|
| Reports |
[The following is a translation of the speech delivered to the Life Insurance Management Institute of ROC on March 25, 1998; the data in the attached figures has since been updated.]
As you know, in April 1997 the Japanese insurer Nissan Life failed. It was a company that had had \2.1 trillion in assets (as of the end of fiscal year 1996 in March 1997) and over 4,300 employees (1,207 office employees and 3,141 sales employees as of the end of FY 1996). And in February this year (1998), Toho Life announced a financial alliance with an American company. As of the end of FY 1997, Toho Life had assets on the order of \5 trillion and some 10,400 employees (3,070 office employees and 7,359 sales employees). By Japanese standards these are middle-ranking companies, but by international standards they may be considered relatively large. By looking from various angles at the circumstances of the Japanese life insurance industry that have caused one substantial company to fail and forced another to transform its framework of incorporation, I hope to give you some insight into the environment in which Japanese life insurance now finds itself.
My talk, for which I will take about two hours, will consist of three sections:
- The sluggish performance of the Japanese life insurance business and factors behind it
- Changes in the structure of life insurance company assets and liabilities in the “bubble” years and lessons from this experience
- The proper shape of life insurance company operations from now on
The Japanese life insurance industry is now experiencing a number of difficulties unprecedented in the over five decades since the end of World War II, and its business performance is stagnating.
This trend may be attributed to major changes in the external conditions of the life insurance market. These changes do not represent continuous development from the previous state of affairs; rather, they represent discontinuity, or the emergence of phenomena qualitatively different from those of the past.
To start, let us consider the business results of the Japanese life insurance industry.
Please refer to Figure 1.
After peaking in FY 1988, the business results of the Japanese life insurance industry showed a sharp decline in terms of growth rates.
Let us consider the three indicators shown here. First of all, the growth rate of total policies in force has declined for eight years in a row since 1989. This is a result of the sluggishness in the growth of new business, combined with increased lapses and surrenders. The factors in the background include (1) the economy’s delay in recovering from the prolonged recession, (2) the resulting lag in growth of personal income, and (3) the maturation of the market for death coverage.
During the current fiscal year (FY 1997) surrenders have increased further in the wake of the failure of Nissan Life, and I think we are going to see a negative growth rate in total policies in force over the course of the year (April 1997 to March 1998). This will be the first such decline in the half century since the end of World War II.
Premium income growth has also been lagging since the start of the current decade, and in FY 1996 the figure was down 4.6%. This was the second such year-on-year decline of the postwar period, the previous such drop having been recorded in FY 1990. One major factor behind this is that we have had to lower our expected rate of interest three times, in 1993, 1994, and again in April 1995, meaning higher premium rates.
Total asset growth has also been lagging. In FY 1996 the industry barely avoided recording negative growth, with a year-on-year increase of only 0.6%.
Reflecting these conditions, the surplus that is the source of funds for policyholder dividends peaked in FY 1990 and has been declining ever since (dropping from \3.7 trillion in FY 1990 to \1.5 trillion in FY 1996).
While the business results have been sluggish among the life insurance companies of the private sector, customers have been shifting to the government-operated postal life insurance system. Over the past decade, and especially over the past five years, declining confidence in the soundness of private-sector companies has caused the market share of the postal life insurance system to grow; it has gone from a 31% share of the total individual life insurance market at the end of FY 1990 to 39% at the end of FY 1996.
Part of the background to the sluggish performance of the Japanese life insurance industry as shown in Figure 1 lies in the major changes, both qualitative and quantitative, that have taken place in the external environment for the life insurance market. A prime example of these changes in the external environment is the shift in Japan’s population structure.
Please refer now to Figure 2.
Japan’s total population is now about 125 million. With the ongoing decline in both the birth rate and the death rate, the figure is expected to peak in the year 2007 and then enter into a slow decline.
The share of the so-called working-age population, ages 15 through 64, already reached its peak in 1992; the share is now declining, and this is one factor restraining economic growth. Meanwhile, the share of the elderly population, 65 and older, is slated to continue to increase rapidly.
