Japan’s Insurance Woes Rattling Policyholders
The effective collapse of second-tier Taisho Life Insurance Co. last week amid allegations of fraud is sending shivers through Japanese households. The industry many count on to provide security, protection and assurance is looking more insecure by the day.
Behind Taisho’s meltdown, the second in three months, is growing concern that Japan’s insurance industry faces several more insolvencies in coming months, particularly among weaker players.
On Aug. 28 prosecutors arrested two Taisho board members--Yoshihiko Kokura, 39, and Takashi Yamaguchi, 49--and accused them of swindling the already weak insurer out of $80 million. Regulators then revoked part of the company’s license, forcing the nation’s 28th-largest life insurer into the arms of an industry administrator until the government can figure out what to do next.
Although the life insurance industry is only about half the size of Japan’s commercial banking sector and has a smaller impact on the economy, its problems have great resonance with consumers.
The Japanese spend more than twice as much per person on life insurance as Americans and have traditionally viewed their policies as core savings vehicles. This helps make them among the most heavily insured people on Earth.
About 95% of Japan’s 126 million people own private life insurance policies, plus many own additional policies held through the national post office.
“Because everyone has life insurance, this strikes particularly close to home,” said Brian Waterhouse, financial analyst with HSBC Securities. “It’s such a basic part of every household that it undermines confidence in the financial system.”
Those holding government policies can sleep soundly. The problem is with private insurers, many of whom forgot a basic lesson from Business 101: Don’t pay out more than you take in. During the speculative bubble years of the 1980s and early 1990s, they promised policyholders 5% or more annually for up to 30 years on their policies.
As real estate and stock values plunged and interest rates subsequently fell to near-zero levels, however, the pledge of greater payouts became a lead-coated albatross around the industry’s neck. Although insurers have gradually reduced their exposure, they still face huge holes in their balance sheets, with some analysts estimating the losses at $628 billion.
Japanese insurers also look increasingly out of touch to a new generation of customers able to buy higher-return investments from foreign insurers, asset managers and brokerage houses. Between 1993 and 1998, new life insurance underwriting fell 25%.
Like many Japanese, Shizuka Iwamoto, a 50-year-old Tokyo building manager, has little sympathy for these cloddish giants. In 1992, a sharp-tongued salesman convinced her to buy a $95,000 Nissei Life policy for $1,650 in monthly premiums. He also promised her to expect high interest rates until she retired, and a large lump sum thereafter.
In the ensuing years, however, the company has whittled down her dividends and expected future benefits. “I feel betrayed,” she said. “Maybe it was my fault for not knowing better, but they deceived me.”
The latest allegations of skimming at Taisho have also raised hackles. “This fraud is really unbelievable,” said Hiroaki Kanetaka, a 36-year-old manager at a printing company in Tokyo. “I blame Taisho for allowing it to happen, and the financial regulators for not catching it earlier.”
Although fraud is viewed as extraordinary within the industry, lax management and inefficiency are not. Tools commonly used in the West to match assets and liabilities, for instance, have only recently been introduced at many companies, even as many insurers continue to rely on low-productivity “insurance ladies” to sell policies.
Still, getting a handle on the depth of the industry’s outstanding problems remains difficult. For one thing, most life insurers are organized as mutual companies, which means they’re owned by their policyholders. As such, they face limited disclosure requirements and relatively little pressure to perform--until they collapse. Even when assets and liabilities are disclosed, these are often inflated or deflated on the books to boost appearances.
“Although the published accounts of the life companies record that they are making profits and paying tax on those profits . . . it is probable that the Japanese life insurance industry has been consistently loss-making over the past seven years,” said a report by London-based Smithers & Co.
Smithers and Consulting Actuaries Tillinghast estimate Japan’s insurance industry is in the hole to the tune of $628 billion.
Analysts say they expect the largest Japanese life insurers to muddle through, in large part because their keiretsu--or network of business affiliates--will be arm-twisted to prop them up.
Far more vulnerable are insurers without rich relatives. “Some of the worst off are the second-tier independent players,” said Ken Okamura, senior strategist with Dresdner Kleinwort Benson. “It’s highly likely the costs will be very high.”
For now, the government is playing down the risks in a bid to avoid panic or a political backlash. In the shadows, however, regulators are encouraging weaker players to merge or find buyers and are changing laws to help insurers raise more capital. They’re also moving faster to anticipate problems, following some painful lessons on the cost of letting things fester learned during the banking crisis.
Government regulators blew the whistle on Taisho, for instance, when the insurer failed to meet solvency margin requirements. This in turn led them to discover fraud at the highest levels, with board members Kokura and Yamaguchi accused of using fake overseas bank documents to divert Taisho capital into a company controlled by Kokura.
“In the past, companies would decide themselves that they were too weak to stand,” said Tetsuro Shigeto, deputy director of insurance oversight at the Financial Services Agency. “But with Taisho we took action.”
The government also has beefed up a protection fund designed to help policyholders if their insurer goes bust, which didn’t even exist before 1998. “Nobody expected there would ever be an insolvency,” said Runa Ichihari, an insurance ratings specialist with Standard & Poors. “That was the old way of thinking.”
The collapse of Nissan Life Insurance in April 1997 changed that thinking pretty quickly, however, leading to the creation of a $4.3-billion fund. That level was doubled this year after more insolvencies surfaced.
“The fund is still quite small,” said Tetsuro Sugiura, chief economist with Fuji Research Institute. “This could add to the anxiety and uncertainty many Japanese feel about their social safety net.”
The government is not eager to pony up a lot of taxpayer bailout money, after injecting more than $480 billion into the commercial banking system. The government has its own problems, with its debt levels now approaching a whopping 130% of gross national product.
Instead, more mergers appear likely and could open the door for foreign takeovers. GE Edison Life stepped in when Toho Life failed in June 1999, and Canada’s Manulife took over Daihyaku Life in May of this year.
Last month, regulators also paved the way for mergers between banks, life and nonlife insurers, prompting Dai-Ichi Mutual Life to announce a comprehensive alliance with Yasuda Fire & Marine.
That said, Japanese regulators are still reluctant to move too quickly. Japan has so many interconnected structural problems that there’s fear of unanticipated tremors in related sectors. “The Japanese government is probably not going to be very proactive,” said Dresdner’s Okamura.
In the end, the ones most hurt by bad investment bets and mismanagement will likely be small policyholders.
After Toho’s bankruptcy last year, 45-year-old housewife Chika Nakajima was told that her promised $40,000 payout was now worth $10,000, even as she watched her dividends decline to almost nothing. “All I want to say is ‘Give me my money back!’ ”
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Hisako Ueno in The Times Tokyo bureau contributed to this report.
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The Japanese spend more than twice as much per person on life insurance as Americans. Share of the world market in 1998:
Japan: 28.6%
U.S.: 27.6%
Britain: 9.8%
France: 5.9%
Germany: 4.6%
Other: 23.5%
Source: Swiss Reinsurance Co.
