Insurance & Reinsurance 2024

Last Updated January 23, 2024

Japan

Law and Practice

Authors



Chuo Sogo Law Office specialises in the following insurance matters: legal advice and opinions relating to insurance laws and regulations; incorporations, M&A, company restructurings and liquidations for insurance companies; and litigation, mediation, ADR and other dispute resolution remedies related to insurance claims and insurance products. Since 2005, the firm has been loaning its attorneys to work at the Financial Services Agency (FSA) – an agency overseeing the insurance sector in Japan. This experience has given Chuo Sogo insight 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 the 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 licences.

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 (the “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. 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, 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 licences mentioned above. Foreign companies planning to enter through their branch offices must obtain a foreign insurer’s licence.

During the licence application procedure, the “basic documents” (articles of incorporation, business plan, standard policy provisions and documents showing the method to calculate insurance premiums and policy reserves) must 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 (the “Flexible Provision System”).

Conducting Other Business and Owning 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 the 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 appoint an insurance administrator with a predetermined actuary’s licence to be 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. In March 2016, the EU announced the 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 the Economic Value-Based Solvency Framework, which was established at the FSA, published a report in light of which the FSA is currently deliberating the Economic Value-Based Solvency Regulation ahead of its implementation in 2025. So far, the FSA has published the progress of these deliberations in The Tentative Decisions on the Fundamental Elements of the Economic Value-Based Solvency Regulations dated 30 June 2022, and An Update on the Deliberations on the Economic Value-Based Solvency Regulations for Finalising the Relevant Standards dated 30 June 2023.

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, this 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 licence 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 licensed 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 to enable policyholders 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 licensed 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 or 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 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 1 August 2022, 15 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). The 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 information 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 licensed 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 this 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 long-standing characteristic feature of Japanese selling channels is for life insurance companies to utilise a large number of salespeople who belong to those companies and are hence categorised as “employees of a life insurer” described above (mostly female employees known as “Sei-ho ladies”) among their overall sales staff. 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 made by agencies, which account for 90.5% of total sales 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 8.6% and 0.9% respectively.

Dedicated insurance agencies account for 18% (based on the number of entities involved) of all non-life insurance agencies. Around 55% of non-life insurance agencies which are involved in another business are automobile dealers and repair shops, and around 9% of them are entities within the real estate industry – with both figures standing at high percentage rates.

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 other insurance agents.

There are only 56 insurance brokers in Japan, which is comparatively low. While most of them focus on large-scale corporate insurances, handling products for individual 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, they essentially 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 mandatory provision unilaterally imposed (ie, a mandatory provision that voids agreements entered into in contravention of that provision and thus adversely affecting policyholders); however, the provision is not applicable to the following types of non-life insurance:

  • maritime insurance contracts;
  • aviation insurance contracts;
  • nuclear energy insurance contracts; and
  • non-life insurance contracts for the coverage of damages arising from business activities conducted by a juridical person or some other organisation or an individual who operates a business.

Therefore, for these exceptional contracts, it is possible to stipulate special provisions. 

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, they are committed to writing so that the conditions of the contracts are clearly memorialised on paper. 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, to meet the convenience of everyday operations, 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.

From the viewpoint of protecting policyholders, the mission of the Insurance Act has been, in large measure, to impose a duty on insurers to insert certain mandatory provisions into the insurance contract (ie, provisions whose absence would ipso facto adversely affect policy holders and consequently render the insurance contract void). However, in view of the fact that unilaterally imposed mandatory provisions are not applicable to the following types of non-life insurance: (i) maritime insurance contracts, (ii) aviation insurance contracts, (iii) nuclear energy insurance contracts, and (iv) non-life insurance contracts (including reinsurance contracts) for the coverage of damages arising from business activities conducted by a juridical person or some other organisation or an individual who operates a business, for these exceptional contracts, it is possible to separately stipulate special provisions. 

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

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;
  • the matters concerning insurance benefits (including giving typical examples of payment conditions of insurance benefits and explaining cases where insurance benefits are not paid);
  • the duration of the insurance policy;
  • the amount of insurance and other conditions for underwriting of insurance contracts;
  • the payment of insurance premiums;
  • the cancellation of insurance contracts and refunds thereof;
  • the cooling-off procedures;
  • the matters concerning the notification to be made by the policyholder or the insured;
  • the timing of commencement of the 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 if it 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 regarding 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 a party to the New York Convention; arbitration awards received in the member countries can be enforced in Japan.

Insurance alternative dispute resolution (ADR) is common, especially in the field of consumer contracts. An increasing number of insurance-related disputes are resolved through ADR.