In concrete figures, as of 1995 the 15−64 age group accounted for 69% of the total population, while the 65-and-older group accounted for 15%, but by the year 2025 their respective shares will be 60% and 27%. In other words, the difference between the two shares will narrow by more than 20 percentage points. We are facing a major structural transformation, with fewer working people and more people who have to be supported.
Incidentally, according to U.N. statistics, the period of time required for the share of the 65-and-older age group to go from 10% to 20% will be 61 years in the United States and 78 years in Britain, but in Japan it will take a mere 22 years−a third or less of these other countries’ periods. What this signifies is that Japan is now experiencing a population-aging process of a speed unmatched by the countries of Europe and North America.
According to an estimate by our Dai-ichi Life Research Institute, the shrinking growth of the labor force resulting from the aging of Japan’s population will lower the growth rate of Japan’s gross domestic product to about 1.4% in the years from 2006 to 2010. This is less than half of the 3% GDP growth rate that Japan has averaged over the past 15 years.
As the graying of the population progresses, household disposable income growth will also lag, and this will act as a brake on the economy as a whole, especially on the growth of domestic demand.
With the decline in the share of the 15−64 age group, which has been the target for life insurance sales so far, and the expansion of the share of the elderly population, the external conditions for the life insurance market will change significantly: (1) There will be less demand for the death cover that has until now been the mainstay of the industry’s growth. (2) At the same time, we can expect to see increased demand for “insurance for life,” including pensions, medical coverage, and nursing-care coverage.
Now please refer to Figure 3.
The bar graph presented here gives an international comparison of the amount of life insurance in force, including both individual and group insurance, expressed as a percentage of national income. The figure for Japan is much higher than for any other country. Probably the main factor behind this high level is the shift in the Japanese insurance market since the 1960s from the traditional savings-type policies (mainly endowment insurance) to protection-oriented policies (mainly whole life with additional term insurance).
According to the most recent statistics, which are for 1997, a full 93% of Japanese households have life insurance policies (meaning one or more policies with a private life insurance company, the postal insurance system, or the agricultural cooperative insurance system). This means that almost every household in Japan has insurance of one form or another.
The decline in demand for death cover, which I mentioned earlier, is due in large part to the fact that the amount of life insurance in force is already at such an extremely high level.
Now let me turn to the internal problems of the life insurance industry. The most serious such problem is the mismatch between assets and liabilities.
I will start with an explanation from the liability side.
Please refer to Figure 4. This shows the changes in the shares of life insurance companies’ policy reserves by type of insurance. One can easily see the shift in composition that has taken place. Reflecting the declining birth rate and aging of the population, the share of individual insurance has been declining, while the shares of individual annuities and group pensions have been on the rise.
As of FY 1980, individual annuities and group pensions accounted for only 1% and 15%, respectively, of policy reserves. But both these product types increased their shares substantially during the “bubble economy” years of the late 1980s. And their shares continued to expand steadily even after the bubble collapsed, partly because of the slowdown in growth of individual insurance policy reserves.
Since FY 1995, however, the percentage for group pensions has stopped growing. One factor was the reduction of the expected rate of interest, or guaranteed yield, from 5.5% a year to 4.5% in April 1994. This reduction was carried out despite the fact that some of the major sources of pension business, such as the Employees’ Pension Fund (which operates as a component of the public pension system), use a rate of 5.5% as the basis for their funding calculations. This rate had simply become too out of keeping with the actual investment environment. Another factor was that the pension business, which had previously been limited to life insurance companies and trust banks, was opened up to other participants, such as investment advisory companies.
In April 1996 the expected rate of interest was lowered again (from 4.5% to 2.5%). This, combined with the emergence of concerns about life insurance companies’ soundness, has led to a withdrawal of funds from life insurance companies by both public and private pension plans. As a result, in FY 1996 there was a net decrease of 10% in corporate pension funds at life insurance companies. Some of the money, however, was shifted to life insurers’ affiliated investment advisory companies, and some insurance company groups were actually able to increase their overall holdings of pension assets. The Dai-ichi Life Group as a whole was fortunately able to record an increase.
