 (Mar.1999)
Prudential Japan to Sell Dollar-Denominated Policies

On February 15, Prudential Life Insurance Company, Ltd., the Tokyo-based affiliate of top-ranking U.S. life insurer Prudential Insurance Company of America, launched sales of a dollar-denominated whole life insurance policy not requiring the use of a foreign-currency bank account. By using a set of riders providing for payment of premiums and benefits and handling of policy loan transactions in yen, customers can take advantage of the dollar-denominated policy without having to have a dollar-based bank account. This is a first in the Japanese market.
Policyholders do face the risk of exchange rate fluctuations, but they enjoy the benefit of lower premium rates, which are made possible by the fact that the expected rate of interest is 4.5%, considerably higher than for yen-denominated policies, and that the policy does not pay dividends.

No.26 (Mar.1999)
Asahi Life Ties Up with Metropolitan

Asahi Mutual Life Insurance Co., Japan's fifth-ranking life insurer, announced on February 23 that it had reached general agreement on an alliance with the United States' second-ranking life insurer, Metropolitan Life Insurance Co. (MetLife), in the field of asset management. Under the agreement, Asahi Life Investment Management Corp. (ALIMCO), a subsidiary of the Japanese insurer, will set up an asset-management joint venture with MetLife affiliate Nvest Companies, L.P., this coming June. This will be the first alliance of its kind between major Japanese and United States life insurers. Asahi Life expects the tie-up with MetLife to strengthen its asset-management capabilities and to help it develop its investment trust business as the leading supplement to its life insurance business.
Asahi Life's subsidiary ALIMCO will put up 51% of the funds for the joint venture, with Nvest providing the remaining 49%. In addition, Asahi Life will entrust U.S. investment of its insurance and pension assets to MetLife. The two insurers also plan to conduct joint development of investment trust products and exchanges of investment personnel. The cooperative relationship is further expected to extend to the area of insurance product development, particularly in response to the anticipated growth in demand from Japanese customers for individual annuities and other savings-oriented plans.

No.25 (Mar.1999)
Nippon Life to Introduce Comprehensive Accounts

Nippon Life Insurance Co., or Nissay, Japan's biggest life insurer, announced on February 3 that it planned to introduce a system of comprehensive accounts for its customers, under which all the insurance business for a particular customer will be handled on an integrated basis as part of a single account. The new accounts, slated for introduction in April, will be a first in the Japanese life insurance industry. Nissay will at the same time adopt a system of premium discounts for new policies based on the volume of insurance business the customer has with the company. This will produce savings of up to 27% on whole life with term insurance, the company's biggest-selling product. Nissay also plans to include non-insurance business like investment trusts in the new accounts at some point in the relatively near future; this is aimed at coping with the expected launching of defined-contribution pensions modeled on the 401(k) plans of the United States. With the traditional life insurance business in the doldrums, the company hopes that its new approach will help it build customer loyalty through the provision of a broad range of integrated services.
Under the existing system, each insurance policy is handled as a discrete unit for purposes of premium calculation and administration. From April on, these existing policies will be shifted in stages to the new comprehensive accounts, and all new policies will be included in them. Three levels of discounts will be provided for premiums on new policies on the basis of the premiums and sums insured of the customer's total business with Nissay. The discounts will be applicable to all types of policies being sold by the insurer.
Nissay will also revise its system of policyholder dividends for new business starting in April. Instead of being paid annually, dividends will be calculated and paid once every five years on the basis of points accumulated over the period. Additional points will be provided for customers who submit no claims for benefits under hospitalization coverage, for example. The company will provide customers with a notice of their number of points every year, which will make it easy for them to calculate the amount of their expected dividend.

No.24 (Jan.1999)
Two Midsize Life Insurers Announce Broad Alliance

Two mid-ranking Japanese life insurance companies, Taiyo Life and Daido Life, have reached agreement on a broad-reaching alliance, which may involve establishment of a holding company in the future. The two insurers will start out with cooperation in investment and sales, and they will also consider cooperating in other fields, such as the defined-contribution pension plans that are expected to be introduced in fiscal year 2000. The environment for the life insurance business has grown increasingly harsh because of factors like the prolonged slump in the stock market, and the two insurers are hoping to improve their competitive position in this context with an alliance that will make their operations more efficient.
The agreement was officially approved on January 17 at specially called meetings of the two companies' boards of directors. The following day they launched a joint deliberative council to work out the specifics of the arrangement.
In the area of investment, the initial plan is for Daido's investment advisory affiliate to assist in managing Taiyo's stock portfolio; the two companies plan to consider the possibility of merging their investment advisory affiliates in the future. They are also thinking of merging their leasing companies and other affiliates.
On the sales front, the plan is for the two companies to use sales offices jointly. Since Taiyo is headquartered in Tokyo and Daido in Osaka, they have judged that they can improve their efficiency by supplementing each other in this way.
Both insurers are currently organized as mutual companies, but once the necessary legal provisions are in place, they will consider a de facto merger to be implemented by establishing a holding company.
As of the end of September 1998, Taiyo had total assets of \6,900 billion and Daido had \5,400 billion. If they were to combine their operations, they would together represent the fifth largest life insurer in Japan.

No.23 (Jan.1999)
Government Announces New Standards for Insurance Companies

On January 13 the government announced the new standards to go into effect this April to govern the soundness of insurance companies under the system of prompt corrective action, similar to the framework applied to the banking industry.
The basis for oversight will be the solvency margin ratio, which is a measure of capital adequacy. It is calculated by taking the "solvency margin" consisting of the company's equity capital and surplus available to cover risks, and dividing this figure by a quantified measure of the total risks borne by the company.
Insurers with solvency margin ratios of 200% or higher will be considered sound, and they will not be subject to any action under the prompt-corrective-action standards. Those whose ratios fall below 200% will be grouped into three categories. Companies in category 1, consisting of those with ratios between 100% and 200%, will be required to submit plans for the strengthening of their operations. Companies in category 2, with ratios ranging from 0% to 100%, will be subjected to a variety of possible measures, including orders to halt or reduce dividend payments and directors' compensation, to revise premium rates, to streamline operations, and to sell off shares in affiliates. Those in category 3, with ratios under 0%, will be ordered to halt all or part of their operations.