Japan has not introduced the concept of punitive damages. Late payment interest is recoverable in respect of claims. Before 31 March 2020, the rates for late payment interest were 5% per annum for non-commercial claims and 6% per annum for commercial claims. As of 1 April 2020, the amendment of the Civil Code became effective and a new structure for late payment interest was introduced, ie, 3% per annum with subsequent reviews every three years to reflect market interest rates. The current rate of 3% per annum is effective from April 2023 to March 2027.

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. In 2021, the Insurance Business Act was amended in the same way for insurance companies to own subsidiaries that provide IT and other technology to enhance insurance activities and benefit the insurance companies’ customers.

Adoption of New Technologies

Japanese insurance companies are gradually adopting new technologies such as IoT (internet of things), big data and AI 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 on the insurance fees if they walked a certain average number of steps on a daily basis. The insured would be required to use wearable technology 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 towards the insurance fees.

The Fintech Support Desk

The FSA regards the fintech trend quite positively. One example of the positive attitude of the FSA is 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 (METI) issued the Cybersecurity Management Guideline, which establishes 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 unauthorised disclosures of information or damages caused by a cyber-attack. The survey conducted by the General Insurance Association of Japan in 2022 shows growing recognition of cyber-risk as an important management issue. However, notwithstanding the fact that only 23.7% of the survey respondents that said cyber-risk was an important concern have purchased cyber-insurance, the cyber-insurance market in Japan still has significant room to grow.

With advancements in autonomous car technology, the question of who should bear legal responsibility in the case of accidents involving self-driving cars is being debated. The Study Group on Liability for Damages in Autonomous Driving that was established by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) published its report in March 2018. In the report, the Study Group concluded that, in the transition period where autonomous technology from level 0 to level 4 exist intermixedly, while drivers should basically bear legal responsibility for the damage arising from car accidents, it is appropriate to establish a framework for insurance companies to recover from automobile manufacturers effectively.

Japanese insurance companies have commenced to provide protection for 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.

There have been but few significant legislative or regulatory developments in the field of insurance and reinsurance during the last two years.

On 29 August 2023, the FSA announced “The JFSA Strategic Priorities July 2023–June 2024.” According to these JFSA Strategic Priorities, the policy on administering insurance supervision for fiscal year 2023 can be summarised as follows.

  • Apropos of the two recent major misconduct cases in the non-life insurance industry, namely the formation of an insurance premium cartel among non-life insurers participating in the bidding for a coinsurance contract and the insurance fraud scandal of a major insurance agency in the automotive line of business, the FSA will conduct a thorough investigation to uncover the whole picture and determine causes of the misconducts. In cases where a problem is found in terms of the protection of insurance policyholders, the FSA will then apply strict measures based on the applicable laws and regulations, and will launch an initiative to develop and implement effective measures to prevent recurrence.
  • In view of the change in medium- and long-term business climate, such as the aging society, intensifying natural disasters and the shrinking automobile insurance market, insurance companies are required to build sustainable business models by streamlining their business operations through digitalisation and by developing products catering to the changing customer needs.   
  • As the insurance companies continue to expand their business overseas or establish subsidiaries, it is important that they enhance the sophistication of their group governance on a global basis. The FSA will facilitate the steady progress of these initiatives through dialogue, in co-operation with overseas authorities. 
  • With regard to the financial soundness of insurers including the performances of their asset management, the FSA will continue monitoring with an eye on the financial market movements.
  • In addition, with regard to the economic value-based solvency regulations, the FSA will conduct a specific examination to achieve the seamless implementation of those regulations.
  • With regard to natural disasters, due to their high frequency and severity, the insurance payouts have increased and the fire insurance rates are rising. In this context, in order to have non-life insurers more appropriately fulfil their function as insurance for natural disasters, the FSA will encourage non-life insurers to enhance their enterprise risk management (ERM), review their insurance coverage and premium rates considering the customer needs and actual risks, and take actions to support disaster prevention and mitigation. Furthermore, the FSA will work with local financial bureaux to promote non-life insurance industry’s efforts aimed to enhance customer-oriented business operations.
  • With regard to life insurance companies, in light of the recurrent misconduct by their in-house sales representatives, the FSA will work with the life insurance association to give them follow-up advice with a view to upgrading their systems for managing sales representatives. Moreover, the FSA will promote the mode of private insurance solicitation that involves knowledge of the public insurance system.       
  • With regard to small-amount and short-term insurance providers, the FSA will work with local finance bureaux to enhance the monitoring methods in light of the revised JFSA Strategic Priorities. The FSA will also continue to encourage small-amount and short-term insurance providers to effectively manage their business to ensure financial strength and appropriateness of their business operations.   
Chuo Sogo Law Office

