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Going beyond tradition in Japan.

Going Beyond Tradition In Japan

Although the Japanese insurance industry is modeled on international insurance practices, particularly on those in the United States, there remain significant differences. A U.S. risk manager whose company acquires an operation in Japan will find that these differences will materially affect not only insurance pricing and availability, but also which company will underwrite and service the coverages.

The international risk manager is likely to find that the situation within his company can have a significant impact on external aspects of his insurance program in Japan, namely pricing, limits, markets, intermediaries and control. The internal conditions most likely to affect the program are whether the company has a global insurance program that consolidates all the premiums paid both worldwide and locally (including Japan), and whether the operations in Japan are under the management control of the international company or a Japanese partner.

With regard to program control and program costs, the risk manager with international exposures and any foreign non-Japanese insurer would probably have a different perspective on the positioning of the program than would the Japanese partner who arranged the program with a Japanese insurer. It is not important to decide which view is correct, but rather to recognize that there can be a difference of viewpoint and to understand why. The broad insurance program objectives of cost and control provide a basis for assessing the significance of the differences between the Japanese and the U.S. markets.

Before a risk manager can examine these differences he must define his specific objectives for insurance coverages purchased in Japan. At a minimum, the risk manager's objectives will include compliance with Japanese insurance regulatory/statutory requirements, compliance with corporate insurance specifications, and minimum local premium risk costs. Additional objectives will apply when there is a global program overlaying the local coverages purchased in Japan. Objectives of a global insurance program might include the avoidance of gaps in local/underlying coverages, the consolidation of premiums through reinsurance, flowing reinsurance premiums to a captive and the monitoring and allocation of risk costs.

The Japanese Market

Japan is a tariff market for commercial as well as personal lines of insurance. Rates are strictly controlled by the Ministry of Finance (MOF) and there is limited pricing variability with a range rather than fixed value for some rates. Non-admitted insurance is prohibited in Japan. Only companies licensed by the Ministry of Finance, whether domestic or foreign, can write insurance in Japan. It is illegal to bring funds into Japan from claim payments from offshore insurance.

The insurance industry in Japan is highly consolidated. Presently, there are only 21 Japanese direct property and casualty insurance companies and approximately 37 active foreign insurance companies. Foreign insurance companies are subject to the same regulations as the domestic Japanese insurance companies.

In the Japanese market, there is no "unbundling" of insurance services. Domestic and foreign insurance companies, in contrast with the U.S. market, provide all insurance and risk management services. In this sense, the Japanese insurance market today is similar to that which existed in the United States in the 1950s. In the Japanese insurance industry, there is a true transfer of risk. Rates are established on industry loss results, and although there are some credits available, particularly to larger policyholders, there is no such thing as individual risk loss rating.

In Japan, risk values are highly concentrated. This is a function of geography and the high degree of technology utilization, and of course, economic growth. The degree of risk concentration is easy to grasp considering the GNP of Japan is approximately 60 percent of the GNP of the United States and yet geographically Japan is no larger than California.

Highly concentrated property values in Japan have resulted in a severe earthquake coverage capacity problem. The Japanese domestic insurers, in particular, restrict the limits-to-value they will write on earthquake insurance. The normal limits that can be written by Japanese and by foreign companies can range anywhere from 15 percent of fire insurance property values in the greater Tokyo area to 30 percent in other industrial areas and 100 percent in less concentrated value areas. Depending on the existence of any international DIC insurance that also covers Japanese exposures, these limits restrictions within Japan can be extremely important relative to meeting global insurance specifications.

Although Japan is a direct-writing market for commercial business, that does not mean there are no agents. In fact, there are more than 260,000 property and casualty agents which averages out to one agent for every policy written. Japanese insurance company employees handle all negotiations and all services with the Japanese commercial client. A consequence of these relationships or possibly an integral component of these close relationships is cross equity ownership among commercial organizations.

When a Japanese insurance company decides to seek the business of a Japanese commercial client, it must first demonstrate commitment and seriousness of intent. They may do this by investing in the shares of the potential customer since this is the way that most business is conducted. As a result, only about 25 percent of all the public equity shares in Japan listed on the Tokyo Exchange are actually traded with the remainder being held by commercial firms that do business with each other.

Another key element of insurance industry relationships in Japan is the in-house or captive agent. This concept is a method of reducing the premium costs in a tariff market by placing insurance through a subsidiary insurance agency. Virtually all large companies in Japan have such an agency, or if they belong to an industrial group, the group itself has an in-house agent. When the Japanese partner controls the insurance program of the international company's operation in Japan, it is likely that an in-house agent will be the intermediary for the program. The principal regulatory objective of the Ministry of Finance is to assure the financial integrity and the solvency of the individual insurance companies.

Since the Japanese insurance market is a tariff market, it is not price driven. However, while this is due in part to tariff levels, service and quality, as well as price, these are also priorities with the Japanese consumer. This form of competition is true not just for insurance but in virtually every consumer market in Japan.

