Insurance & Reinsurance 2021

Last Updated January 19, 2021

Japan

Law and Practice

Authors



Chuo Sogo Law Office, P.C. specialises in the following insurance matters: legal advice and opinions relating to insurance laws and regulations; incorporations, mergers and acquisitions, company restructurings and liquidations for insurance companies; and litigation, mediation, ADR and other dispute resolutions involving insurance claims and insurance products. Since 2005, the firm has been loaning its attorneys to work at the Financial Service Agency (FSA) – an agency overseeing the insurance sector in Japan. This experience has given Chuo Sogo insights into and a better understanding of the workings of this complex governmental agency, allowing it to better deal with complex insurance-related regulations to the benefit of its clients.

The Insurance Business Act is the basis for regulation of insurance businesses in Japan, providing a contractual relationship surrounding insurance products. Although Japan is not a common law country, the judicial precedent, especially that established by the Supreme Court, should be referred to when interpreting insurance contracts.

The Financial Services Agency (FSA) is the regulatory authority for insurance and reinsurance businesses in Japan. Life and non-life insurers are regulated by the Insurance Business Act. Reinsurers are regulated in the same way as non-life insurers. Based on the Insurance Business Act, the regulatory authorities have the power to issue administrative dispositions to insurance companies, including orders for business improvement, orders for suspension of business, and/or orders for cancellation of licenses.

In fact, broad discretion is given to the regulatory authorities, and those administrative dispositions against insurance companies invoked by the regulatory authorities are not necessarily based on the assumption that violations of law by insurance companies have taken place.

Against this background, entities targeted for supervision not only have to make sure that laws and regulations are being observed but must also follow the guidelines officially promulgated by the regulatory authorities (Comprehensive Guidelines for the Supervision of Insurers).

Underwriting Life and Non-life Insurance

Underwriting life insurance and non-life insurance entails obtaining the necessary business licences from the regulatory authorities. Such licences for life insurance and non-life insurance business cannot be acquired by the same company, and companies are prohibited from running both businesses concurrently. However, both life insurers and non-life insurers are at liberty to offer insurance such as medical care insurance, accident insurance, or overseas travel accident insurance, ie, insurance from the so-called “third sector” insurance market.

Nevertheless, life insurance companies – whether operating in the form of a kabushiki kaisha or mutual company – must have board of directors’ meetings, auditors’ meetings, audit and other committee meetings, and meetings such as nominating committee meetings, and accounting auditors. Foreign companies intending to enter into the Japanese market through their subsidiaries are required to acquire the licenses mentioned above. Foreign companies planning to enter through their branch offices must obtain foreign insurer’s licences.

During the licence application procedure, the so-called “basic documents” (articles of incorporation, business plan, standard policy provisions and documents showing the method to calculate insurance premiums and policy reserves) are required to be submitted to the regulatory authorities. Furthermore, insurance companies cannot operate their businesses while being in violation of the basic documents, and, in order to develop and offer new insurance products, must procure approval for corresponding changes to the basic documents from the regulatory authorities (“Insurance Product Approval” – regular processing takes 90 days, standardised 45 days). However, regarding certain types of insurance, such as fire insurance where there is little concern of insufficient policyholder protection, a notification system to the regulatory authorities has been adopted; nevertheless, notification may not be required in cases where insurance companies state in the statement of business procedures that special provisions related to business insurance are to be established or modified without notifications (“Flexible Provision System”).

Other Business and Subsidiaries

Insurance companies are not permitted to conduct any business other than the insurance business (underwriting insurance) and business incidental thereto (restriction on other business). Furthermore, insurance companies are not allowed to own subsidiaries that perform businesses other than as legally stipulated, or obtain voting rights in domestic companies in excess of 10% of their total voting rights. However, with the approval of the regulatory authorities, insurance holding companies may have companies as their subsidiaries that insurers themselves may not own.

With respect to prescribed matters (which are quite extensive), such as customer explanations, or information control, insurance companies are obligated to have a system in place to secure soundness of operations and appropriate management. The minimum amount of capital of an insurance company is JPY1 billion.

Policy Reserves

Insurance companies are required to accumulate policy reserves and it is necessary for them to appoint an insurance administrator with a predetermined actuary’s licence who gets involved in work related to actuarial science. In 1996, regulations on the solvency margin ratio were introduced. The solvency margin index has become an assessment standard for the supervisory authorities to execute early corrective actions with broad supervisory reach against targeted companies, including orders to submit an improvement plan.

At present, the solvency margin ratio on a consolidated basis has been introduced. The European Union announced in March 2016 adoption of the equivalence recognition between Solvency II with temporary equivalence and the Japanese reinsurance supervision and group solvency. In June 2020, the Advisory Council on Economic Value-Based Solvency Regulations (ESR) established by the Financial Services Agency in 2019 released a report on the future direction of domestic regulations.

In light of this report, more discussions are anticipated to take place to revise, as needed from the viewpoint of convergence to the ICS Version 2.0, the standard model for domestic regulations, which serves all insurance companies as a basic computational model for ESR, in terms of (a) the risk factor and the categories to reflect the domestic risk profile, and (b) co-ordination with non-consolidated regulations, while employing the basic framework of the ICS.

See 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance.

This is not applicable in Japan.

Under the Insurance Business Act, the regulations that apply to Japanese insurance companies also apply to local subsidiaries of overseas-based insurers. Nevertheless, the Act allows foreign insurance companies to conduct insurance business without establishing such local subsidiaries.