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


Authors



Mori Hamada & Matsumoto (MHM) is one of the largest full-service Tokyo-headquartered international law firms. The firm has also established a strong international presence; in addition to a presence across East Asia and South-East Asia, having offices in Beijing, Shanghai, Singapore, Bangkok, Yangon, Vietnam and Jakarta, it opened a new office in New York in 2023. The firm's insurance expertise encompasses insurance litigation, regulatory affairs, compliance, reinsurance, captive insurers, group restructurings, M&A and financing. The firm provides solutions to clients engaged in insurance markets globally.

New Insurance Solvency Regime

Introduction of economic value-based solvency regulations in Japan

Japan will introduce economic value-based solvency regulations in 2025. Under the new regulations, ESR (economic value-based solvency ratio), as an indicator of the financial soundness of insurers, will be calculated by assessing the assets and liabilities of insurers on an economic value basis. The Japan Financial Services Agency (JFSA) is preparing to align the implementation of the regulations in 2025 with the scheduled introduction of the ICS (Insurance Capital Standard) agreed by the IAIS (International Association of Insurance Supervisors). Since the JFSA established the Advisory Council on the Economic Value-based Solvency Framework (the “Advisory Council”) in 2019, some important reports have been issued, including the Advisory Council on the Economic Value-based Solvency Framework: Final Report (26 June 2020) (the “Final Report”). This article illustrates the features of the regulations and some issues on reinsurance related to the regulations.

Features of the new solvency regulations

According to the Final Report, ESR will be designed as a standard to

  • assess the economic value of an insurer’s balance sheet;
  • identify the amount of risks (required capital) by measuring potential losses in economic value under certain stress scenarios; and
  • assess the adequacy of capital (qualifying capital resources) against the capital requirement, by reference to the ICS.

The JFSA plans to set:

  • the Prescribed Capital Requirement (PCR) which initiates formal supervisory intervention by the JFSA; and
  • the Minimum Capital Requirement (MCR) where the strongest supervisory actions could be taken, such as suspension of an insurer’s operations.

The Final Report emphasises the effectiveness of the economic value-based approach in risk management given the business model of insurers. It expects the new approach to enable insurers to assess their solvency position in a forward-looking manner by comparing their net asset value using current assumptions with the economic value of their net assets under various stress scenarios. In addition, with the economic value-based approach, the Final Report looks to sophisticated asset-liability management (ALM) that appropriately reflects the durations and cash flow structures of both sides of the balance sheet, and enhanced product design and profit management activities that take into account the balance between risk and return.

According to the Final Report, the Advisory Council is concerned that, if the new regulations were to be a mechanical and uniform regulation based solely on the level of ESR, they could cause unintentional and harmful effects. Therefore, the Final Report proposes that the JFSA aim for a more holistic prudential policy that also considers the internal management of insurers, reflecting the concept of “three pillars”, adopted in Solvency II in the EU, as follows.

  • Pillar I (solvency regulation): establishes a common standard of solvency ratio and framework of supervisory interventions, which functions as a backstop to protect policyholders. 
  • Pillar II (risk management and supervisory review): covers risks that are not fully captured in Pillar I and establishes a supervisory review on insurers’ risk management frameworks that facilitate enhancement of their risk management practices.
  • Pillar III (disclosure): facilitates dialogue between insurers and external stakeholders that improves corporate governance and enhances discipline in insurance companies through external scrutiny.

Currently, Japanese insurers and the JFSA are mainly focusing on Pillar I, especially the calculation of the standard model. However, in view of the scheduled implementation in 2025, other potential issues that may need to be addressed in the regulations should also be considered. For example, governance for the internal validation structure of ESR is important. The JFSA notes the need for a mechanism that ensures the appropriateness of the overall ESR calculations, in order to ensure the reliability and robustness of the ESR regime given that insurers are often required to make judgements and estimates on their own in the valuation of insurance liabilities and the use of internal models to calculate the ESR. Another issue is reinsurance, as discussed below.

The impact of new solvency regulations on reinsurance practice

Due to the introduction of economic value-based solvency regulations, many Japanese insurance companies, especially life insurance companies, are considering entering into new reinsurance agreements, which are sometimes called “block reinsurance” or “funded reinsurance”, with reinsurers. ESR can be profoundly affected by fluctuations in interest rates especially when an insurer has existing blocks of insurance contracts with high long-term interest rates. One solution which insurance companies are considering to address the new regime is entering into such a reinsurance agreement.