No.22 (Jan.1999)
Postal Insurance Premiums to Be Hiked

On January 13 the Ministry of Posts and Telecommunications announced its plan for hikes of 5%-10% on most types of new policies under the postal life insurance system starting this April. The move brings the postal system in line with private-sector life insurers, which have already announced rate hikes for April.
The postal life insurance system invests more than half of its assets through the government's Fiscal Investment and Loan Program, while private-sector insurers are subject to the effects of the lowering of market interest rates. This has resulted in a gap between the yields earned by the postal system and private-sector insurers. In FY 1998 the former earned 4.02% and the latter only 2.48%.
In December 1998 the Financial Supervisory Agency decided on a further lowering of the assumed rate of interest applied by private-sector life insurance companies from 2.75% to 2.0%, in response to which the companies are slated to hike their premiums. The increases are expected to be on the order of 5%-10%.
Meanwhile, the postal insurance system has been benefiting from its government backing at a time of financial jitters, and in FY 1997 it earned a share of 38.2% of Japan's total individual insurance and annuity premiums. It was expected that its share would rise even further if it left its premiums unchanged when the private-sector insurers hiked theirs.
The MPT is currently sensitive to complaints that its operations are squeezing the private sector. It has recently moved to link the automated teller machines of the postal savings system with the systems of private-sector financial institutions and to open up its debit-card system to them. The ministry has been concerned lest its insurance system give rise to additional complaints from the private sector. This is seen as the reason for the decision to hike its premium rates.
Consumers, however, may not be willing to accept the higher rates in the absence of disclosure of accurate financial information from the postal insurance system. The result may thus be to accelerate the move away from all types of life insurance, both public and private.

No.21 (Jan.1999)
Meiji Life to Start Mail-Order Sales

It was revealed on January 13 that Meiji Life has started experimental mail-order sales of life insurance in a tie-up with Cecile Co., a catalog retailer. Foreign-affiliated life insurance companies have been carrying out mail-order sales for years, but this is the first time a major domestic insurer has adopted this sales channel. Meiji decided to introduce mail-order sales to supplement its traditional channel of solicitation through sales employees in the hope of developing additional business at a time when many consumers are shunning life insurance.
The mail-order sales are being limited to a single type of insurance, term policies (with a death benefit of \5 million) with additional medical coverage, including hospitalization and surgical benefits. The main target is Cecile's base of women customers in or around their thirties. Postcard inserts were included in Cecile catalogs starting early in January; customers can either send in the postcards or call a toll-free number. The monthly premium for a 30-year-old woman is about \ 4,400, to be paid through automatic debit from a bank account.
A representative of Meiji Life explains the motivation for the insurer's move as being the need to find new approaches to reach consumers at a time when women are increasingly working outside the home, making it harder for door-to-door salespersons to contact them.

No.20 (Jan.1999)
Regulators Disallow Cutting Guaranteed Yield

The Ministry of Finance and Financial Supervisory Agency have ruled against possible moves by life insurance companies to lower their guaranteed yields (assumed rates of interest) on existing insurance policies.
Starting in April 1999 life insurers will be subject to "prompt corrective action" standards, which will force them to improve their operational strength, and the companies had been seeking permission to lower their assumed rates of interest at this juncture. But the regulatory authorities have decided not to allow such moves, which would effectively mean reducing the benefit levels under existing policies.
The ongoing decline of market interest rates to ultra-low levels and the poor performance of the stock market have caused life insurers' investment performance to deteriorate severely, to the point where they have been recording negative spreads between the return on their assets and the yields guaranteed to policyholders. The struggling insurers had strongly hoped to receive permission to reduce the guaranteed yields on existing policies in connection with the introduction this April of prompt-corrective-action standards, which will require them to adhere to a more stringent set of criteria based on their solvency margin ratios.
The Ministry of Finance and Financial Supervisory Agency had submitted this matter to deliberation by a panel of experts. But they determined that the existing Insurance Business Law permits such cuts only when an insurance company fails and its business is taken over by a new company, confirming that the assumed rates of interest on existing policies at solvent life insurance companies cannot be reduced.

No.19 (Jan.1999)
Major Life Insurers Report Poor Results

Late in November the eight major domestic life insurers announced their results for the first half of fiscal year 1998 (April-September). The picture is a generally bleak one. New business continues to decline, while lapses and surrenders continue to run at a high level. On the investment side, ultra-low interest rates and sluggishness in the stock market are taking their toll, with seven out of the eight big life insurers reporting latent stock losses (meaning that the market value of their stock portfolios had fallen below the book value).
Ever since the failure of Nissan Life in April 1997, consumers have become more selective among life insurance companies. And insurers can no longer rely on the approaches that worked for them in the past, including the drumming up of new business by using large numbers of sales employees and reliance on latent stock profits as an operational buffer. It appears quite possible that the variations in management strength among the companies will widen and that life insurers will become pitted against each other in a fierce competition for survival.
One highly indicative feature of the life insurers' difficulties is the fact that the return on their assets is now running below the assumed rate of interest on their insurance policies, which is the rate of return guaranteed to policyholders. For FY 1997 the total of this negative spread at the eight big insurers came to about \1.2 trillion, and in FY 1998 it seems possible that the figure will be even larger. Some insurers themselves have recognized this prospect, including top-ranking Nippon Life, which recorded a negative spread of \330 billion in FY 1997 and is expecting an even larger figure in the current fiscal year.
Four of the companies, Mitsui, Asahi, Yasuda, and Chiyoda, have announced projections for negative spreads of about \ 10 billion less than in FY 1997, but overall the industry's negative spreads are continuing to widen in the context of the further lowering of already ultra-low market interest rates. These conditions are acting to weaken life insurance companies.
Another unfavorable development is the poor performance of the stock market. Traditionally life insurance companies had large amounts of latent stock profits, but now these profits have largely evaporated. Only Nippon Life reported a positive figure in this category as of the end of September; the other seven all reported latent losses, including Chiyoda, which was already in the red by this measure as of March 1998.
Total latent stock losses (net of Nippon's profits) for the eight big life insurers came to over \ 440 billion. This is quite a change from the "bubble" years of the late 1980s, when insurers were able to pay generous dividends to policyholders on the strength of latent profits that at their peak were said to amount to some tens of trillions of yen.