Foreign insurance companies may conduct insurance business in Japan only if they have opened a branch in Japan and obtained the applicable license from the FSA, the body overseeing insurance companies (Article 185-1 of the Insurance Business Act). This requirement allows the FSA to effectively execute administrative power over such foreign insurers. With some exceptions, Article 185-6 of the Insurance Business Act requires such licenced foreign insurers to conclude insurance contracts with persons having an address or residence in Japan, property located in Japan, or vessels or aircrafts with Japanese nationality inside Japan. The procedure to apply for the licence is mostly the same as that for Japanese insurance companies. Since foreign insurance companies do not have capital inside Japan, they are required to deposit a minimum of JPY200 million to the deposit office to protect policyholders.

Restrictions on Unlicensed Foreign Insurance Companies

Unlicensed foreign insurance companies may not conclude insurance contracts with persons having an address or residence in Japan, property located in Japan, or vessels or aircrafts with Japanese nationality (Restriction on Foreign Direct Insurance; Article 186-1 of the Insurance Business Act) other than the insurance contracts listed below:

  • reinsurance contracts;
  • marine insurance contracts pertaining to objects such as vessels with Japanese nationality used for international maritime transportation;
  • aviation insurance contracts pertaining to aircrafts with Japanese nationality used for commercial aviation;
  • insurance contracts pertaining to launching into outer space;
  • certain insurance contracts covering cargo located within Japan which is in the process of being shipped overseas; and
  • overseas travel insurance.

Exceptions and permissions

The restriction does not apply when an applicant wishing to purchase insurance from unlicensed insurance companies has obtained a permission from the FSA in advance of their applications for insurance as set forth in Article 186-2 of the Insurance Business Act. This exception is provided for policyholders’ benefit to purchase insurance products that are most beneficial to them. That permission may not be provided in the following cases:

  • the insurance product in question violates laws or is unfair;
  • it is easy to conclude insurance contracts with licensed Japanese or foreign insurers for comparable insurance products on equal or more advantageous conditions;
  • the terms and conditions of the insurance product in question are significantly unbalanced compared to the typical terms and conditions of the same type of insurance products with licenced Japanese or foreign insurers;
  • concluding such insurance contracts would unjustly deprive the insured and other related persons of their benefits; and
  • concluding such insurance contracts would likely negatively impact the development of the Japanese insurance business or be harmful to the public interest.

In a recent trend, the government of Tokyo is pursuing a policy to attract overseas financial business providers to the Japanese market by providing assistance to cope with complicated financial regulations in Japan, such as opening a one-stop service centre for financial start-ups. It is expected that such a move will attract more overseas insurance companies and revitalise the Tokyo financial markets.

Fronting is not expressly prohibited nor permitted in Japan and there are no explicit expectations with regard to the cedent’s retention.

Existing insurance businesses may be acquired in several ways, such as through obtaining shares of Japanese insurance companies, a merger of insurance companies, or sale and purchase of insurance business. The Insurance Business Act provides a regulatory framework for these M&A activities of insurance businesses.

Obtaining Shares

Under the Japanese regulatory framework, shareholders who own a certain percentage of voting rights in insurance companies are subject to oversight of the regulator.

  • A shareholder with more than 50% voting rights in an insurance company is required to obtain an approval from the Financial Services Agency (FSA) in advance of acquisition of such voting rights (Insurance Holding Company; Article 271-18-1 of the Insurance Business Act). Insurance holding companies are subject to strict regulations including those regulating the scope of business and imposing subsidiary restrictions, and, in certain instances, reporting obligations. As of 26 March 2019, 14 insurance holding companies have been approved by the FSA.
  • Except for insurance holding companies, a shareholder with 20% or more voting rights in an insurance company needs approval from the FSA in advance of acquisition of such voting rights (Major Shareholder of Insurance Companies; Article 271-10-1). Such approval is required even if the investor resides overseas. The FSA oversees major shareholders of insurance companies by imposing reporting obligations and taking administrative dispositions.
  • A shareholder with more than 5% voting rights in an insurance company is required to report such acquisition of voting rights within five days (in case of foreign investors, one month) to the FSA (Shareholders with Large Voting Rights in Insurance Company; Article 271-3-1 of the Insurance Business Act). Such shareholder has to submit a report if the shareholder’s percentage of voting rights changes by 1% or more (either as an increase or decrease). The FSA may take administrative dispositions against shareholders with large voting rights in an insurance company if the FSA finds the report submitted includes false, or lacks important or necessary information, thus causing potential misunderstanding.

Mergers

A merger with an insurance company requires approval by the FSA. Article 167-2 of the Insurance Business Act provides the following standards/checkpoints that the FSA could use in determining whether to give an approval:

  • the merger is appropriate in light of the protection of policyholders;
  • the merger will not hinder fair competition among insurance companies; and
  • it is certain that the surviving insurance company after the merger will be capable of operating the insurance business appropriately, fairly and effectively.

Sale and Purchase

A sale and purchase of insurance business also requires approval from the FSA pursuant to Article 142 of the Insurance Business Act. Purchasers of insurance businesses must be licenced insurance companies. Such sale and purchase also requires a separate approval to transfer insurance contracts from the FSA pursuant to Article 139 of the Insurance Business Act. Petitions for approval to transfer insurance contracts are reviewed according to the following standards/checkpoints:

  • the transfer of insurance contracts is appropriate in light of the protection of policyholders;
  • it is certain that the transferee will be capable of operating the insurance business precisely, fairly and effectively; and
  • the transfer does not unjustly affect the benefit of the creditors of the transferor.