Individual annuities did not exhibit the decline seen in individual insurance after the bursting of the bubble, because they offered a relatively high rate of return by comparison with other financial products.
The expected rate of return on new individual annuities has in fact been lowered three times in the period from FY 1990 to FY 1996 (from 5.5% in FY 1990 to 4.75% in FY 1993, 3.75% in FY 1994, and 2.75% in FY 1996), but even so their share of policy reserves rose some 3 percentage points over the same period (from 7.2% in FY 1990 to 10.6% in FY 1996).
In the period ahead, with the rapid aging of the population, we can expect the market for the traditional death-cover products of the individual insurance field to mature and the weight to tend to shift toward old-age financial-security products like annuities. The same sort of trend, incidentally, is producing a gradual increase in the weight of coverage against illness and injury.
*Figures 5 and 6
Next, using Figures 5 and 6, I will explain about the asset side, or in other words, the investment side at Japanese life insurance companies.
Please refer first to Figure 5.
The Japanese economy enjoyed a period of unprecedented liveliness in the latter part of the 1980s, but at the start of the 1990s the good times vanished like bubbles. Stock prices plunged, and the economy entered into a period of prolonged recession and declining interest rates.
The period around the years of the “bubble economy” was also a period of drastic change for life insurance company investment. I will explain this in terms of three stages: the pre-bubble years, the years of the bubble economy, and the post-bubble years.
The top chart shows how, in the pre-bubble years, the expected rates of interest were at an appropriate level, lower than the domestic market interest rates.
The graphs of Figure 6 show the composition of life insurance company assets in Japan, the United States, and Britain. Please look at the graph for Japan. In the pre-bubble years, Japanese life insurance companies’ portfolios were relatively well balanced, with the main portion (about 70%) made up of fixed-rate assets like bonds, loans, and deposits. This enabled life insurers to earn the yield needed to meet their expected rates of interest. Meanwhile they invested a certain portion (about 20%) of their funds in higher-risk assets like stocks and foreign securities in pursuit of greater profits.
Now please return to the top graph in Figure 5.
With the onset of the bubble economy, however, life insurers started experiencing considerable negative yield spreads, because they were competing for individual insurance business by setting their expected rates of interest at excessively high levels even while market interest rates were declining.
In order to earn greater yields than those available on fixed-rate instruments, life insurers decreased the weight of their fixed-rate portfolios and shifted funds to high-risk, high-return investments like stocks and foreign securities. At the peak in 1989, these risk assets accounted for close to 40% of the total.
During these bubble years, as shown in the bottom graph of Figure 5, stock prices rose dramatically. This meant that life insurance companies had generous amounts of latent stock profits (unrealized capital gains) that could be used at any time if necessary to meet the expected rate of interest.
Allow me to add a few words of explanation about these latent stock profits. Under Japanese accounting standards, stocks are valued at the lower of their acquisition cost and their current market price.
When stock prices rise, this results in “latent profits,” that is, unrealized capital gains reflecting the difference between the market value of companies’ stockholdings and their book value.
In the past, Japanese life insurance companies used these latent stock profits as an important buffer, alongside their equity capital, to meet the liabilities of their expected interest rates at times of poor investment conditions.In other words, the companies had a certain degree of leeway, an ability to sustain risks.
However, it is necessary for life insurance company investments to maintain a sound balance giving ample consideration to three points: safety, profitability, and liquidity. Viewed in this light, the portfolios of the bubble years were excessively risk-prone, reflecting a greater priority on profits than on safety.
This distortion was not due just to companies’ investment policies on the asset side; another major factor was on the liability side, namely, the sales stance that caused companies to compete for business by keeping their expected interest rates higher than market rates.
With the start of the 1990s, the drastic fall of the stock market and the appreciation of the yen caused life insurance companies to see their latent stock profits melt away and to experience major currency losses on their investments in foreign securities.