Life insurance business also lags
The April-September 1998 results for life insurance business at the top eight insurers were also bleak. All eight companies reported double-digit declines in their sales of new insurance policies by comparison with the same period of 1997. Meanwhile lapses and surrenders have continued to increase at most of the companies, indicating consumers' disaffection with life insurance in the context of the prolonged slump in the economy. Insurance premium income is also lagging.
Total new business at the eight big insurers for the six-month period came to \50,472 billion, 21% less than the year before. Nippon Life recorded an especially large decline of 32%, and at Meiji, Asahi, and Mitsui the figure was down by more than 20%. Meanwhile, lapses and surrenders came to a total of \58,398 billion, a 3.9% increase over the previous year. Lapses and surrenders jumped 12.8% on a year-on-year basis in April-September 1997 following the failure of Nissan Life; the more recent figures indicate that consumers are continuing to move away from life insurance. At every company except for Sumitomo and Yasuda, lapses and surrenders actually exceeded sales of new business.
Small increases in premium income were reported by Dai-ichi, Sumitomo, and Yasuda, but the other five companies posted declines, and the total figure for the eight was down 2.0% at \10,493.5 billion.


No.18 (Oct.1998)
Standard Interest Rate for Life Insurers Lowered to 2%

The Financial Supervisory Agency has decided to lower the standard interest rate that serves as the basis for life insurance companiesf expected rates of interest (the rates of return guaranteed under life insurance policies and pension contracts) from the present 2.75% to 2.0%.
In connection with this move, most life insurers are planning to hike the premium rates on new individual insurance policies and annuity contracts. It will be the first rate hike in three years.
The standard interest rate is calculated on the basis of the yield to subscribers of long-term government bonds over the past three years and other indicators. It serves as the basis for the expected rates of interest that are used by life insurance companies in setting the premium rates required to build up the appropriate policy reserves..

No.17 (Oct.1998)
Dai-ichi Life and IBJ Agreed to Enter into Comprehensive Alliance

The Dai-ichi Mutual Life Insurance Company ("Dai-ichi") and The Industrial Bank of Japan, Limited ("IBJ") reached an agreement to enter into a comprehensive alliance within every possible business area. Dai-ichi and IBJ agreed on the proposed alliance with a long-range objective of taking full advantage of the opportunities being presented by Japan's Big Bang.

Dai-ichi and IBJ share their birth year in 1902 and, throughout their almost 100 years histories since then, they have established a solid and close business relationship. The proposed alliance between Dai-ichi and IBJ intends to reinforce and enhance this relationship with a view of creating a higher level of corporate culture which nurtures creativity and pioneering spirit, while maintaining mutual respect for each other's management policy and corporate culture.

Dai-ichi and IBJ stand complementary to each other and will constitute a best partnership in the increasingly deregulated Japanese financial service industry of the 21st century. Dai-ichi has been a leader of insurance and pension business and has the advantage of its broad customer base drawn down from not only more than ten million individual customers but also wide-ranged corporate customers. IBJ has been a leader of corporate finance in Japan and has the advantage in its close business ties with both blue-chip corporations and institutional investors, as well as its enhanced capability to provide advanced professional services and products principally in the area of investment banking and financial technology.

The proposed comprehensive alliance enables the two firms to meet increasingly diversified and sophisticated customer needs by delivering the innovative and comprehensive financial services and products, and to expand the customer base. It will also allow the two firms to step up their investment in strategic areas while cutting down on expenses as a result of more efficient usage of the combined resources. Dai-ichi and IBJ believe that the proposed alliance will be significantly beneficial for both of the respective firms and their customers.

The details of the agreement are as follows:

  1. Complementation of Financial Products and Services Focusing on Customers' Needs

    (1) Financial Products and Services for Individual Customers
    Dai-ichi and IBJ intend to enhance individual customer satisfaction by complementary combination of "Total Life Planning Strategy" (catch phrased as "Your Lifelong Partner" provided by Dai-ichi and its group companies ("Dai-ichi Group") and products and services delivered by IBJ and its group companies ("IBJ Group") .

    (2) Financial Products and Services for Corporate Customers
    IBJ and Dai-ichi intend to enhance satisfaction of their corporate customers by complementary combination of IBJ Group's financial products and services and Dai-ichi Group's reputable service and expertise in such areas as life insurance, pension, and employees' benefit plan. In addition, Dai-ichi and IBJ will study the possibility of future joint development and offering of "Comprehensive Employee Benefit Plan".

    (3) Cooperation in the Area of Loans
    Dai-ichi Group and IBJ Group will cooperate with each other in the area of loans, and jointly arrange for syndicated loans and securitization of their corporate loans. Such arrangement will enable both groups to respond their customers' needs for financing with flexibility and further to allocate their asset more efficiently.

    (4) Cooperation in Developing and Providing Advanced Financial Products including Real Estate Related Securities
    Dai-ichi and IBJ will jointly develop and provide advanced financial products, including real estate related securities, by combining Dai-ichi Group's long time experience and expertise as a premier real estate investor in Japan and IBJ Group's advanced financial technology.

