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OUTLINE OF NEW INSURANCE BUSINESS LAW IN JAPAN

I. BASIC BACKGROUND AND PURPOSE

The totally revised New Insurance Business Law of Japan was promulgated at the end of May, 1995 and became effective on April 1, 1996. Its purpose is three fold as specified below. Specific measures implemented to meet the individual goals are also listed below for each purpose:

Purpose 1: Efficiency, fairness, and soundness of the insurance business for the consumer. By freeing the market, consumers can choose from insurance products that are more diverse and flexible.
Measure 1-1: Availability for an insurance company to provide both life and non-life insurance.
Measure 1-2: Reform of solicitation activities. i.introduction of a brokerage system as a new solicitation channel. ii.reexamination of exclusive agent system.
iii.reexamination of the entire solicitation/acceptance system.
Measure 1-3: Diversification of products and premium rate.

Purpose 2: Protection of the policy holder. This purpose was designed to ease the fear, coming from deregulation of the insurance industry, that the insurance companies would become unable to pay out its policy holders when due. To meet this purpose, the new law aims to ensure the financial stability of insurance companies by providing the following specific measures:
Measure 2-1: Introduction of a standard solvency margin.
By standardizing the calculation method of comparing the assumed risks with the companyｹs capital, the regulators can quickly and timely understand the conditions of the business and its changes.
Measure 2-2: Preparation for emergency situations for the insurance company. By establishing an emergency fund, insurance companies are better able to cope with emergency situations.

Purpose 3: Maintain fair solicitation activities for insurance business.
Measure 3-1: By introducing a ｳcooling-offｲ period, the new law aims at providing fair business transactions between customers and insurance companies.

II. EFFECTS OF THE NEW INSURANCE BUSINESS LAW

Effects on Approval Criteria for a License to Conduct Insurance Business
The New Law specifically sets out the criteria used to determine whether a license will be issued, whereas the old law did not make that clear.

The Minister of Finance shall examine whether the applicants for a license met the following criteria:

i.The applicant possesses sufficient assets to carry on insurance business soundly and effectively, and the prospects of revenues and expenditures concerning the applicantｹs insurance business are satisfactory.
ii.The applicant, in the light of its human resources such as its officers and other employees, possesses sufficient knowledge and experience to conduct insurance business appropriately, fairly, and effectively, and holds adequate social credibility.
iii.The contents stated in the statement showing the methods of operations and the general policy conditions satisfy the following criteria:
a)The terms of insurance contracts do not interfere with the protection of policy holders, etc.
b)The terms of insurance contracts do not discriminate unfairly in favor of specific persons.
c)The terms of insurance contracts do not promote or induce behavior which is detrimental to the public order or good morals.
d)The terms of insurance contracts concerning the rights and duties of policy holders, etc. are described clearly and plainly for policy holders, etc.
iv.The contents stated in the statement showing the bases of working out premiums and underwriting reserves satisfy the following criteria:
a)The methods of working out premiums and underwriting reserves are reasonable and adequate based on actuarial methods.
b)Premiums do not discriminate unfairly in favor of specific persons. (Insurance Business Law 5)

What to include in the License Application Form (Insurance Business Law 4-1)
1.Name or Trade Name
2.Amount of Capital or gross amount of insured.
3.Names of Directors and Inspectors.
4.Types of License the company is applying for, either life or casualty.
5.Location of Registered or Main Office.

Documents needed to attach to the Application (Insurance Business Law 4-2)
1.Articles of Incorporation.
2.Methods of Business Operation
3.Standard Terms of Insurance
4.Method of calculating premium and underwriting reserves.
5.Operational Planning Documents
6.Certified copies of Corporate Register, Statement for Application, etc.

Effects on Insurance Environment
Three major effects are expected from the new law: 1) availability of a wide range of insurance coverages from the development of new insurance products; 2) flexibility in insurance premium-rates, and 3) increase and simplicity to the process of insurance purchases.

Effects on Insurance Companies in General

First of all, the new law would enhance competition in the insurance industry. From this competition, there would emerge a niche insurance coverage and then its market.
Second, there will be an across-the-board increase in casualty-rate, and thus, a greater emphasis will be placed on proper underwriting, rather than just revenues.
Third, more cost-reduction in the business will be demanded.
Fourth, due to fierce competition, more personalized sales techniques and products would become essential.
Fifth, due to fierce competition, a greater gap in the success and failure of businesses would be seen.