The Insurance Business Act does not require policyholders’ approvals for transfers of insurance contracts to another insurance company. Instead, the transferor must make a public notice and notify each policyholder, and provide policyholders a chance to file objections to the transfer.

Unless otherwise allowed by any other law, the Insurance Business Act prohibits any person from acting as an agent or intermediary to conclude insurance contracts, an activity that falls within the definition of “insurance solicitation” under the Act.

In the case of a life insurance company, only registered life insurance agents (officers and employees of a life insurer; life insurance agencies (agents) as well as their officers, employees and other personnel) may conduct “insurance solicitation.” A characteristic feature of Japanese selling channels is for life insurance companies to utilise a high rate of salespeople who have long belonged to those companies (mostly female employees known as “Sei-ho ladies”) among their overall salespersons. Put simply, every person selling insurance contracts has to be registered to do so. In principle, in the current legal system, life insurance agents may deal with insurance products of only one insurance company. In other words, they operate within the so-called “one-company exclusive system”. However, by fulfilling the prescribed legal requirements (such as enrolling two or more life insurance agents) it is possible to deal with insurance products of multiple insurance companies – in fact, quite a number of independent agencies currently do this.

Non-life Insurance Companies

The situation involving non-life insurance companies (including a reinsurance company) is as follows:

  • It is recognised that officers (other than auditors) and employees of a non-life insurer may engage in “insurance solicitation,” not only without being registered but also, similarly to officers and employees of below-mentioned non-life insurance agencies, without any obligation to give notice thereof. In many cases employees of a non-life insurance company engage in “non-face-to-face” offerings of their products (by such means as telephone, mail or internet) and tend to transfer business opportunities with large-scale companies to their head office for handling.
  • Registered non-life insurance agencies, their officers (with the exception of auditors) and their employees may engage in “insurance solicitation”. No officers or employees of non-life insurance agencies are required to be registered, however, they are required to give notice of such a fact.

The majority of non-life insurance sales are carried out by agencies, which account for 91.2% of the total on a direct-net-premiums-written basis, while sales by officers and employees of insurance companies (through their direct sales) and insurance brokers account for only around 8.1% and 0.7% respectively.

Dedicated insurance agencies account for 19% (based on the number of entities involved) of non-life insurance agencies. Around 53% of non-life insurance agencies involved in another business are automobile dealers/repair shops, and around 10% are entities within the real estate industry – with both figures indicating high ratios.

Insurance Brokers

Registered insurance brokers may also engage in “insurance solicitation” (limited to mediating conclusions of insurance contracts). The Insurance Business Act has assigned special duties to such insurance brokers, including the duty to deposit a security guarantee (JPY20 million at the time of commencement of their business, which can be exchanged for an insurance broker’s liability insurance policy), the duty to disclose fees and commissions, the duty to prepare bought and sold notes, the duty of loyalty (the duty of “best advice”), and other special duties that have not been imposed on insurance agents. The number of insurance brokers in Japan is comparatively low (54 companies). While most of them focus on large-scale businesses, handling products for consumers is extremely rare.

Sales Through Banking Channels

Insurance sales through banking channels in Japan commenced in 2001 but the number of products they could sell was severely restricted. The range of insurance products available for sale by banks has since expanded multiple times, and the restrictions were totally removed in 2007.

Banks function as insurance agents in the selling process. In this respect it is worth mentioning that additional special regulations have been applied to banks in order to avoid circumstances of insufficient consumer protection, which could result from improper use of the banks’ information-gathering ability in relation to customers’ funds or their improper influence over customers.

Strict regulations have been imposed on banks, including measures/regulations for the protection of non-public information (pursuant to which customer information obtained through their banking business cannot be used in connection with insurance solicitation without customers’ consent) or the regulations concerning soliciting of borrowers (where certain types of insurance products cannot be sold to customers who are granted business loans). While these additional regulations have been imposed for the protection of consumers, in essence they function to protect the traditional channels of insurance distribution.

Recently, “open-for-visitor” agencies have strengthened their presence. Out of the insurance products of multiple insurance companies, these agencies make – on their own initiative – proposals of insurance products that conform to customers’ actual needs, which open-for-visitor agencies call consultative selling.

The Insurance Business Act imposes on a policyholder or the insured a duty to disclose material matters regarding risks requested to be disclosed by the insurer (the duty of answering the question).

This is a unilaterally mandatory provision (a provision that makes void those agreements that, contrary to this provision, adversely affect policyholders); however, in the field of non-life insurance – for example, maritime insurance contracts, aviation insurance contracts, nuclear energy insurance contracts and non-life insurance contracts – the coverage of damages arising from business activities conducted by a juridical person or some other organisation or an individual who operates a business is excluded from the scope of the application of the foregoing provision.

If a policyholder or the insured violates the aforementioned duty, the insurance company may cancel the insurance contract and, except for damages not arising from violation of the duty of disclosure, will be discharged from liability for making insurance payments. An insurance company’s right of cancellation will be extinguished one month after it learns the cause of the cancellation, or five years after the conclusion of the contract.

While insurance agents act on behalf of insurance companies, insurance brokers act on behalf of customers independent from insurance companies (buyer's agents).

Insurance contracts may be concluded verbally but, in practice, it is commonly done in writing so that the conditions of the contracts are clarified. The existence of insured benefits (economic benefits that may be disadvantaged by the occurrence of insured events) is required as a condition to effectuate a non-life insurance contract. The insured is the person to whom the insured benefit belongs.

The reason for the existence of insured benefits is to prohibit gambling and prevent moral hazards. However, this requirement for the existence of insured benefits tends to be applied fairly moderately and flexibly.