  2. Cooperation in Asset Management and Administration Business

    Dai-ichi and IBJ will promote the cross utilization of respective resources in the asset management business, and will explore the possibility of consolidating their respective affiliated asset management arms. In addition, Dai-ichi and IBJ will enter into cross-marketing arrangement for the investment trust products of respective affiliates, and will pursue the possibility of further cooperation in this business area. Dai-ichi Group and IBJ Group will promote cooperation in the asset administration business.

  3. Establishment of Joint Venture for the Development and Engineering of Advanced Products and Services in the Area of Finance and Insurance

    Dai-ichi shall subscribe to new shares in "IBJ Financial Technology Co., Ltd." which is currently a wholly owned subsidiary of IBJ, specializing in R&D in financial engineering. The joint venture will expand its scope of activity from the domain of finance to the synthetic engineering and product development in finance and insurance.

  4. Other Joint Business

    In order to maximize the potential for synergy and more efficient use of resources, Dai-ich and IBJ will investigate into the possibility of further cooperation in any other areas possible including but not limited to such areas as computer system development and research.

  5. Cross Investment

    As a part of the proposed comprehensive alliance, Dai-ichi and IBJ will invest in each other in fiscal year 1998 and/or 1999 in expectation of the promising future of each other as a leading financial service company of the next century.

  6. Joint Steering Committee

    Dai-ichi and IBJ intend to establish the joint steering committee for the implementation of the proposed comprehensive alliance immediately. The steering committee will work out the specifics for the proposed alliance and the management of Dai-ichi and IBJ intend to start implementing actual measures as soon as their specifics are ready for their approval.

No.16 (Sep.1998)
Dai-ichi Life to Equip Sales Staff with Portable Computers

Dai-ichi Life has announced plans for a new information-based sales system to be implemented starting in fiscal year 1999 (April 1999 to March 2000). The companyfs sales force of approximately 50,000 people will be equipped with portable computers, and the home office will be able to address client information and individual messages separately to each salesperson as a way of reinforcing sales activities. This move is part of the overall new information network plan that the company has been implementing since FY 1997. This involves creating a computer network linking over 10,000 personal computers at some 2,600 locations around Japan.
In May this year, Dai-ichi launched an open-architecture information system directed at 117 sales offices around the country via an intranet. This represented a change from the earlier setup, under which the home office sent the same sales information to all the offices. Now each office can freely access the sales and marketing information it needs for its own activities.
Starting in FY 1999 the scope of the information network will be extended to the level of e individual salesperson. Members of the sales force will each be equipped with a portable computer that they can use to access client information in the host computer at the home office. In addition, the home office will send each salesperson an individualized gmorning message.h
In addition to these network-building efforts, Dai-ichi has this spring launched a new-generation individual insurance system that is on line 24 hours a day. By replacing nighttime batch processing with real-time processing, the company has achieved faster handling of the examination of applications for new policies and computerization of more procedures. It hopes that the introduction of portable computers for its salespersons next spring will enable it to build the strongest sales force in the industry.

No.15 (Sep.1998)
Major Insurers Prepare to Sell Investment Trusts

Starting in November this year, both life and non-life insurance companies will be permitted to sell investment trusts directly. Major insurers are now scrambling to prepare their sales setups for this new type of business. At first they plan to handle sales of investment trusts to career office employees; later they will work to increase sales of the new product by members of the sales force and agencies. Insurers are approaching the start of sales with caution because investment trusts are a product whose value may fall as well as rise; as such, they represent something unfamiliar for customers of traditional insurance products, and those making the sales require a high degree of expertise in order to be able to explain the products accurately.
Investment trusts are seen as a promising product to attract money from Japanfs individual investors, who have large amounts of personal financial assets. The entry into this field of the major life and non-life insurers can be expected to lead to intense competition between these newcomers and the banks and securities companies that are already marketing investment trusts.
According to a survey by the Nihon Keizai Shimbun, Japanfs leading business daily, the first insurance company to establish its sales setup for investment trusts was Nippon Life. Its plan calls for starting with a sales force of 500 in FY 1998, to be expanded to over 5,000 within two years. The initial sales force will consist of 400 office employees and only 100 salespersons, but by the time the 5,000 mark is reached, the company expects to have 4,600 salespersons involved. It will be hurrying to carry out the necessary training of personnel.
Nippon Life will sell investment trusts through its gLife Plazas,g the 16 comprehensive sales centers that it has around the country. In addition, it plans to hire salespersons devoted entirely to handling investment trusts, who will visit homes and workplaces. The product line will consist mainly of offerings from the companyfs subsidiary Nissay Asset Management; the plan is to offer a choice among about 15 funds.
Meanwhile, Dai-ichi Life is planning to have a total of 300 to 400 employees qualify for sales of investment trusts. This initial sales force, consisting entirely of career office employees, will include the gfinancial plannersh stationed at most of the companyfs 120-odd branches around the country, along with employees responsible for corporate sales. As part of its efforts to offer individual clients advice on asset management, Dai-ichi Life also plans to use the services of its gfinancial designers,h who are a highly trained full-time sales force made up of mid-career hires.
On the non-life side, top-ranking Tokio Marine & Fire plans to have about 2,000 of its employees qualify to sell investment trusts. Agency sales will be limited initially to selected specialist agencies-probably fewer than 1,000 of the companiesf total of some 80,000 agencies.
Yasuda Fire & Marine plans soon to set up a new department devoted to investment trust product planning and sales support. Nippon Life already established this sort of organizational unit on September 1.