Effects on the Third Field of Insurance
One of the major points of the New Insurance Business Law is that it divides the insurance industry into three major categories: 1) Life insurance, 2) Non-life insurance, which indemnifies damages caused by specified accidents, and 3) Third field, which covers expenses incurred by injuries, illnesses, and similar care related expenses (ex. cancer insurance). This segment of the market is expected to boom by being able to meet the needs of consumers.

Relationship between Insurance Companies and Anti-trust Law
The following non-life insurance businesses have been generally (except for unfair and unjust transactions) been exempted from the anti-trust law:
1.aviation insurance
2.nuclear power insurance
3.automobile liability insurance
4.earthquake insurance
(difference from old law: maritime insurance was removed from the list, and nuclear power insurance was added)

The following groups of insurance business will be exempted from the anti-trust law if there is a necessity for reinsurance pooling to provide protection for the insureds:
1.terms of insurance contract (except for terms related to insurance premium-rate).
2.determination of damage assessment method.
3.determination of the parties and the number in the reinsurance pool.
4.determination of reinsurance premium-rate and handling charges.

Conditions necessary to be exempted from the anti-trust law:
1.Not to unjustly affect the position of the insurance purchaser and the insured.
2.Not to unjustly discriminate people.
3.Not to unjustly restrict the subscription nor the termination of insurance.
4.To minimize joint operations for risk dispersion or risk equaliation, etc.

Outlook for Foreign Insurance Companies
The Japanese life and non-life insurance markets are the largest and second largest in the world, respectively, and currently, there are six foreign life insurance companies and 32 foreign non-life insurance companies operating in Japan. There are debates as to whether these numbers are low, especially considering the fact that foreign non-life insurance companies account for only 3% of that particular market. The general consensus for the reason behind the poor performance by foreign companies is that the Japanese market is very non-responsive to new insurance products designed by foreign companies to better meet the demands of the consumers due mainly to loyalty to continuous relationship with domestic companies. However, due to the enactment of the new law and since there is a general consensus that the overall Japanese market will continue to grow, a large number of foreign insurance companies are expected to enter the Japanese market. It is not expected that these foreign companies will enter the Japanese market by taking over existing companies because of Japanese resistance to takeovers. However, the global economy is continuing to influence Japanese businesses, so it will be interesting to see what the future holds.

Changes in Regulations of Foreign Insurance Companies
Under the old law, foreign insurance companies were treated differently under a different law. Due to the consolidation of the different laws into the New Law, foreign insurance companies are treated just like domestic insurance companies. This is another attempt to free the insurance industry. The only difference is that foreign companies have their main office outside Japan, so in order to protect insurance purchasers, its treatment in terms of supervision is different.

1.License
a)License for foreign insurance companies are separated into two categories: life insurance and non-life insurance. Criteria for license are the same as with domestic insurance companies. (Art 187-5)
b)The particular ｳNotification of Changeｲ in the License Application was abolished.
c)Amendments to the articles of incorporation can now be done by notice, unlike the approval.
d)will apply same regulations as with domestic insurance companies on conducting operations within and outside the scope of Insurance Business Law.
e)will apply same regulations as with domestic insurance companies on asset transfers.

2.Operations
a)will apply same regulations on operation of insurance business as with domestic insurance companies.
b)In terms of regulations on Firewall between domestic insurance companies and its insurance subsidiary, almost identical regulations are in place for transactions between a foreign insurance company and its subsidiary.
c)There is no need anymore for special approval on issuance of insurance policies denominated in foreign currency.

3.Management
a)will apply same regulations on distribution, valuation of stocks, as with domestic insurance companies.
b)will apply same regulations on insurance actuarial, disclosure, etc. as with domestic insurance companies.

4.Special provisions for foreign insurance companies
a)A foreign insurance company must deposit with the Ministry of Finance the amount specified in Article 24 of the Insurance Business Directive (an amount of ･100,000,000 or ･10,000,000 for life insurance business with conditions). This start-of-business deposit has always existed, but it has increased tremendously from the ･10,000,000 that was required by the old insurance business law.
b)Just as domestic insurance companies, foreign insurance companies must set aside payment reserves. In addition, foreign insurance companies must have in Japan an amount equal to the sum of 1) total amount of payment reserves, 2) deposit amount, and 3) capital. This requirement comes from the notion that it is difficult to monitor insurance activities outside Japan by foreign insurance companies, so instead, the Minister of Finance will make sure there is money in Japan to meet possible payment obligations.