Under the Insurance Business Act of Japan (IBA), “insurance business” includes any business that receives insurance premiums in exchange for the agreement to compensate someone for damages caused by uncertain events. This definition is broad enough to capture reinsurance businesses. Generally, an insurance business must be licensed. The exception to this licensing requirement is a reinsurance transaction carried out “offshore” (ie, outside Japan) as it is exempted from regulations on overseas direct insurance. If a reinsurer operates a “(re)insurance business” on an “offshore” basis (ie, it carries out all underwriting, claims handling, contract negotiations and other activities from outside Japan and does not utilise its own employees or agents to conduct any such activities in Japan), then it is not required to obtain an insurance business licence under the IBA and, thus, is not subject to the supervision of the JFSA, any regulatory (including reporting) obligations or any capital requirements regardless of the amount of business it conducts with Japanese cedants.

However, cedants must pay attention to regulatory requirements for them to obtain credit for reinsurance on their financial statements. Licensed cedants (insurers) in Japan must hold policy reserves for the policies they have insured. However, there is an exemption for policies that have been reinsured, which exemption is available without limitation for reinsurance transactions concluded by licensed reinsurers in Japan. Foreign reinsurers without a licence in Japan may also invoke this exemption but only to the extent that the reinsurance would not impair the financial soundness of the cedants considering the foreign reinsurer’s businesses and financial conditions. There is no bright-line test based on specific monetary thresholds or limits under the IBA; however, if, for example, the maximum reinsurance payment is less than 1% of the total assets of the cedant and there is no concern that the foreign reinsurer would fail to make the reinsurance payments due to insolvency or other reasons, then this exemption may be invoked according to the Supervisory Guidelines for Insurers published by the JFSA. Japanese insurance companies (cedants) may ask a foreign reinsurer for information, materials and other evidence regarding the foreign reinsurer’s businesses and financial conditions from this perspective.

Key Supervisory Matters Illustrated by the JFSA in the “Insurance Monitoring Report 2023”

Since 2021, the JFSA has been publishing the “Insurance Monitoring Report” on an annual basis. The JFSA illustrates some key supervisory matters in the report. Although the key supervisory matters have generally remain unchanged since 2021, developments in some areas are becoming apparent, as evidenced in the “Insurance Monitoring Report 2023.”

Business models

The JFSA recognises the need for insurers to build sustainable business models through efficient operations that leverage digitalisation and product development to meet changing customer needs and business environments, such as a declining birth rate and aging population, more frequent and severe natural disasters, and a shrinking automobile insurance market. The JFSA encourages steady progress in these efforts through dialogue with insurers.

Responding to more frequent and severe natural disasters

In recent years, large-scale natural disasters such as typhoons and floods have become more frequent, and the JFSA acknowledges that related insurance claims continue to increase. The JFSA believes that it is important for non-life insurers to take measures to address this, including having Catastrophe Loss Reserve and reinsurance arrangements, and to establish a system to ensure prompt insurance payments.

Financial soundness

The JFSA takes the view that Japanese insurers generally maintain a sound financial base and the financial system is generally stable. However, there are some uncertainties surrounding the financial markets due to trends in the global economy and financial environment. Therefore, the JFSA will continue to monitor the financial soundness of insurers, including their asset management businesses.

Group governance

Major insurance groups, in particular, have made overseas business development an important part of their business strategy and are increasingly forming insurance groups that include overseas subsidiaries. Under these circumstances, the JFSA believes that it is important to strengthen the management and risk management systems not only of individual companies, but also of the group as a whole, and to enhance group governance.

Enhancement of sales staff management systems

The sales staff channel of life insurers continues to experience ongoing inappropriate incidents, including monetary fraud, so the challenge continues to be the development and establishment of an effective management system. In February 2023, the Life Insurance Association of Japan (LIAJ) published “Focus Points for Further Upgrading the Compliance Risk Management System of the Sales Staff Channel”, which outlines principles and examples of initiatives that insurers should take into consideration when further upgrading the compliance risk management system of their sales staff channel. Along with this, the JFSA has urged insurers to develop a corporate risk culture to realise a strong sales staff management system. 

Enhancement of insurance agent management systems 

In addition, life insurance agents, together with the sales staff, have become a major channel; non-life insurance agents also continue to be a major channel accounting for the majority of sales by non-life insurers. As such, insurance agents play an important role as a link between customers and insurers in both life and non-life insurance and, therefore, the JFSA considers it necessary to promote more sophisticated supervision of insurance agents. In 2023, the JFSA conducted interviews with 84 insurance agents and found that there were a number of insurance agents with inadequate cybersecurity measures, and that further progress was needed in addressing this issue.