In non-life insurance, only the insureds may be the beneficiaries of an insurance contract. Insurance benefits are paid to the insureds and/or parties authorised by the insureds to receive the benefits.

This is not applicable in Japan.

It should be determined based on the content of the product whether such product is subject to Japanese regulation. Certain products may be subject to regulation as reinsurance products.

In June 2018, an interim report of the Financial System Study Group was published, indicating the need to consider a functional financial regulatory system. In this report, it was pointed out that "Credit guarantees, derivative transactions and insurance have functionally similar aspects. However, there are no special business regulations for credit guarantees, and engagement in derivative transactions business are subject to registration. On the other hand, insurance businesses are subject to license requirement and are required to obtain approval on each insurance product from the competent authorities".

It is possible that function-based regulations will be introduced in the future, and attention should be paid to future discussions.

This is not applicable in Japan.

There are no laws or regulations on how to interpret contracts specific to insurance contracts.

In general, the courts interpret insurance contracts objectively, taking into account their comprehensibility by average, reasonable customers. Nonetheless, the courts tend to recognise agreements between insurance companies and customers that differ from explicit policy conditions, taking into consideration the way in which insurance companies and customers negotiated and concluded their insurance contracts, and seek reasonable solutions while ordering compensation for damages.

At the time of solicitation of an insurance contract, the Insurance Business Act requires insurance companies to deliver documents (contract outline) containing the following items to fulfil their obligation to provide information:

  • the structure of the insurance policy/coverage;
  • matters concerning insurance benefits (including giving typical examples of payment conditions of insurance benefits and explaining cases where insurance benefits are not paid);
  • duration of the insurance policy;
  • the amount of insurance and other conditions for underwriting of insurance contracts;
  • the payment of insurance premiums;
  • cancellation of insurance contracts and refunds thereof;
  • cooling-off procedures;
  • matters concerning the notification to be made by the policyholder or the insured;
  • the timing of commencement of insurance liability;
  • the grace period for payment of insurance premiums; and
  • the invalidation and reinstatement of insurance contracts after their expiration.

This is not applicable in Japan.

This is not applicable in Japan.

Insurance disputes are generally resolved in district courts or summary courts, depending on the value of the dispute. There are no special courts for resolving commercial insurance disputes and therefore the same procedure is applicable to both consumer contracts and reinsurance contracts. In practice, a jurisdiction clause in an insurance policy determines which court will hear disputes in relation to the insurance policy.

See 9.1 Insurance Disputes Over Coverage.

Generally, a first hearing date is scheduled around one month after the filing of a lawsuit. It usually takes six months to one year to reach a judgment.

The losing party may appeal to the upper court based on any grounds if such party is not satisfied with the decisions of the court of first instance. There are two stages of appeal.

A foreign judgment is required to be recognised in Japanese courts. To be capable of recognition and enforcement, a foreign judgment must satisfy the requirements of Article 118 of the Code of Civil Procedure. Whether these requirements are satisfied will be determined by the court in an action for “execution judgment” under Article 24 of the Civil Execution Act.

This is not applicable in Japan.

The Arbitration Act provides that an arbitration agreement must be in writing but does not require any specific wording. Parties to the arbitration may not appeal to the courts from the decision of the arbitral tribunal. However, the Arbitration Act provides that the parties may file a petition to set aside the arbitral award to the court in some situations, such as invalidity of the arbitration award due to the limited capacity of a party.

Japan is party to the New York Convention, and arbitration awards received in the member countries can be enforced in Japan.

Insurance alternative dispute resolutions (ADRs) are common especially in the field of consumer contracts. An increasing number of insurance related disputes are resolved through ADRs.

Japan has not introduced the concept of punitive damages. Late payment interest is recoverable in respect of claims; 5% per annum for non-commercial claims and 6% per annum for commercial claims. A revision of those interest rates to 3% per annum with subsequent reviews every three years to reflect market interest rates will be introduced from 1 April 2020.

For non-life insurance, Article 24 of the Insurance Act provides that, where insured property is totally lost or destroyed, an insurer that has paid an insurance proceeds payment shall be subrogated to ownership and any other real right that the insured holds over the insured property, in accordance with the ratio of the amount of the insurance proceeds payment thus paid to the insured value (or the agreed insured value if there is any such amount).

Article 25 of the Act provides that, when an insurer has made an insurance proceeds payment, the insurer shall be subrogated with regard to any claim acquired by the insured due to the occurrence of any damages arising from an insured event up to the smaller of:

  • the amount of the insurance proceeds payment made by the insurer; or
  • the amount of the insured's claim.

In Japan, the emergence of fintech was, at first, most pronounced in the banking sector. Indeed, the Japanese government first responded to fintech by amending the Banking Act so that banks could own technology companies as their subsidiaries, which was previously restricted to some extent (the “Amended Banking Act”). The Amended Banking Act came into force on 1 April 2017.

Adoption of New Technologies

Japanese insurance companies are gradually adopting new technologies such as IoT (Internet of Things), Big Data and Artificial Intelligence to their services. For example, Tokio Marine & Nichido Anshin Life Insurance Co Ltd has introduced a medical insurance policy where an insured might obtain cash back of insurance fees if they walked certain average number of steps, daily. The insured would be required to use a wearable instrument to monitor their activities and record their health data.

Another example is Sony Assurance Inc’s automobile insurance, where an insured has a “driving counter” installed in their car to monitor the insured’s driving. If it shows safe driving on the part of the insured, the insurer will provide cash back toward the insurance fees.