The relative importance of pricing as a market factor is a subject on which many different opinions exist. One such opinion of just how Japanese markets differ in general from U.S. markets is well stated in the following excerpt from a recent Washington Post article. "For most of its history, the United States has behaved more or less in accordance with the pro-consumer capitalist model. Japan has not. The welfare of its consumers has consistently taken second place to a different goal; preserving every person's place in the productive system. The primary reward for working hard in Japan is to continue to be able to work. Japan has consistently protected its producers--farmers, unions, small shops and big corporations--at the expense of Japanese consumers, who must pay exorbitant prices for everything they buy."

Within Japanese business organizations the responsibility for insurance purchasing tends to rotate among employees as they are shifted from assignment to assignment. The international risk manager may have difficulty identifying who is responsible for insurance management within the operation in Japan, particularly if the Japanese partner is in control. Even when the person responsible has been identified, his assignment may be change before any real international risk management teamwork has developed.

Elements of an Insurance Program

The eight principal elements of an insurance program in Japan include the markets, the intermediaries, the buyer, coverages, rates, policy contracts, special arrangements and support of the global program. A risk manager must consider each of these elements in terms of the significant differences, if any, when insurance is arranged under an international company's control or under the control of a Japanese partner.

With international business management control, the underwriters will almost always be foreign insurance companies. If the Japanese partner arranges the insurance, the underwriters will be Japanese domestic insurers. The domestic insurance companies will be those with whom the Japanese partner or his group have a strong relationship or perhaps a cross equity investment. In neither case will there by an surplus lines or non-admitted coverage available in Japan.

Since insurance brokerage doesn't exist under Japanese law, an insurance broker will not act as the intermediary. The intermediary on the Japanese operation can be either a foreign or Japanese agent. Both are licensed under the same regulations by the Ministry of Finance, with the foreign agent often being a Tokyo office of an international broker. While there are no licensed or regulated risk management consultants in Japan, there is a handful of international brokers who provide fee-based risk management consulting services for a number of foreign and Japanese clients.

The employee in the operation in Japan who arranges the insurance will most likely not be an insurance specialist. If the foreign company has management control, the responsible employee will be a general or financial executive or possibly someone in the accounting department. This responsibility is likely to be a regular, a permanent assignment. When the operation is controlled by the Japanese partner, this responsibility is more likely to be a non-permanent assignment.

Since Japan is a tariff market all companies must charge the same rates. However, foreign companies do tend to take a more aggressive posture in quoting the minimum rates under the tariff. Of course, they also get a lot of encouragement to do so from the foreign agents. Control is the process of monitoring the international insurance program specifications given by the risk manager to the person responsible for purchasing insurance in Japan. This includes receiving information or documentation that confirms timely and accurate compliance with these specifications.

An example of the potential difficulty in implementing this control process is the number of policies required to achieve and maintain compliance. When the program is arranged through a foreign agent (global broker), and the coverage is placed with a foreign underwriter, the number of policies will be about the same as in the United States. On the other hand, if the program is arranged by the Japanese partner the number of policies could be considerably greater.

"Special arrangements" is a highly sensitive issue, particularly in a tariff market. Such matters as the interpretations and extensions of coverage would be handled quite differently between a foreign and a Japanese insurer. Foreign business organizations, including insurance companies (particularly American firms), are accustomed to and prefer to address any such considerations very specifically, and these issues are usually discussed when coverage is arranged. Any broadened interpretations are agreed to specifically, and if there is no such specific commitment, it is highly unlikely that any broader concessions or arrangements will be given after a loss occurs. Since among Japanese businessmen, relationships are deemed more important than specific agreements: Where a strong relationship exists it is possible that a favorable response will be given to a request by the policyholder for a broadened interpretation sought even after a loss.

The success of a global insurance program will be affected by whether the insurance has been underwritten by a foreign or a Japanese insurance company. Although both can reinsure to a global program, many foreign insurers willingly reinsure to a captive. Japanese insurers can also reinsure to a captive but won't except under significant pressure to do so. However, if the operation in Japan is under the control of the Japanese partner and the intermediary is an in-house agent, the chances of arranging reinsurance to a global program or to the international company's captive are small.

In the absence of an experienced employee handling the insurance program on the Japan operation, the risk manager with international exposures will find it to be a significant challenge to obtain the information necessary to confirm compliance with the global insurance specifications. Most multinational clients have to rely on their foreign agent in Japan to provide this information.

The characteristics of the Japanese insurance market present a significant challenge for any risk manager who has to direct insurance protection for operations in Japan. The international partner and the Japanese partner must both protect their company's assets and earnings through risk transfer at the most economical cost despite their significantly different perceptions as to the preferred way to accomplish this common objective.

The role of the foreign agent in Japan goes beyond assisting merely risk managers with international exposures achieve their goals for the company's global insurance program in Japan. Their role must also include assisting the foreign partner and the Japanese partner to understand their respective insurance program objectives and confirm that they are being met.

James Y. Paulding is president of Alexander & Alexander of Japan.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
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Title Annotation:Japanese insurance industry
Author:Paulding, James Y.
Publication:Risk Management
Date:Oct 1, 1989
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