Insurance solicitation by providing information about public insurance

In order for households to choose insurance products that are not excessive or insufficient, the JFSA believes that it is important to understand the coverage provided by public insurance and to purchase appropriate private insurance. From this perspective, insurance companies and insurance agents are encouraged to provide insurance services with the public insurance system in mind to ensure customer-oriented business operations.

Foreign currency-denominated insurance

Sales of foreign currency-denominated insurance, mainly through agents of banks and other financial institutions, have increased, partly due to the recent sharp depreciation of the yen and rise in overseas interest rates. In conjunction with this, there are signs of change in the number and incidences of complaints, which had been on a downward trend in recent years. To curb complaints, the JFSA believes that it is important to continue ensuring customer-oriented operations, such as careful promotion based on the compatibility of customer characteristics with insurance product characteristics. In 2023, the JFSA compiled and analysed the figures reported to the JFSA on comparable common KPIs among the sales companies of foreign currency-denominated insurance. The JFSA notes that only a few insurance agencies other than financial institution agencies are considering introducing comparable common KPIs but expects to see progress in their efforts.

Introduction of Best Interest Obligation by New Legislation

On 20 November 2023, the Diet enacted the “Act for the Partial Revision of the Financial Instruments and Exchange Act” (the “Revised Act”). While the Revised Act covers diverse matters, one aspect of the law that has attracted attention for its impact on the financial industry, including the insurance industry, is the Best Interest Obligation (ie, the obligation to conduct business in good faith and in a fair manner, taking into consideration the best interests of financial service customers, who are the ultimate beneficiaries of the business). The foregoing “duty of best interests”, which was Principle 2 of the “Principles for Customer-Oriented Business Conduct” (the “Principles”) formulated by the JFSA in 2017, will be a legal obligation.

The JFSA adopted the Principles as a principles-based approach, rather than a rule-based one. Specifically, the JFSA has called on financial business operators to accept the Principles and has encouraged them to proactively provide better financial products and services. However, approximately six years after the formulation of the Principles, the Task Force on Customer-Oriented Business Conduct in the Financial System Council of Japan (the “Task Force”) assessed the current efforts of financial business operators to provide customer-oriented products and services as “halfway complete”, pointing out:

  • the issues related to product origination and selection, the nature of explanations and proposal methods; and
  • that many financial business operators have not adopted the Principles.

Finally, the Task Force, referring to the Regulation Best Interest of the US Securities and Exchange Commission (SEC), proposed that the JFSA encourage financial business operators to make more effort to serve the best interests of customers and beneficiaries in line with the Principles by, for example, imposing a legal duty on all financial business operators that they conduct business in good faith and in a fair manner.

The Revised Act provides for a wide range of financial business operators to be subject to the Best Interest Obligation. As for the insurance industry, insurers, insurance agents, insurance brokers, and their officers and employees, are all subject to that obligation. The Task Force’s report, however, implied that the obligation should not be the same for all financial businesses, but should be determined on an individual basis according to the specific circumstances of each financial business operator, such as its business type and business model. Thus, financial business operators should keep a close watch on future developments surrounding the Best Interest Obligation.

Mori Hamada & Matsumoto

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Chiyoda-ku Tokyo
100-8222
Japan

+03 6266 8735

+03 6266 8635

kazuo.yoshida@mhm-global.com www.mhm-global.com
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Law and Practice

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Chuo Sogo Law Office specialises in the following insurance matters: legal advice and opinions relating to insurance laws and regulations; incorporations, M&A, company restructurings and liquidations for insurance companies; and litigation, mediation, ADR and other dispute resolution remedies related to insurance claims and insurance products. Since 2005, the firm has been loaning its attorneys to work at the Financial Services Agency (FSA) – an agency overseeing the insurance sector in Japan. This experience has given Chuo Sogo insight 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.

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Mori Hamada & Matsumoto (MHM) is one of the largest full-service Tokyo-headquartered international law firms. The firm has also established a strong international presence; in addition to a presence across East Asia and South-East Asia, having offices in Beijing, Shanghai, Singapore, Bangkok, Yangon, Vietnam and Jakarta, it opened a new office in New York in 2023. The firm's insurance expertise encompasses insurance litigation, regulatory affairs, compliance, reinsurance, captive insurers, group restructurings, M&A and financing. The firm provides solutions to clients engaged in insurance markets globally.

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