Alliance with Tech Companies

Insurance companies alone may not be able to create new insurtech products because they do not have enough resources/knowledge to develop new technology. An alliance with tech companies or telecom companies is therefore necessary. Another question has been whether insurance companies are allowed to own tech companies or telecom companies as their subsidiaries to take full control of the new technologies.

In response, an amendment to the Insurance Business Act enacted in June 2020 allows insurance companies to own technology companies as their subsidiaries, similar to banks under the Amended Banking Act.

The Fintech Support Desk

The FSA regards the fintech trend quite positively. One example of such positive attitude of the FSA can be seen in the Fintech Support Desk, which was established to provide a streamlined process for fintech businesses. Indeed, the FSA appears to be watching developments regarding insurtech with a high degree of interest.

See 10.1 Insurtech Developments.

Cyber-attacks have come to pose a severe and present risk, which Japanese companies have to cope with. Even though countermeasures are being introduced, they can easily be rendered ineffective. The Ministry of Economy, Trade and Industry of Japan (the METI) issued the Cybersecurity Management Guideline, which clarifies that cybersecurity is a business challenge and that Japanese companies have to take appropriate protective actions.

To respond to such situations, insurance companies have developed insurance products to cover the costs of information leakage or damages caused by a cyber-attack. However, considering the survey conducted by the General Insurance Association of Japan in 2019 showing that only 6.9% of SMEs respondents have purchased cyber-insurance, the cyber-insurance market in Japan still has enough room to grow.

With advancements in autonomous car technology, it is being debated who should bear legal responsibilities in case of accidents involving self-driving cars. A project team of the General Insurance Association of Japan published a paper discussing legal responsibilities involving autonomous driving in June 2016.

In the paper, the project team gave its opinion that the current legal framework is basically applicable to level 3 autonomous driving, where an automated driving system performs entire driving tasks with the expectation that human drivers will respond appropriately to a driving system’s request to intervene. Tokio Marine & Nichido Fire Insurance Co Ltd has added protection to cover accidents arising from malfunctions in autonomous driving systems in order to provide prompt relief to victims of such accidents.

Increased longevity may affect the strategy of insurance companies. Recently, the Institute of Actuaries of Japan published the Standard Longevity Table 2018 (previously amended in 2007), indicating significant decreases of projected death rates. With this trend, it is reported that insurance companies will lower fees for life insurance by 5%-10% for newly entered insurance contracts. It is also reported that demand is gradually shifting away from life insurance to products covering living costs when the insureds become unable to work, reflecting increased longevity.

COVID-19

On 10 April 2020, as the impact of COVID-19 continued to expand, the FSA requested that the insurance industry consider a more flexible interpretation and application of policy conditions from the viewpoint of protecting policyholders, regardless of any precedents.

As of today, the insurance companies’ policy is to pay insurance benefits by taking that request into consideration. For example, insurance companies have paid hospitalisation benefits to COVID-19 patients with mild or no symptoms who were given treatment at lodging facilities or at home in order to secure the availability of the medical system to severely ill patients.

The Financial Services Agency’s view is that insurance companies should take measures to adopt the so-called "new lifestyles" to cope with the COVID-19 impact; thus, the Agency believes that it should supervise insurance companies by focusing on the issues critical to building a sound and sustainable business model for insurance companies (such as product design and risk management), as well as the development of accompanying solutions.

On 5 June 2020, a bill was passed revising the “Act on Sales, etc, of Financial Instruments” and renaming the Act as the “Act on Provision of Financial Services.” The new law is set to come into effect 18 months from the enactment of said bill, as a part of the legislation on cross-sectional financial services intermediaries.

New Intermediary Business Category

The new law introduces a new category of “Financial Services Intermediary Businesses,” a category which entails a registration system that allows for a one-stop mediation service in all financial areas for a single registration, covering banking, securities, insurance, and loans (ie, cross-sectional legislation for the provision of financial services).

Today, while the employment and the household arrangements have diversified, the progress of ICT has enabled the provision of various financial services online. In this context, the new law puts emphasis on allowing users of financial services more freedom of choice in obtaining financial services that satisfy their individual needs.

Belonging to Financial Institutions

It is not required to belong to a specific financial institution to start business of a financial services intermediary. However, a security deposit is mandatory to secure financial resources to pay potential compensation in the future. Furthermore, a financial services intermediary is not allowed to accept users’ assets, handle certain types of services, or concurrently run an insurance agency or a brokerage business.

Scope of Insurance Products

The scope of insurance products that can be handled by financial services intermediaries is yet to be defined by a cabinet order in the future. These developments should be followed closely, as the scope of these products will be critical in determining the impact of the “financial services intermediaries” as a new sales channel and a game changer in the insurance industry.

Insurance Brokers

Each individual insurer has to decide how to deal with financial services intermediaries and what attitude to adopt toward this new sales channel. The insurance sector already has a long-standing market player in the form of an insurance broker which is independent from insurers. To determine what stance to take toward financial services intermediaries, insurers are advised to analyse their own relationships with brokers, bearing in mind the different functions served by brokers and intermediaries.

General Principles of Customer-Centric Business Operation (Trend to Disclose Agency Fees)

On 30 March 2017, the Financial Services Agency published the “General Principles of Customer-Centric Business Operation”. If financial undertakers running a financial company attempt to adopt these general principles (although it is up to financial undertakers whether to adopt them, in practice, however, it is difficult for insurers to choose not to do so), they are required, for example, to develop and make public clear guidelines to achieve the customer-centric business operation and then regularly make public announcements on how their efforts in relation to such guidelines are progressing. These general principles contain an item that requires the disclosure of information relating to the “concrete contents (including fees received from third parties and other information) of any possible conflict of interest with a customer in connection with financial products or services to be sold, suggested or otherwise presented to the customer as well as the resulting impact on its trade and business”.