Meanwhile, the bankruptcies of corporate clients and the decline in the value of land used as collateral for loans caused the bad-debt problem to become a matter of serious concern for life insurance companies, even though the impact on them was considerably less than the impact on banks.
As a result of these changes, life insurance companies came to hold large amounts of risk assets, and they discovered that their financial leeway had shrunk considerably.
Please refer again to Figure 6.
The graph for Japan shows how, since the start of the 1990s, life insurance companies have moved rapidly to shift back to safety-oriented portfolios consisting mainly of fixed-rate investments.
Compare this with the situation in the United States and Britain.
One point we must note when comparing these figures is that unlike in Japan, where stocks are valued at acquisition cost, in the United States and Britain they are valued at market prices. So for comparative purposes, given the level of stock prices at the height of the bubble economy, the share of life insurance companies’ holdings of risk assets should be seen as considerably higher than what is shown in the graph.
The American life insurance industry has traditionally taken a safety-first investment stance, investing mainly in fixed-rate long-term instruments like bonds and mortgages.
In recent years, however, financial deregulation produced competition with other industries, leading to large outflows of funds from the life insurance industry. This resulted in a number of structural changes on the liability side, including (1) a decline in the share of traditional whole-life insurance policies, which are accompanied by long-term liabilities, (2) active sales of profit-oriented products like universal insurance and guaranteed investment contracts (GICs), and (3) growth of separate accounts.
Particularly after the start of the 1990s there was a sharp rise in sales of variable insurance and pension products, whose assets are invested through separate accounts. As a result there has been a major increase in the share of risk assets, specifically stocks, in U.S. life insurance company portfolios. As of the end of 1995 this share had risen to 17% of the total, though this is still less than the share of stocks and foreign securities in Japanese life insurers’ portfolios (24%). Incidentally, 76.4% of these stocks are held in separate accounts.
In other words, though the share of risk assets has risen sharply at American life insurance companies, there has also been an increase in the weight of products like variable insurance on the liability side, and so there is a good match between assets and liabilities.
In Britain, by contrast, life insurance companies have held large amounts of stocks; particularly since the late 1980s they have steadily kept 50% or more of their assets in ordinary shares.
The share of risk assets is far higher than in Japan’s case. However, insurers in Britain have sold large amounts of a type of variable insurance, called “unit-linked insurance,” and so, just as in the United States, there is a good match between assets and liabilities.
As I stated earlier, the biggest problem for Japanese life insurance companies is the mismatch between their assets and their liabilities.
After the start of the 1990s, Japanese insurers moved hastily to deal with this problem by lowering their expected rates of interest on individual insurance, individual annuities, and group pensions. But they were unable to keep up with the pace of the decline in investment yields.
This is just as we saw in the upper graph of Figure 5.
Companies made up for this negative yield spread by using profits made from their insurance operations and by selling stocks and real estate to realize latent profits.
Nissan Life, however, was unable to generate sufficient profits to offset its negative yield spread.
During the final part of the bubble period, Nissan Life had sold individual annuities with a high expected rate of interest in amounts that were large by comparison with other life insurers. Its subsequent difficulties in investing these funds and the rapid widening of its negative yield spread acted as the biggest cause of its failure.
Based on the experience of the negative yield spread in the bubble years, we at Dai-ichi Life acted in advance of other Japanese life insurers to strengthen our investment risk management system so as to avoid excess risk on the asset side, and we are continuing to pursue this objective.
In concrete terms, we have established an Investment Risk Management Center to track risks on an ongoing basis and an Investment Risk Management Committee, which reports its findings to top management.
These measures focus on the asset side. But in recent years it has become important not to focus exclusively on assets but also to take into account the nature of the funds that we have raised−our liabilities, in other words. This means pursuing a strategy of ALM, or asset-liability management, that aims to improve profitability on a comprehensive basis, considering both the asset side and the liability side of our balance sheet.
ALM, in simple terms, carefully weighs the features of the company’s liabilities, such as their term, cost, and liquidity, and the features of the company’s assets, such as their term, risk, and rate of return, and manages them so as to avoid mismatching the two sides.
