Cliff Rees
Technical AdvisorFinancial Services Leader +62 21 521 2901 ext 90550 [email protected]
Margie Margaret
Tax Partner+62 21 521 2901 ext 90862 [email protected]
Cornelis P. Poelman
RCS Technical Advisor +62 21 521 2901 ext 75683 [email protected]Indonesia 43
Legislative and regulatory framework
The insurance industry regulator in Japan is the Financial Services Agency (FSA). The FSA supervises financial institutions as well as certified public
accountants and auditing firms. The FSA is responsible for ensuring the stability of Japan’s financial system, and the protection of depositors, insurance policyholders and securities investors, through such measures as planning and policymaking concerning the financial system, inspection and supervision of private sector financial institutions, and surveillance of securities transactions.
The insurance industry is highly regulated. Insurers require a licence approved by FSA to undertake insurance business in Japan.
In 2007, the FSA kicked off a project, “Better Regulation”, to encourage financial institutions to maintain proactive and up-front communication with the regulator to avoid future surprises. The following pillars were established:
First pillar: development of explicit rules and principles.
Second pillar: timely recognition of priority issues and effective response.
Third pillar: encouraging voluntary efforts and emphasis on incentives
Fourth pillar: improving regulatory transparency.
All life insurers are members of the industry’s
representative body, the Life Insurance Association of Japan (LIAJ). LIAJ is started as an incorporated association with formal sanction by the authorities concerned on 7 December 1908. There are two
associations in Japan representing the general insurance market, the General Insurance Association of Japan (GIAJ) and Foreign Non-Life Insurance Association of Japan (FNLIA). Most domestic companies including 3 mega general insurance groups are the member of GIAJ.
Most of foreign capital insurance companies including both of branch form and subsidiary form are the member of FNLIA.
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Financial reporting, capital and taxation
Financial reporting requirements
The Insurance Business Law in Japan requires an insurance company to file semi-annual and annual returns to the FSA, and then publish an annual disclosure report. No external audit of these statutory returns and annual disclosure report is required under the Insurance Business Law.
An insurance company incorporated in Japan is required to prepare an annual financial report, which is subject to audit and based on the Japanese Company Act. Since the annual return to be filed with the FSA basically imports the financial part of the annual report under the Japanese Company Act, most of the financial aspects of the annual returns to the FSA are audited already. In contrast, a branch of foreign insurer, which is not a company incorporated in Japan, is not subject to reporting under the Japanese Company Act, and therefore it is also not subject to external audit. A listed insurance company is required to disclose financial results on a quarterly basis. Financial results for 1Q and 3Q are subject to external review, but 2Q is subject to external semi-annual audit.
Insurance companies should follow Japanese GAAP unless overriding rules have been established by the Insurance Business Law and related regulations. In Japanese GAAP there are no comprehensive set of accounting standards for the insurance contracts (such as IFRS) or Insurance industries (such as USGAAP).
The Insurance Business Law in Japan, related enforcement rules and announcements from the regulators define detailed and individual requirements for accounting for insurance companies. Such areas relate to methodologies for calculating policy liabilities and outstanding claims provisions, recognition of premium revenue, liability adequacy testing, and accounting for certain initial business set up costs, among other topics.
Capital regime and requirements
Solvency margin regulation was established in 1996 for both life insurers and general insurers. It has been revised couple of times and since 2012, the current regulation considers solvency from both a consolidated and stand-alone basis. The solvency margin calculation is a factor based calculation and similar to the US risk
based capital requirement in concept. If solvency margin ratio is less than 200 %, the FSA will take prompt early warning measures which in the worst case can lead to a suspension of the insurance business. The FSA has indicated an interest in implementing a new solvency regime and in this regard is paying attention to the Solvency II outcome in Europe.
Taxation
Insurance businesses operating in Japan are assessed for tax under the Japanese Corporate Tax Laws. National corporations tax and local inhabitants tax are payable on the profits of insurance businesses at the tax rate, which is currently approximately 33.3%. This rate comprises the national corporation tax rate of 28.05% (25.5% plus temporal restoration surtax of 2.55%) and a local inhabitants tax rate of 5.2785% applicable in Tokyo. The national corporation tax rate is scheduled to decrease to 25.5% for fiscal years beginning on or after April 1, 2015.
In addition to the profit-based national corporations tax and local inhabitants tax, non-life insurance businesses are subject to size-based local enterprise tax and local corporate special tax. Local enterprise tax and local corporate special tax are payable on the premium income of an insurance business multiplied by a certain ratio at the tax rate of 1.332%. The applicable ratio, differs depending on the class of business, for example hull insurance (25%), land transport insurance and cargo insurance (45%), compulsory automobile liability insurance (10%), earthquake insurance (20%) and others (40%).
The taxable basis of local enterprise tax and local corporate special tax for a life insurer is calculated as annual gross premium income (excluding reinsurance premium income and before deduction of ceded
insurance premium) multiplied by the applicable ratio, ie group pension insurance (5%), group insurance other than the group pension insurance (16%), saving
insurance other than the group insurance (7%) and other individual insurance (24%).
The provision of services within Japan are generally subject to Japanese consumption tax at the tax rate, currently 5% under the Japanese Consumption Tax Law.
Following the amendment to the Japanese Consumption Tax Law, the consumption tax rate will be raised to 8%
from April 1, 2014 and to 10% from October 1, 2015.