As a result, the question as to whether insurers or insurance agencies will end up publishing their agency fees has drawn considerable attention. Although at present nothing suggests that they will, many banking channels (financial institutions) have disclosed the agency fees relating to insurance products with strong investment characteristics on a voluntary basis since around the summer of 2016.

Impact of Amendment to the Civil Code on Liability Insurance

The amended laws of the Civil Code, which contain private general laws of Japan, were enacted on 26 May 2017 and publicly announced on June 2nd of the same year. The amended Civil Code has come fully into force as of 1 April 2020. Previously, a 5% statutory interest rate was adopted in the Civil Code. In the amended Civil Code, however, a fluctuating rate is applicable, in which the rate of 3% applies the first year and the subsequent rate is subject to change every three years on the basis of the short-term loan rate.

In the case of compensation for damages suffered in traffic accidents or similar events, the amount of interest accrued at a given point in time is deducted from the loss of prospective profits when the damages for death or secondary diseases are calculated. In civil matters, a statutory rate of interest was established by the Supreme Court of Japan and has been adopted. It is predicted that the lower rate effectuated by the amendment of the Civil Code will increase the amount of damages.

Note that the amended Civil Code makes it clear that the statutory rate of interest at the time of the emergence of the right to seek damages is adopted as the rate for interim interest deduction. After the enforcement of the amended Civil Code, it is expected that claims paid under damage liability insurance will increase and the management of non-life insurers will be affected by the amendment by, among other things, the necessity to raise insurance premiums.

Policy for Insurance Supervision

According to "JFSA priorities for July 2020-June 2021: Fight against COVID-19 and the development of a better post-COVID society", published by the Financial Services Agency on 31 August 2020, the policy of Insurance Supervision Administration for 2020 fiscal year is as follows:

Monitoring

Based on the results of monitoring during the last fiscal year, another monitoring will be conducted focusing on in-depth dialogues on the risk management system that supports a formulation and promotion of appropriate management strategies, the demonstration of governance functions, and other issues essential for the creation of a sustainable business model.

Natural disasters and IT

In particular, with regard to the response of each non-life insurer to natural disasters, from the viewpoint of economic recovery of the victims of a disaster, it is important that individual damage assessments and insurance benefit payments be conducted effectively and promptly; accordingly, each company has been making its own efforts, including the introduction of IT. Along with these operational issues, the FSA will promote dialogues and discussions with non-life insurers and relevant organisations such as the Japan Non-Life Insurance Association on how the insurance sector should function to prepare for large-scale natural disasters.

Group governance

With regard to group governance, including the management of overseas subsidiaries, in light of the international guidelines adopted by the International Association of Insurance Supervisors (IAIS) in November 2019, the guidelines for group supervision will be revised to stimulate sophistication of group governance and risk management according to the scale and risk profile of each insurance group. In particular, with regard to the overseas expansion of major insurers, in collaboration with foreign authorities, business management as well as ERM will be closely monitored by such means as information exchanges with relevant supervisory authorities through the Supervisory College.

ESR

With respect to economic value-based solvency regulations (ESR), etc, the government will, by taking account of the direction and discussion schedule set forth in the Report of the Expert Committee, make steady progress in preparing for a seamless transition to a fiscal soundness policy based on new solvency regulations through the implementation of domestic field tests and conducting a dialogue with a wide range of participants. The current financial indicators and regulations will also be continuously revised to contribute to appropriate internal management of insurers. Specifically, the optimal goal of achieving basic profits in consistency with economic value-based risk management will be discussed. In addition, based on the state of investment by each company and the interest rate environment in each country, the appropriateness of policy reserves for foreign currency-denominated insurance for which the amount of policy in force has been increasing is another topic that will be examined.

COVID-19

In addition, assuming that the recent developments will require insurers to respond to "new lifestyles" emerging with the aging of the society and the COVID-19 pandemic experience, the FSA will discuss with each company issues that need to be addressed to achieve a sound and sustainable business model, as well as analyse the progress of their responses. In particular, concerning the insurance industry where the traditional core business is retailing by face-to-face sales to a diverse range of policyholders, the FSA will engage in a dialogue on how the business management system should be organised, based on a customer-centric approach in both customer-handling procedures and internal operations. Further, monitoring and discussions will be conducted focusing on changes in business models, involving areas such as product design and risk management.

Chuo Sogo Law Office, P.C.

Hibiya Kokusai Building, 18th Floor
2-2-3 Uchisaiwai-cho, Chiyoda-ku
Tokyo 100-0011
Japan

+81 3 3539 1877

+81 3 3539 1878

nishikino_h@clo.gr.jp www.clo.jp
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Trends and Developments


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Mori Hamada & Matsumoto is among the country’s largest locally headquartered full-service firms. The firm has also established a strong international presence; it now has a presence across East Asia, having offices in Beijing, Shanghai, Singapore, Bangkok, Yangon and Ho Chi Minh City. The firm's insurance expertise encompasses insurance litigation, regulatory affairs, compliance, reinsurance, captive insurers, group restructurings, mergers and acquisitions, and financings. The firm provide solutions to clients engaged in global insurance markets.