The key characteristics of a life insurance company’s general account may be summed up in two points: (1) When the investment environment is favorable, policyholders are paid dividends in line with the company’s investment profits. (2) Even when the investment environment is unfavorable, policyholders are guaranteed payments equal to their principal plus the expected rate of interest.
For our ALM strategy, the two most important considerations are thus (1) to maximize expected profits and (2) to control the risk of investment profits being less than the expected rate of return−the risk, in other words, of a negative yield spread.
Also, because of the increasing diversity of our insurance products and the need for investment in keeping with the features of the various products, since 1996 we have been introducing a system of segregated accounting on a product-line basis. This has further heightened the importance of a matching ALM strategy.
Traditionally we have managed the assets for individual insurance, annuities, and group business all as part of the same account, but what we have now started to do is to manage them separately, grouping together products that share the same features and putting them in their own segregated account, since this makes it possible to build asset portfolios and manage liabilities on the basis of a more precise ALM strategy.
Earlier, when comparing the asset compositions of life insurance companies in Japan, the United States, and Britain, I mentioned the existence of separate accounts in the latter two countries. Now let me explain about separate accounts in Japan.
Please refer to Figure 7.
The system of separate accounts was introduced in Japan in 1986 when we started selling variable insurance to individual customers. But variable insurance did not sell very well, and when we talk about separate accounts today, we are referring mostly to the special accounts set up for group pension plans.
During the bubble years, the sponsors of pension plans came to demand high returns, and there were also demands for investment to be tailored to the requirements of each plan. In FY 1990, four years after the launching of variable insurance for the individual market, we introduced a “special account rider” for group pensions as a way of responding to these needs.
To put this in simple terms, it means that we have added a system of investment advisory accounts to handle group pension assets within our company. In addition, Dai-ichi Life has set up an investment advisory company as an external subsidiary. Existing customers may take out the special account rider, which is like setting up an investment advisory account within Dai-ichi Life proper, but new customers deposit their funds with our subsidiary.
In the background of this development is the fact that the management of pension funds, which was previously limited to life insurance companies and trust banks, has gradually been liberalized, and funds have been shifting to investment advisory companies. Life insurance companies set up separate accounts for pensions as a way of competing under these new conditions.
Since there are no figures for the industry as a whole, what we show in Figure 7 is the record of our own company. As of the end of FY 1996, separate accounts had grown to account for 3.6% of the company’s total assets. The other major life insurers are probably recording similar levels and trends. The share is still small by comparison with Western countries, but it is fair to say that a shift toward non-guaranteed yields has begun.
What course will life insurance company management take in Japan in the period to come?
It is likely that management strategy will come to vary considerably from company to company.
As background information for considering Japanese life insurance companies’ management strategies, here I would like to explain the reform of the insurance system that was implemented in April 1996.
Please refer to figure 8.
The issue of banking and securities industry reform was taken up in Japan before insurance system reform, and about five years ago, in April 1993, the Financial System Reform Law went into effect. Three years later, in April 1996, the new Insurance Business Law went into effect. This was the first revision of this piece of legislation in half a century. The revision of this law and the other measures to reform the insurance system were aimed at dealing with the changes in the external environment for the Japanese insurance industry, including (1) the rapid aging of the population and diversification of consumer needs, (2) the trends in the financial sector toward liberalization, internationalization, and securitization, and (3) demands for international harmonization of insurance systems.
The reform program was based on three pillars of administrative action: (1) the maintenance of sound life insurance company operations, (2) the securing of fair business conduct, and (3) progress toward deregulation and liberalization.
First of all, the issue of soundness of operations is one of extremely great significance given the failure of Nissan Life.
If I may digress a bit, in the area of bank regulation a “prompt corrective action” system is slated to be introduced applicable to the results of the closing of accounts at the end of the current fiscal year. Under this system, the Ministry of Finance will take regulatory action on the basis of banks’ capital-to-assets ratios; this action may take the form of orders for improvement or even for the halting of operations.