No.14 (Sep.1998)
Life Insurers Seriously Consider Demutualization

Japanese life insurers have started to seriously consider conversion of their organizations from mutual companies to stock companies. The Life Insurance Association of Japan has established a working group to consider this matter; it held its first meeting in August. Major life insurance companies are also moving on their own to conduct studies and gather information on U.S. and other examples of demutualization. The Life Insurance Association officially announced the formation of the new working group on the basis of a proposal from Sumitomo Life President Koichi Yoshida, who took office as chairman of the association this July. The group will consist of working-level representatives from association member companies.
Of Japanfs 19 domestic life insurers, 15 are organized as mutual companies, meaning that they are owned by their policyholders, who are thus entitled to shares in any profits the company makes. This has been considered a suitable form of corporate organization for the life insurance business in keeping with the idea of insurance as a system of mutual aid. But recently it has come to be seen as problematic in connection with companiesf desire to strengthen their equity capital foundations, since it does not allow them to receive infusions of outside capital.
Financial institutions are now competing intensely with each other across the traditional dividing lines among industries, and as Chairman Yoshida observes, being a mutual company may be a competitive disadvantage for institutions as they seek to raise funds for entry into new fields of business. A process of demutualization has already been seen in the insurance industries of major Western countries during the current decade.
Existing legal provisions are not conducive to demutualization. The only way companies are permitted to compensate policyholders if they demutualize themselves is by giving them stocks. But another legal provision requires life insurersf stocks to have a face value of at least \50,000. This means that a tremendous number of fractional shares would have to be issued to policyholders. Other issues include (1) how to arrive at a system of allocating shares in keeping with policyholdersf contributions to the formation of the companyfs assets, (2) how the change to a new form of organization and the distribution of shares would be taxed, (3) how to balance stockholdersf interests against policyholdersf and (4) how to manage annual meetings, given that major life insurance companies would have stockholders numbering in excess of 10 million. The Life Insurance Association working group will have to consider these and similar issues. Once it has clarified the problems to be dealt with, it is expected to prepare a set of recommendations for the Finance Council, a deliberative body that reports to the minister of finance.

No.13 (Sep.1998)
Aoba Life to Be Auctioned

At a press conference on September 18, Chairman Koichi Yoshida of the Life Insurance Association of Japan (president of Sumitomo Life) announced a decision to sell off Aoba Life through competitive bidding. Aoba, which is owned entirely by the association, was established to take over the life insurance business of the failed Nissan Life. In April the American International Group (AIG) approached the association with an offer to buy Aoba. The association apparently decided that it could get a better selling price by having multiple bidders. It delegated negotiating authority to the American investment bank Morgan Stanley and sought other offers.
The association has not revealed the names of the companies that are seeking to bid for Aoba. Sources say that almost 10 foreign-capital institutions have indicated their interest, but it is not clear how many of them will participate in the final bidding, which Chairman Yoshida explains will be limited to those with serious interest. The results may be announced as early as at the associationfs November board meeting.

No.12 (Sep.1998)
Major Non-life Insurers to Offer Flexible Fire Insurance

In response to requests from clients, Japanfs major non-life insurance companies are starting sales to corporations of fully order-made fire insurance contracts. (Fire insurance is the main product sold to corporations by non-life insurers.) The new arrangement allows corporate clients to opt for exclusion of certain types of coverage, such as wind damage or water damage, unlike the former system, where only a standard package was available. Corporations will be able in this way to lower their insurance premiums. With the introduction of this new arrangement, following an earlier move to allow the addition of supplementary coverage on top of the basic contents, it has become possible to provide totally order-made fire insurance contracts. The move comes in the wake of the deregulation of non-life insurance premium rates in July this year.
The main product that has been sold so far by mid-ranking and smaller non-life insurers, storeownersf comprehensive insurance, provides basic coverage not just against fire but also against wind and water damage (such as from typhoons), explosions, and theft. Meanwhile, so-called ordinary fire insurance policies, which are sold mainly to large corporations, have also covered against wind damage and other risks. Now it is possible for clients to select only the types of coverage they want.
In January this year, non-life insurance companies received approval to offer coverage against air-conditioning failures and other additional forms of coverage as optional supplements to their basic contracts. Now it has become possible not only to add supplements but to omit coverage items from the basic contract. The contents of the coverage can thus be tailored to match a corporate clientfs needs and budget.
Previously non-life insurance premiums were determined by the Casualty and Property Insurance Rating Organization, and the contents of insurance contracts were almost identical among all the companies. But from July on, companies have no longer had to use the rates set by the rating organization, and this has moved the major insurers to reexamine their basic contract contents.
The question now is when insurers will start competing with each other to offer lower premium rates for the various types of coverage.
In the individual market, meanwhile, since it is difficult to assess risks separately for each household, insurers are expected to continue selling home fire insurance and householdersf comprehensive insurance as packages.

No.11 (Jun.1998)
AIG Extends Feelers Toward Aoba Life

The major U.S.-based insurer AIG (American International Group) has shown interest in acquiring Aoba Life, the company established to take over the life insurance business of the failed Nissan Life. AIG's aim is to strengthen its customer base in Japan. This is part of a recent surge of activity on the part of foreign institutions interested in the Japanese market, including the move by GE Capital of the United States to acquire a controlling interest in Toho Life and the eagerness of Citibank to market insurance products here. Even AIG, which has had a presence in the Japanese life insurance market for some time and which has the largest volume of business in force among all the foreign-affiliated insurers in Japan, has been looking for ways of expanding its operations.
In financial terms, Aoba Life, which was set up with equity investment from 42 life insurance companies, is in excellent condition. When Nissan Life failed, it left behind losses of L300 billion; of this amount, L200 billion was covered by funds from other companies in the life insurance industry, and the remaining L100 billion was borne by policyholders in the form of reduced benefit amounts. The previously high guaranteed rate of return to policyholders, which was the cause of Nissan Life's failure, has been lowered to a level at which Aoba Life is capable of earning a return on its own investments. Furthermore, since the company is not selling new business, its staff and offices can be kept to a bare minimum.
Immediately after Nissan Life's failure, AIG unofficially offered to take part in the investigation of the failed company's assets along with representatives of the Life Insurance Association of Japan. At that time the association declined its offer, and AIG gave up for the time being. But now, with other foreign institutions showing more interest in the Japanese market, AIG has once again entered the fray, showing interest in acquiring Aoba Life. (Another insurer may also offer to acquire Aoba.)
A move to acquire Aoba Life would be sure to run into opposition from the companies in the life insurance industry that put up L200 billion to cover Nissan Life's losses, but in practice they would probably be unable to block negotiations.