Impact of the COVID-19 Pandemic

Emergency declaration

On 7 April 2020, the then prime minister, Shinzo Abe, issued an emergency declaration (the “Emergency Declaration”) to seven prefectures based on Article 32(1) of the Act on Special Measures for Pandemic Influenza and New Infectious Diseases Preparedness and Response. On April 16th, the Emergency Declaration was extended to all prefectures. On May 25th, the Emergency Declaration was lifted.

Impact on the insurance industry

The number of new contracts acquired by insurance companies significantly dropped from April to June, which included the Emergency Declaration period.

Many insurance companies took measures to protect the interests of their customers affected by COVID-19, such as by extending the grace period for paying premiums, providing reduction or relief of interest accrued from policyholder loans, and permitting proactive insurance payments.

Insurance Solicitation Using Web Conferencing Systems

With the ongoing pandemic, insurance solicitation using Zoom and other web-based conferencing systems has attracted more attention than ever before since it enables insurance solicitors and customers to visually communicate with each other from remote locations.

Although the Emergency Declaration has been lifted in Japan and insurers and insurance agencies have resumed their businesses, the government’s “new lifestyle” framework must be put into practice and thus the need for insurance solicitation using web conferencing systems may continue to increase.

Face-to-face or non-face-to-face solicitation?

Insurance solicitation using web conferencing systems may be discussed in terms of being conducted face-to-face or non-face-to-face.

The Insurance Business Act does not distinguish between these two methods, but they are specifically discussed in the Comprehensive Guidelines for Supervision of Insurance Companies (the “Supervisory Guidelines”), in which the applied viewpoints may differ depending on whether solicitation is conducted face-to-face or not.

However, since insurance solicitation using web conferencing systems has not been assumed in the past, it may be difficult to classify as either face-to-face or non-face-to-face in a consistent manner.

Therefore, when interpreting the Supervisory Guidelines, appropriate measures should be considered on a case-by-case basis in light of the contents and purposes of each discipline of the guidelines.

Document delivery procedures

Insurance solicitation using web conferencing systems does not differ from general insurance solicitation in that the same rules (eg, to provide information to customers and ascertain their intentions) are imposed on both forms of solicitation. Therefore, insurers must consider how to deliver important documents (eg, contract summaries and alert information as required by applicable laws and regulations) regardless of the form of solicitation.

Cybersecurity management

The Supervisory Guidelines primarily assume that sales of insurance products are conducted by means of mail ordering. The importance of cybersecurity management basically remains unchanged in the case of insurance solicitation using web conferencing systems. Therefore, a cybersecurity management system is considered necessary to be established by referring to these descriptions of the Supervisory Guidelines when, for example, customers’ personal and account information is inputted online.

Solicitation of elderly persons

The elderly must be carefully solicited, including consideration for the presence of relatives or multiple insurance solicitors. In the past, non-face-to-face solicitation was difficult to realise due to such considerations, but now it may be possible by using web conferencing systems.

On the other hand, compared with the younger generation, many elderly people are not necessarily familiar with using the internet. Thus, it is necessary to examine whether insurance solicitation using web conferencing systems is appropriate on a case-by-case basis.

Comment

The level of customer protection required by applicable laws and regulations does not differ between traditional insurance solicitation and that using web conferencing systems. Therefore, when establishing a system for the latter, it is important to not only consider the points mentioned above, but also to have a broad perspective of whether there is any substantial lack of customer protection compared with that under the conventional handling of insurance solicitation.

Impact of the Financial Services Intermediary Act on Insurers

On 5 June 2020, the Diet passed a bill to revise the Act on Sales, etc. of Financial Instruments to increase convenience and protect users of financial services, known as the Financial Services Intermediary Act. The bill, which is expected to be enacted by the end of 2021, will amend the Act and introduce a new financial services intermediary system.

Background

Until now, businesses that provide financial services (eg, banking, insurance and securities services) have been regulated under separate legislation. In order to carry out multiple financial intermediary services, multiple qualifications were required.

By the end of this year, however, the bill will enable intermediaries to mediate services in various fields, including insurance, by obtaining one registration, allowing those entities to act as one-stop shops for financial services.

In creating this new system, the Act on Sales, etc. of Financial Instruments, which until now mainly established civil rules concerning the sale of financial products, was renamed the Act on the Provision of Financial Services (APFS). The provisions regarding the financial services intermediary system will be established in this renamed act.

The financial services intermediary system was established in response to the growing need for financial services to be provided online. However, this system does not exclude face-to-face financial services intermediation.

Scope of operations that may be conducted as a financial services intermediary business

A “financial services intermediary business” is defined as a business that performs certain financial services, including insurance intermediary services.

Financial services that require highly specialised explanations for customers are excluded from the services that may be provided by a financial services intermediary business. The exact details are scheduled to be specified in a Cabinet order. For instance, insurance contracts denominated in foreign currencies are expected to be excluded from the subject of intermediary services.

Financial services intermediary registration system

Registration with the prime minister is required for conducting any financial services intermediary business (Article 12 of the APFS). Parties that have obtained this registration are called “financial services intermediaries” (Article 11, paragraph 6 of the APFS).

The registration application documents must describe the type of business (Article 13(1), Item 4 of the APFS). In other words, when registering as a financial services intermediary business, it is not essential to perform all types of intermediary businesses (ie, deposit intermediary business, insurance intermediary business, securities brokerage business and money lending intermediary business); rather, it is sufficient to list only the types of business conducted. If a registered financial services intermediary intends to change the types of business conducted (or add any new types of business), a change of registration is required (Article 16, paragraph 1 of the APFS).