Life insurance regulation is expected to move in this same direction. Under the new Insurance Business Law the Ministry of Finance has positioned the “solvency margin ratio” as the measure of an insurance company’s leeway to pay claims, corresponding to the capital-to-assets ratio of banks. The regulatory authorities will take “prompt corrective action” with respect to insurance companies whose ratios are too low, just as in the case of banks.
For the calculation of this solvency margin ratio, please see Figure 9.
This ratio, which serves as an indicator for insurance companies’ risk management, is calculated by dividing a company’s solvency margin, meaning its equity capital and similar items, by a measure of its risks beyond normal expectations, including insurance risks and investment risks.
The difference between insurance policy reserves and the solvency margin is that the former is supposed to cover risks within normal expectations and the latter to cover risks beyond normal expectations.
Now please refer to Figure 10.
Meanwhile, with the increasing intensity of competition, an issue that has become extremely important is that of how to protect the policyholders of life insurance companies that fail despite the application of prompt corrective action for the improvement of company operations in stages.
Currently there is a big gap between the safety net provided for bank depositors and that for life insurance policyholders.
The present safety net for life insurance is the Life Insurance Policy Support System that was established at the same time as the new Insurance Business Law went into effect in April 1996; life insurance companies participate in this system on a voluntary basis. This is shown on the left side of Figure 10. Under this system life insurance companies make voluntary contributions, and up to \200 billion in supporting funds can be provided to an insurance company that purchases a company that has failed.
On April 25, 1997, the minister of finance issued an order halting the operations of Nissan Life. This was the first failure of a Japanese life insurance company since the end of World War II, and the Policy Support System went into operation. The \200 billion charge has been divided up among the participating life insurance companies, each of which is to pay in accordance with its contribution ratio. For Dai-ichi Life, the quota is to contribute \3.2 billion out of its surplus every year for 10 years starting in FY 1997.
Work is now underway toward enactment of a compulsory payment guarantee system similar to the deposit insurance system for banks to replace this existing voluntary system so as to provide stronger protection for policyholders in the case of a life insurance company failure and to maintain the creditworthiness of existing life insurers.
An outline of the proposed new system is shown on the right side of Figure 10.
The overall contents are not very different from those of the existing system, but it will be mandatory by law, and it will provide for protection of policyholders through payments from a guarantee organ even in cases where there is no purchaser for the failed company.
The main contents of the new system are (1) the creation of two payment guarantee organs, one for life insurance and another for non-life insurance, in December 1998 (2) the contribution of up to \690 billion by the life insurance industry, including the payments for Nissan Life, over a period of 10 years, and (3) compensation amounting to 90% of policy reserves−with a temporary provision for 100% compensation of certain insurance policies through March 2001.
Please refer back to Figure 8.
One of the three pillars of insurance system reform is to ensure fair business conduct; this is related to the objective of maintaining the soundness of operations. In order to achieve this, calls have been raised for greater thoroughness in disclosure. The failure of Nissan Life gave rise to severe complaints that policyholders had been told nothing and that the information disclosed by the company had given no clue that it would fail−in other words, the level of disclosure of company operations had been inadequate.
The prime focus of attention with respect to disclosure of operating information is the solvency margin ratio that I mentioned earlier. The Ministry of Finance considers it desirable for life insurance companies, like banks, to reveal their level of capital adequacy, and it is expected that the solvency margin ratio figures will soon become subject to disclosure.
Next I will speak briefly about deregulation and liberalization. This is of course related to the Japanese Big Bang, the sweeping program of financial reform that is about to be implemented in Japan. The three key concepts of this Big Bang are “Free,” meaning that the market must be a free one in which market principles prevail, “Fair,” meaning that it must be a transparent one in which people can place their confidence, and “Global,” meaning that it must be international and progressive.
By achieving these principles, the goal is to reestablish Tokyo’s position as an international financial center on a par with New York and London.
In the period ahead, the program of deregulation will open up new possibilities for life insurance companies, such as the following:
(1) To establish holding companies.
(2) To own banks and securities companies as their own subsidiaries or as subsidiaries of their holding companies.