Certain types of transactions, however, are treated as non-taxable transaction for Japanese consumption tax purposes. Receipt of insurance premiums and payment of insurance claims are not subject to Japanese
consumption tax.
Products and the market
Products
Traditional life insurance products such as Whole life, Term life, Endowment continue to be the major products sold in Japan. Products such as Medical and Cancer insurance are heavily sold by foreign life insurers.
Variable annuity products were well sold in 2000 to 2007 but decreasing the balance by reflecting depression of the economies.
Group term life and Group annuity business is also sold largely to companies for the purpose of employee benefits and saving strategies.
In Japan, there is a comprehensive range of general insurance products available for both of individuals and corporate policyholders. As with the life segment, individual insurance dominates the market. Total
industry premiums are generally spread as follows: about 50% from Voluntary auto, 15-20% from Fire, 10-15%
from Personal Accident, 10% from miscellaneous
Casualty and 10% from Compulsory Automobile Liability Insurance (CALI). Marine and In-land transit is less than 5% share.
CALI is a mandatory insurance for automobile liability required by CALI Act 1955, and coverage and premiums
are regulated. Results of underwriting are gathered into a nation-wide pool then ceded back to the individual insurance companies who participate in the pool.
A nation-wide earthquake program for households has been established through the Earthquake Insurance Act 1966, which can be sold as a rider on fire insurance. The coverage, premiums and claim payments under the program are regulated. Results of underwriting aggregate into a complex reinsurance program which is ultimately underwritten by the Japanese government.
In-house or agencies tied to the insurer are the prime distribution channel for the traditional life insurance products. Independent agents tend to sell Medical, Cancer or Hospitalisation products. Bank channels typically sell Fixed Annuity and Variable Annuity products. The proportion of sales through the internet is gradually growing off a low base.
Independent brokers are still the major distribution channel in general insurance market. Direct insurance for Auto and Personal Accident continues to grow gradually.
The proportion of sales through the internet is gradually growing off a low base.
Headline market statistics and commentary
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Growth in the insurance market follows that of the wider economy. Japanese GDP has been in decline
The population has remained relatively stable for the past decade and there is an ageing population
Continued competition in the mature market.
Potential barriers to entry
These are not necessarily barriers, rather uniqueness in the market:
Regulation and supervision: the industry is regulated by the FSA who grants licences and expects upfront and proactive communication with licensees.
Global trend in regulation: following the financial crisis and the reporting from the Financial Sector Assessment Program of some concerns with the regulatory framework in Japan, the FSA has been considering the enhancement of the supervision regime for financial institutions including insurers.
No announcements have yet been made as to what changes will be made but any changes are likely to follow trends in global regulatory and capital frameworks, such as Solvency II.
insurance experts may not be a large population like those in the capital markets. English education in Japan has focused on reading and writing skills rather than hearing and speaking skills. Documentation is written in Japanese with Chinese characters.
Investment market: the investment market
environment has been suffering lower returns due to poor performance of Japanese economy.
Demographic change in Japan: due to change of the demographic derived from a decrease in population led by the lower birth rate and longer life expectancy, the Japanese population is expected to shrink. This means the nature of risk to be insured will shift which may create new opportunities.
Key developments and future outlook
Key issues
High level concentration into Japanese Government Bond (JGB) may create future unrealized losses when interest rates increase. The impact of a JGB interest rate change may be larger for life than the general insurance industry due to the accumulation of long duration insurance contracts and related assets
Selling stock investments in order to reduce equity risk exposure may impact profitability of insurers
Consumption tax rate increase in the future may squeeze insurance profitability
Some Japanese insurers are making investments in overseas insurance businesses which will require new management skills for the Japanese insurers
Pricing competition in the lower investment yield market may squeeze insurance profit
Automobile insurance pricing competition may continue to erode margins across the industry
Potential increases in frequency of natural disasters may bring larger volatility to the profitability of insurers, compared to the past experience.
Future outlook
Continuously competitive markets
Potential recovery in the Japanese economy may provide growth opportunities for the insurance industry
Trends in regulation change, particularly around risk based capital, will impact insurers both in terms of how much capital is required but also the approach to managing the risk sensitivities around capital
assessments.
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Key players and competition
Competitive environment
Life insurance General insurance
The life insurance industry is considered to have a high level of concentration. There are 43 life insurance companies in Japan, including a government owned company, Kampo Life (Japan Post Insurance), 4 major domestic life insurers and another 38 companies. Kampo and 4 major insurers account for 70% of industry-wide total assets. 4 major domestic life insurers consisted of 3 mutual life insurers (Nippon Life, Meiji Yasuda Life and Sumitomo Life) and a listed stock life insurance company, Dai-ichi life, which demutualised in 2010.
The use of the internet as a distribution channel has proven successful for internet based insurers. Larger market players have taken note of this innovation and have adjusted their pricing strategies.
Foreign companies tend to focus on specific market such as cancer insurance or medical insurance, and have been successful due to the uniqueness in the product lines and brand value.
The general insurance industry is considered to have a very high level of concentration. There are 53 general insurance companies in Japan and 29 companies are domestic insurers incorporated in Japan (5 companies are owned by foreign capital), while 24 companies are primarily branches of foreign non-life insurers or non-life reinsurers. There are 3 mega general insurance groups, Tokio Marine Group, MS&AD Group and NKSJ Group who account for around 85% of industry-wide total assets.
The top five insurers by premium income are Japanese companies and account for more than 80% of the general insurance premium in the Japanese market.