Existing intermediaries (eg, insurance agents and brokers) and financial services intermediaries may not have both qualifications in the same field. This is because customers may be confused as to which position and under what regulations the intermediary operates. Therefore, if the financial services intermediary later qualifies as an existing intermediary, it loses the qualification to work in the relevant business field as a financial services intermediary.

Regulations imposed on financial services intermediaries

The regulations imposed on financial services intermediaries consist of:

  • common regulations that apply regardless of business type; and
  • regulations that apply according to business type.

Common regulations that apply regardless of business type under the APFS include the following:

  • restrictions on the use of business names (Article 19);
  • display of signs (Article 20);
  • prohibition of name lending (Article 21);
  • security deposits (Articles 22–23);
  • obligation of good faith (Article 24);
  • provision of information (Article 25);
  • measures concerning business operations (Article 26);
  • prohibition of accepting deposits (Article 27); and
  • obligation to enter into a contract with a designated dispute resolution agency (Article 28).

The following regulations stipulated in the Insurance Business Act apply mutatis mutandis to insurance intermediary services:

  • commercial law (provisions for brokerage business) mutatis mutandis (Article 293);
  • obligation to provide information (Article 294, paragraphs 1 and 2);
  • obligation to know and confirm customers’ needs (Article 294-2);
  • prohibition of self-contracting (Article 295);
  • prohibited acts (Article 300, paragraph 1); and
  • cooling-off rights (Article 309, paragraphs 7, 8 and 10).

Practical impact on insurers

Insurers (including foreign and small-amount short-term insurers) are expected to have a financial services intermediary to mediate insurance contracts with customers.

Since financial services intermediaries do not belong to any specific financial institutions (ie, insurers), the insurer is not obligated to supervise the financial services intermediary, and it will not be automatically liable for any damages to the customer caused by the financial services intermediary. In that sense, financial services intermediaries are more similar to insurance brokers, who are independent of insurers, than they are to insurance agents, who are under the guidance and supervision of insurers.

In addition, the obligation to provide information regarding financial services intermediaries (Article 25 of the APFS) includes the obligation to disclose the fees of insurance intermediaries. Specifically, Article 25, paragraph 2 states that: "A financial services intermediary, when requested by a customer, receives the fees, remuneration, and other consideration received by the financial services intermediary for the financial services intermediary business."

While this provision helps to make any incentives transparent, the fees required to be disclosed include those paid by the insurer to the financial services intermediary. Insurers should carefully take this rule into consideration when they outsource the mediation of insurance contracts to financial services intermediaries.

Practical suggestions for insurance agents and brokers

Insurance agents and brokers may not register as financial services intermediaries for insurance intermediary businesses.

Rather, financial services intermediaries may be registered for businesses other than insurance intermediary businesses (eg, deposit intermediary business, securities brokerage business or money lending intermediary business). Qualifications were required in the past since permission as a bank agent and registration as a financial instruments intermediary were required in order to carry out these operations. However, in the future, it will only be necessary to register as a financial services intermediary to carry out such operations.

As a result, insurance agents and brokers may provide a wide variety of financial services, including products other than insurance, as one-stop shops by registering as financial services intermediaries.

Revision of the Supervisory Guidelines for Insurance Group Supervision

On 30 October 2020, the Financial Services Agency of Japan (FSA) published a draft for revising the Supervisory Guidelines to establish a new framework for supervising insurance groups based on the supervisory framework for Internationally Active Insurance Groups (IAIGs) adopted by the International Association of Insurance Supervisors (IAIS).

In the “Monitoring Reports of IAIGs, etc.” published on the same date, the FSA identifies four insurance groups (Dai-ichi Life Holdings, Inc., Tokio Marine Holdings, Inc., MS&AD Insurance Group Holdings, Inc. and Sompo Holdings, Inc.) as IAIGs in Japan.

Final Report by the Advisory Council on the Economic Value-Based Solvency Framework

On 26 June 2020, the FSA published the final report drafted by the Advisory Council on the economic value-based solvency framework.

The Advisory Council discussed the introduction of the economic value-based solvency regulation in Japan, as well as the modality of an upgraded supervisory framework under the new regulatory framework. While this report refers to the specifics of the Insurance Capital Standard (ICS), the focus here is the domestic regulatory and supervisory framework.

Mori Hamada & Matsumoto

Marunouchi Park Building
2-6-1 Marunouchi
Chiyoda-ku Tokyo 100-8222
Japan

+81 3 5220 1800

+81 3 6266 8635

eriko.ishihara@mhm-global.com www.mhmjapan.com
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Law and Practice

Authors



Chuo Sogo Law Office, P.C. specialises in the following insurance matters: legal advice and opinions relating to insurance laws and regulations; incorporations, mergers and acquisitions, company restructurings and liquidations for insurance companies; and litigation, mediation, ADR and other dispute resolutions involving insurance claims and insurance products. Since 2005, the firm has been loaning its attorneys to work at the Financial Service Agency (FSA) – an agency overseeing the insurance sector in Japan. This experience has given Chuo Sogo insights into and a better understanding of the workings of this complex governmental agency, allowing it to better deal with complex insurance-related regulations to the benefit of its clients.

Trends and Development

Author



Mori Hamada & Matsumoto is among the country’s largest locally headquartered full-service firms. The firm has also established a strong international presence; it now has a presence across East Asia, having offices in Beijing, Shanghai, Singapore, Bangkok, Yangon and Ho Chi Minh City. The firm's insurance expertise encompasses insurance litigation, regulatory affairs, compliance, reinsurance, captive insurers, group restructurings, mergers and acquisitions, and financings. The firm provide solutions to clients engaged in global insurance markets.

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