Japan's Insurance Industry

During the heydays of the 80's and the first half of 90's, like rest of its economy, Japan's insurance industry was growing as a juggernaut. The sheer volume of premium income and asset formation, sometimes comparable with even the mightiest U.S.A. and the limitation of domestic investment opportunity, led Japanese insurance firms to look outwards for investment. The industry's position as a major international investor beginning in the 1980's brought it under the scanner of analysts around the world.

The global insurance giants tried to set a foothold in the market, eyeing the gargantuan size of the market. But the restrictive nature of Japanese insurance laws led to intense, sometimes acrimonious, negotiations between Washington and Tokyo in the mid-1990s. The bilateral and multilateral agreements that resulted coincided with Japan's Big Bang financial reforms and deregulation.

Building on the outcome of the 1994 US-Japan insurance talks, a series of liberalization and deregulation measures has since been implemented. But the deregulation process was very slow, and more often than not, very selective in protecting the domestic companies interest and market share. Although the Japanese economy was comparable with its counterpart in USA in size, the very basis of efficient financial markets - the sound rules and regulations for a competitive economic environment - were conspicuously absent. And its institutional structure was different, too, from the rest of the developed countries.

The kieretsu structure - the corporate group with cross holdings in large number of companies in different industries - was a unique phenomenon in Japan. As a result, the necessary shareholder activism to force the companies to adopt optimal business strategy for the company was absent. Although initially touted as a model one in the days of Japan's prosperity, the vulnerability of this system became too evident when the bubble of the economic boom went burst in the nineties. Also working against Japan was its inability to keep pace with the software development elsewhere in the world. Software was the engine of growth in the world economy in the last decade, and countries lagging in this field faced the sagging economies of the nineties.

Japan, the world leader in the "brick and mortar" industries, surprisingly lagged far behind in the "New World" economy after the Internet revolution. Now Japan is calling the nineties a "lost decade" for its economy, which lost its sheen following 3 recessions in the last decade. Interest rates nose-dived to historic lows, to thwart the falling economy - in vain. For insurers, whose lifeline is the interest spread in their investment, this wreaked havoc. Quite a few large insurance companies went bankrupt in the face of "negative spread" and rising volume of non-performing assets. While Japanese insurers largely have escaped the scandals afflicting their brethren in the banking and securities industries, they are currently enduring unprecedented financial difficulties, including catastrophic bankruptcies.

Institutional Weaknesses

The Japanese market is a gigantic one, yet it is comprised of only a few companies. Unlike its USA counterpart, in which around two thousand companies are fiercely competing in the life segment, Japan's market is comprised of only twenty-nine companies classified as domestic and a handful of foreign entities. The same situation prevailed in the non-life sector with twenty-six domestic companies and thirty-one foreign firms offering their products. So, consumers have far fewer choices than their American counterparts in choosing their carrier. There is less variety also on the product side. Both the life and non-life insurers in Japan are characterized by "plain vanilla" offerings. This is more apparent in automobile insurance, where, until recently premiums were not permitted to reflect differential risk, such as, by gender, driving record etc. Drivers were classified in three age groups only for purposes of premium determination, whereas US rates long have reflected all these factors and others as well.

The demand varies for different types of products, too. Japanese insurance products are more savings-oriented. Similarly, although many Japanese life insurance companies offer a few limited kinds of variable life policies (in which benefits reflect the value of the underlying financial assets held by the insurance company, thereby exposing the insured to market risk), there are few takers for such policies. At ¥100=$1.00, Japanese variable life policies in force as of March 31, 1996 had a value of only $7.5 billion, representing a scant 0.08 percent of all life insurance. By contrast, American variable life policies in force as of 1995 were worth $2.7 trillion, roughly 5 percent of the total, with many options, such as variable universal life, available.