(3) To own companies carrying out nonfinancial activities, such as operations relating to health care and nursing, either as direct subsidiaries or as subsidiaries owned by holding companies.
(4) To conduct direct sales of investment trusts.
The Japanese Big Bang is to be completed by 2001, but one measure that was implemented well in advance was mutual cross-entry between the life insurance and non-life insurance industries. Six life insurers have set up non-life insurance subsidiaries, and 11 non-life insurers have set up life insurance subsidiaries.
Please refer to Figure 11.
As a result of cross-entry, not only has the number of companies increased, but there has been a diversification of sales channels. The existing networks of salespeople and agents have become able to sell both life and non-life insurance products; in addition, insurance brokers and mail-order sales have also been added to the picture. A true age of megacompetition has arrived in terms of insurance industry sales channels.
What will all of these reforms mean for life insurance management?
Please refer to Figure 12.
One possible strategy for survival is to specialize within the existing field of life insurance business. This is the strategy that most life insurers will probably adopt; it may be referred to as the “boutique” approach.
At the big life insurance companies, meanwhile, the idea will probably emerge of seeking to provide “one-stop shopping” to handle the investment of all the financial assets of individual customers. These individual financial assets already amount to \1.2 quadrillion, and by the year 2010 they are expected to reach \2 quadrillion. Taking advantage of the imminent lifting of the ban on downstream holding companies, some major companies in both the life and non-life insurance industries will probably take a “department store” approach to financial services, turning themselves into groups of companies that include banks, securities firms, trust banking operations, and investment advisory companies.
Let me explain the lifting of the ban on holding companies, which will serve as the nucleus for this “department store” approach.
Figure 12 presents the two forms of holding company now under consideration. Life insurers are mostly organized as mutual companies, and so they will probably start out with the downstream holding company form of organization shown on the left. But some of them, as they seek to form corporate groups with exiting banks and securities companies, will probably move to “demutualize” themselves−in other words, to turn themselves into stock companies−and to adopt the upstream holding company form of organization shown on the right.
If insurance companies pursue new business opportunities through holding companies, they may focus on such related fields as investment advisory services and welfare-related activities. Particularly in view of the rapid advent of an aged society, a key area is likely to be entry into the field of nursing care services, which is an area where it is hoped that insurers will play a role.
In conclusion, let me sum up my remarks on the current state of the Japanese life insurance industry:
| (1) | The industry as a whole is experiencing ongoing sluggish performance. |
| (2) | One factor behind this is the contraction of the scale of the market for financial-security products. |
| (3) | The difficulties caused by negative yield spreads have even led to life insurance company failure, as seen in the case of Nissan Life. |
| (4) | The problem of negative yield spreads is a serious one for the industry as a whole, and there is no prospect for short-term improvement. |
| (5) | The industry has not yet launched sufficiently competitive products in the promising market for personal savings. |
| (6) | The regulatory framework will soon be modified with the introduction of solvency margin disclosure, prompt corrective action, and a new safety net for policyholders. |
| (7) | Meanwhile, the Big Bang program of financial reform is underway, with completion scheduled for 2001. |
What is important in this context is to consider carefully how to prioritize the various matters requiring attention and how speedily to implement reforms, while keeping in sight the overall picture of the financial reform program. In my view it is important for us to focus on three Cs:
| (1) | The customer: We must provide fair and equitable profits to as many users as possible. |
| (2) | Continuity: We must strive for continuity and consistency with the financial system reforms and insurance system reforms that have already been carried out. |
| (3) | Cost: We must adopt approaches that will minimize social costs on a comprehensive basis. |
The competition within the financial sector, including the insurance industry, will be growing even more intense. Meanwhile, the expected privatization of the postal life insurance and savings systems has been postponed, and until the life insurance companies of the private sector recover their creditworthiness, customers will probably continue to shift to the public sector. We have entered an age in which private-sector life insurance companies must improve the efficiency of their operations and adopt creative approaches of their own so as to survive, such as specializing within the field of life insurance or boldly moving into new fields. It is an age of “survival and development.”
Thank you for your prolonged attention.