No.10 (Jun.1998)
Non-life Affiliates of Life Insurers Run up Losses Again

The six non-life affiliates of major Japanese life insurance companies all recorded losses for the second year running in the year ended March 1998. While their earning power is relatively weak, they have high fixed costs for personnel and systems. The prolonged recession is putting the brakes on profits even at the well-established major non-life companies. Also, premium rates are being deregulated to a significant degree. These affiliates appear likely to face rough going for some time to come.

No.9 (Jun.1998)
Three Top Non-life Insurers Record First Decline in Premium Income

The top five Japanese non-life insurance companies announced their results for fiscal year 1997 (April 1997 to March 1998) on May 21. Of the five, three reported declines in their net premium income (see table) for the first time since the end of World War II. With new car sales lagging, sales of automobile insurance, a mainstay of the companies' operations, were sluggish; the insurers also recorded declines in their savings-oriented contracts because of the persistence of ultra-low interest rates. At the same time, however, because there was relatively little damage from typhoons or other disasters during the year, all the companies reported increased underwriting profits. They also has modest increased in their after-tax profits.
Net premiums for the five top insurers in aggregate were down 0.1% from FY 1996. This was a major drop from the 3.5% increase that had been recorded in FY 1996 over FY 1995-an increase that itself had been the lowest in the postwar period. Automobile insurance was down at Nippon Fire & Marine and only up about 1% at the other four companies. The decline in housing starts also put downward pressure on sales of fire insurance. Personal accident insurance, consisting mainly of contracts with a savings element, was down at all five companies.


Major Results for the Top Five Non-life Insurers, FY 1997

(L billion, percent change from previous year in parentheses)
Net premium
income		 Underwriting
profits		 Ordinary
profits		 After-tax
profits		 Solvency
margin (%)
Tokio Marine & Fire 1,336.3(0.5) 69.1(12.1) 95.1(-22.9) 33.7(10.1) 1750
Yasuda Fire & Marine 938.5(-0.7) 62.4(121.4) 58.4(26.6) 13.2(7.9) 961
Mitsui Marine & Fire 636.6(-0.4) 15.5(37.8) 34.9(17.3) 10.9(8.8) 1,001
Sumitomo Marine & Fire 564.3(0.6) 23.1(104.3) 43.0(17.0) 12.6(9.2) 1,057
Nippon Fire & Marine 437.8(-0.1) 15.1(200.6) 23.3(10.3) 7.1(3.9) 1,004
Total 3,913.7(-0.1) 185.4(57.8) 254.9(-0.9) 776(8.8)

No.8 (Jun.1998)
Top Eight Life Insurers All Report Less Business in Force

On June 8, Japan's top eight life insurance companies announced their results for fiscal year 1997 (April 1997 to March 1998). All of them reported declines in the volume of their individual insurance business in force. The contraction is attributed to overall malaise among consumers about the health of the financial sector, compounded by the shock of the failure of Nissan Life. In aggregate, individual business in force at the eight companies was down by more than L30 trillion from the end of FY 1996. The results were further clouded by the persistence of ultra-low interest rates and the poor performance of the domestic stock market, which caused their asset yields to drop and forced them to cut policyholder dividend rates again (having previously cut them two years ago).
For the first time this year, the life insurers are announcing their solvency margins, which are a measure of their ability to pay claims. Nippon Life topped the list at 939.9%; all the other companies also came in well above the 200% level, which is considered the criterion for soundness. But the differences in their strengths were plain to see.
The prolonged recession has put the pinch on household spending, and on top of that there has been a series of failures of financial institutions. As a result, sales of new insurance policies have declined sharply. At the top eight insurers, individual insurance sales during FY 1997 were down more than 10% from the previous year. At Asahi, Mitsui, and Chiyoda, sales of new business were actually less than cancellations and lapses. Individual insurance in force declined at all eight companies; at Chiyoda it was the second annual decline in a row, while at the other seven companies it was the first such decline in the post World-War II period.
The total of individual insurance in force at the eight top insurers at the end of FY 1997 came to L1,274 trillion, a 2.4% drop from the previous year. Even the top-ranking company, Nippon Life, recorded a 1.2% decline. The heaviest impact was felt by Chiyoda, where the in-force figure plunged 12.2%.
The figure for group insurance in force declined even more sharply. One major factor was the overhaul of the group insurance system implemented in October 1996; since this change, numerous companies have refrained from renewing existing policies. At Yasuda the drop was a relatively modest 3.5%, but at the other seven it was on the order of 30%. In group pensions, meanwhile, the results were mixed, with a growing trend for customers to pull their funds out of contracts with insurers whose credit ratings are lower than others'.
As for the newly introduced reports of solvency margins, six of the eight top life insurers announced figures above 500%, easily clearing the 200% level that the Ministry of Finance is said to have set as its trigger line for remedial action. But among the eight the variation was great, with figures ranging from Nippon's 939.9% to Chiyoda's 314.2%.


