Japan's New Insurance Frontier

By Banham, Russ | Risk Management, March 1995 | Go to article overview

Japan's New Insurance Frontier


Banham, Russ, Risk Management


In the new risk management era, Japan emerges as an expanding market for foreign insurers.

The liberalization of Japan's $320 billion insurance market is underway, stimulated by an awakening Japanese corporate interest in risk management. The devastating Great Hanshin Earthquake this past January and its enormous and tragic consequences have starkly demonstrated Japan's need for foreign insurance capacity and risk management expertise. Besides the earthquake, two historic events - a bilateral insurance trade agreement between the United States and Japan, and a new Japanese insurance law expected to be approved by Parliament in 1995 - will open Japan's lucrative insurance market more fully to foreign insurers and brokers.

The process of market liberalization, however, will be gradual. "If past is prologue, then don't expect instant gratification," says Michael B. Smith, former deputy U.S. trade representative in the Carter and Reagan administrations and currently the president of SJS Advance Strategies, a Washington, D.C.-based consulting group. "Pace is relative, and in Japan, that means slow." U.S. trade and insurance observers, nevertheless, are sanguine that Japan's government is serious about injecting competition into its system of insurance, and that Japanese corporations back the moves.

Japan is not a closed market per se. Nearly a dozen U.S. insurers have operated in Japan since the late-1940s, and the companies' business has been profitable. These firms, for the most part, have been isolated to niche-playing in the so-called "Third Area." This sphere of business basically comprises the development and sale of specialty life insurance products, such as medical, hospital, nursing care and "dread disease" insurance. In the 1992 to 1993 fiscal period, the Third Area accounted for about one-third of total activity by U.S. insurers, roughly $4.4 billion in premiums written.

While these results look good in absolute terms, they dim when compared to the Japanese market as a whole, representing a paltry 1.5 percent of total private-sector volume. Japan is the world's second largest insurance market after the United States, yet foreign insurers - 33 currently are licensed - control only 3 percent of the market, about $8.8 billion in premiums. The lion's share of business is written by 25 licensed Japanese insurers, of which four handle approximately 60 percent of total written premiums. The companies, Tokio Fire & Marine, Yasuda Marine & Fire, Sumitomo and Mitsui, are among the largest insurance carriers in the world.

Leveling the Field

The historic agreement reached by U.S. and Japanese trade officials in October 1994 calls for three stages of Japanese insurance market deregulation. The first stage, already underway, establishes a "file and use" system of product and rate approval for certain coverages. It marks a significant change from the previous system of "prior approval," an inordinately labyrinthine and lengthy process in Japan.

The second stage is expected to occur once Japan's parliament, the Diet, votes on a new insurance law later this year. Various insurance rate restrictions are expected to be eased during this interval. The second stage would also expand the "file and use" system to apply to additional coverages, and other regulatory notification procedures would be liberalized.

The third stage, which kicks in 18 months after the expected implementation of the new insurance legislation, further liberalizes the rating and product approval processes. During this phase, the effects of deregulation will be closely studied, with particular focus on the extent of foreign penetration into Japan's insurance market.

The U.S.-Japan accord also calls for an unprecedented study of "keiretsu," the veiled practice by Japanese companies of conducting business almost exclusively with each other, thereby limiting market penetration by foreign concerns. …

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