Major Results for the Top Eight Life Insurers, FY 1997

(L billion, percent change from previous year in parentheses)

Total
assets		 Premium
income		 Indiv. ins.
in force		 Cancellations,
lapses		 Solvency
margin (%)
Nippon 42,209.6
(5.4)		 6,275.5
(6.5)		 355,414.7
(-1.2)		 30,414.0
(10.2)		 939.9
Dai-ichi 28,669.6
(2. 3)		 4,012.5
(3.3)		 246,827.7
(-1.5)		 21,213.6
(10.3)		 632.1
Sumitomo 23,715.8
(1.4)		 3,419.0
(-0.5)		 229,933.1
(-2.1)		 20,980.0
(15.7)		 526.2
Meiji 17,045.5
(2.0)		 2,747.2
(9.0)		 143,176.4
(-1.8)		 12,807.7
(8.1)		 720.0
Asahi 12,176.0
(1.3)		 1,712.3
(-0.0)		 98,181.5
(-4.1)		 8,746.5
(17.2)		 654.8
Mitsui 10,901.5
(6.8)		 1,767.4
(11.3)		 78,187.5
(-3.9)		 8,356.3
(17.8)		 491.6
Yasuda 9,474.8
(2.6)		 1,703.5
(13.4)		 81,450.4
(-2.5)		 8,133.7
(13.5)		 648.1
Chiyoda 5,028.2
(-13.5)		 780.2
(-9.3)		 40,991.3
(-12.2)		 8,485.3
(69.7)		 314.2
Note: Figures for insurance in force include individual life insurance and individual annuities.

No.7 (Jun.1998)
Foreign Reinsurers Enter the Japanese Market

Foreign reinsurance companies are accelerating their moves to develop presences in the Japanese market. Just this May, Germany's Gerling Global Reinsurance (Gerling-Konzern) and Australia's Sydney Reinsurance opened representative offices in Tokyo. These and other reinsurers see Japan's Big Bang program of financial reform as presenting prospects for increased demand for their services, since it will allow Japanese insurance companies to cover a greater variety of risks. There is also a possibility that some domestic insurers with relatively weak financial bases will enter into tie-ups with foreign reinsurers as a way of boosting their own underwriting capacity.
Gehrling Global, which is headquartered in Cologne and ranks seventh in the world in reinsurance premium income, aims to expand its business with Japanese insurers, particularly on the life insurance side. According to a representative of the company, their aim in setting up an office in Tokyo is to offer speedy, flexible service in the Japanese market, where new needs are expected to emerge in areas like health insurance and nursing-care insurance.
Sydney Re, which opened its Tokyo office on May 15, is a part of Australia's largest insurance group, QBE.
Meanwhile, reinsurance companies that already had presences in Japan have been moving to enlarge the scale of their operations. Lloyd's Japan, a subsidiary of the British insurer Lloyd's, plans to station its chief operating officer in Tokyo starting this autumn. And Swiss Re, one of the world's top-ranking reinsurance companies, has hired employees for local life-insurance-related business to supplement its staff on the non-life side.

No.6 (Jun.1998)
Life Insurers Move into Investment Trust Field

Japan's major life insurance companies are accelerating their moves into the field of investment trust business. Their aim is to get a bigger share of the huge pool of individual financial assets, which are now estimated at 1,200 trillion. The strategies they are adopting are varied, including the acquisition of investment trust business licenses through wholly owned subsidiaries and the establishment of tie-ups with foreign financial institutions. But they are all eager to come up with new ways to target the market for individual asset management services, an area where greater volatility is expected to result from the Japanese Big Bang (the government's sweeping program of financial-sector reform and deregulation). They are also hoping to make use of investment trusts as investment media for the "defined contribution plans" whose introduction is now being considered in the corporate pension field.
In March of this year, Yasuda Fire & Marine and Dai-ichi Life acquired licenses from the Ministry of Finance to conduct investment trust operations through their respective investment advisory subsidiaries. Yasuda entered into a business agreement this past January with the TCW Group, a major U.S. asset management organization, for the development of investment trust products. Current plans call for the launching of the first fund sometime during the first half of 1998 through Yasuda Global Asset Management. Yasuda is considering sales not just through securities companies but also through tie-ups with regional banks that do not have their own financial products of this sort.
Dai-ichi Life, meanwhile, has entered into an asset-management arrangement with the Capital Group of the u.s. It plans to market four products-funds for domestic and international stocks and bonds through its own asset management subsidiary
Both insurers aim to combine their own store of expertise as institutional investors and product development know-how with the advanced financial techniques of foreign institutions so as to achieve high performance for their new offerings. They and other insurance companies are now eager to take advantage of the new opportunities that deregulation offers to tap the individual asset-management market through subsidiaries within their own corporate groups (previously they could only do so through directly marketed insurance products).
Tie-ups with foreign institutions now seem to be the trend: A subsidiary of Nippon Life has already hooked up with Putnam Investments, a U.S. firm, and Meiji Life has tied up with Dresdner Bank of Germany. These relationships are attractive for both sides: For the Japanese institutions, which have been prevented by regulatory constraints from keeping up with their Western counterparts' advances in financial technology, they offer access to their partners' know-how. And for the foreign institutions they offer access to the huge Japanese pool of individual financial assets. The announcement of the merger of Citicorp and the Travelers Group can be expected to accelerate moves toward tie-ups aimed at improving institutions' competitive positions.
Since last December, Japanese insurance companies have been permitted to market investment trusts indirectly by leasing out space on their own premises to investment trust companies. Nippon Life has already started such sales. And from this coming December on, they will be allowed to sell these products directly. Many insurers are expected to take advantage of this opportunity.

No.5 (Jun.1998)
FALIA Has a New President

By a decision of the Board Meeting on June 18, Yasuo Kiga was named president of FALIA effective June 24. (Mr. Kiga formerly served as an executive vice president of Dai-ichi Life.) Yasukuni Kato, the outgoing president, will continue to serve as an advisor to the foundation.

No.4 (Mar.1998)
Toho Mutual Life Sets Up Joint Venture with GE Capital Services

Toho Mutual Life Insurance Co., Japanfs twelfth-largest life insurer, and GE Capital Services Corp., one of the worldfs biggest nonbank financial companies, have entered into a cooperative financial relationship. A key element of the tie-up, which was announced on February 18, is the establishment of a new life insurance company as a joint venture between Toho Mutual Life and GE Financial Assurance Holdings Inc. GE Financial Assurance is a wholly owned subsidiary of GE Capital domiciled in Louisiana.
Toho Mutual Life will hand over its sales operations to the joint venture and will concentrate on maintenance of its existing policies. The venture will offer entry for GE Capital into the Japanese insurance market and pension fund management business. The new company, which is slated to start operations on April 1 this year, will be capitalized at \36 billion, 90% from GE Capital and 10% from Toho. In addition, the two companies will provide \36 billion in legal reserves and \72 billion in subordinated loans, bringing the joint venturefs initial capital base to \144 billion, half from each of the partners.
In addition to Tohofs approximately 4,300 agencies around the country, the new company will take over all 7,000 of its sales employees and 2,300 of its 2,900 office employees. It will direct its sales efforts principally at the individual life insurance market.
Though Toho Mutual Life will continue to exist as a mutual life insurance company, it will limit its operations to the maintenance of existing policies and the management of its asset portfolio. Policies already in force will not be transferred to the joint venture, nor will the contents of the coverage be changed.
Toho will receive up to a maximum of \70 billion in return for yielding its sales operations to the joint venture. It will also receive 30%?50% of the new venturefs insurance business in the form of reinsurance for a period of 10 years, thereby securing a steady stream of income. It will also gain by ceding some of its portfolio of existing business to the GE Capital group in the form of financial reinsurance (also known as surplus relief reinsurance); this will augment its reserves by \50 billion. The combination of these positive elements is expected to provide considerable relief for Toho, which had been encountering financial difficulties.
Tohofs problems were aggravated by the failure of Nissan Life last year, which contributed to a sharp increase in surrenders and lapses of existing policies?up 80% over the previous year in the April?September period of 1997. The tie-up with GE Capital is aimed at allowing it to survive in the face of these difficulties. GE Capital, meanwhile, will secure a position for itself within the huge Japanese insurance market, becoming the majority owner of what will be Japanfs largest foreign-affiliated insurance company.

No.3 (Mar.1998)
Life Insurers Brace for Difficult Annual Accounting

As the end of the current fiscal year approaches in March, Japanfs life insurance companies are concerned about the results that they will be reporting when they close their books. The poor performance of the stock market, combined with an increase in surrenders of existing insurance policies, has left a number of companies facing the need to come up with ways of improving the appearance of their accounts. Some medium-sized insurers are scrambling to strengthen their balance sheets by increasing their capitalization and gsellingh existing policies through financial reinsurance. Consideration is also being given to changing the accounting rules so as to reduce the size of losses companies will have to report on their stock portfolios if share prices continue to languish.
One change now being looked at is from the present system of valuation at gcost or marketh to one of valuation at cost. Under the accounting practices currently followed in the Japanese life insurance industry, shares are valued at the lower of their acquisition cost and their current market value. When the share price falls below the acquisition cost, the insurer must post a valuation loss.
The poor performance of the Japanese stock market in recent months has left insurers facing potentially huge valuation losses, which might even jeopardize their overall financial health. In response to this situation, the government in December modified the applicable accounting rules to give companies a choice between the present system and simple valuation at cost. If a company chooses the latter approach, the reported value of its stock portfolio will not be affected by movements in share prices.
Major life insurers, however, seem disinclined to make this switch. Companies like Nippon Life, Dai-ichi Life, and Sumitomo Life, the top three in the industry, feel that doing so would go against the international trend toward valuation of assets at current market prices.
A further consideration is that before the government came out with the new option, the larger companies had already generated profits through sales of certain stocks and other assets so as to cover their anticipated valuation losses. If they now make the switch to valuation at cost, they will be left with more profits than they want or need when they close their books at the end of March. Such profits will lead to higher tax bills and will also force them to pay dividends larger than justified by their actual performance.
During the course of FY 1998, life insurers expect to be required to release data on their solvency margins, which indicate the adequacy of their financial resources to cover potential claims. In preparation for this requirement, some medium-sized companies like Daihyaku Life and Kyoei Life are now thinking about increasing their capital by taking out subordinated loans.

No.2 (Mar.1998)
Non-life Insurers Experience Premium Income Decline

According to information released recently by the Marine and Fire Insurance Association of Japan, total premium income at the 31 domestic non-life insurance companies for the first three quarters of fiscal year 1997 (April?December 1997) was down 2.3% from the previous year. The outlook is for a year-on-year decline for FY 1997 as a whole. If this happens, it will be the first such annual decline since FY 1987. A major cause is the drop in premium income for contracts with a savings element, reflecting the current low level of interest rates.
The 31-company total for the nine-month period came to \7,940.2 billion. For the first time in the industryfs postwar history, the figure was less than that for the previous year. Premiums on contracts with savings elements were down 8.8%, and premiums on automobile liability insurance, for which the rates were lowered in May 1997, were down 7.4%.
Given the persistence of the low-interest-rate environment, it is expected that the results for FY 1997 as a whole (April 1997 to March 1998) will show a decline in premium income from FY 1996.

No.1 (Mar.1998)
Dai-ichi Life Launches Life/Non-life Package

Dai-ichi Mutual Life Insurance Co. and its non-life subsidiary, Dai-ichi Property & Casualty Insurance Co., Ltd., have marketed a new insurance package consisting of whole life with term insurance (a standard life insurance product) plus personal accident insurance (a non-life product).
The new package, which was put on the market on January 22, offers double protection for risks like hospitalization and surgery; it also provides up to \50 million in personal liability coverage. It is designed to offer a closer match to peoplefs everyday insurance needs than available from existing products.
Nippon Life and other insurers have moved to launch similar offerings.