Japanese insurers remain financially sound, with their solvency margin ratios much higher than the required 200%, and are still growing their premium incomes steadily. But the Financial Services Agency (FSA) is not easing off and letting the market take its own course.
It has implemented new calculation standards for the solvency margin ratio since the fiscal year ended March 2012, which adopt a more rigorous approach to including certain items in the margin. The standards make the measurement of risks more precise, raising the confidence level of the coefficient of each risk, renewing statistical data used as the basis of the coefficient of each risk, and requiring that earthquake CAT risk for fire insurance be computed through a risk model.
Some insurers have welcomed the more rigorous calculation standards, as these mean greater market confidence in insurance companies’ solvency margin ratio. Others noted that these could have a wide-ranging impact on the life insurance market as well as the larger financial market and the Japanese economy.
New solvency regimes
On top of the new standards, the FSA has also been looking into introducing economic value-based solvency regimes. It has conducted field tests and extensive dialogues with professional organisations and is taking international discussions into account.
“Like other jurisdictions, the FSA is of the view that there are a number of issues that need to be considered before an economic value-based solvency regime is introduced,” said Mr Naruki Mori.
Based on the result of the field tests the FSA conducted, it found that many companies recognise the importance of the economic value-based calculation of insurance liabilities, as it contributes to the promotion of asset liability management (ALM) and the enhancement of risk management.
However, many insurers pointed out that estimating future cash flow as part of the calculation of insurance liabilities puts a heavy burden on calculation work. Recognising this, the FSA noted that it is necessary to consider introducing a simplified method within reasonable limits, such as calculation based on a sampling of policies and a summary calculation of insurance policies with the same actuarial assumptions.
Steps up inspections
The FSA has also recently stepped up its inspection of insurers and has come up with a ratings system for this.
Implemented on a trial basis from April 2012, the Inspection Rating System for Insurance Companies aims to encourage insurers to continue improving their business operations, and to enhance the effectiveness of inspections by assigning grades to each institution based on the inspection results, said Mr Mori. It also targets to boost the transparency of financial administration by linking the rating results to certain regulatory measures.
The system was first introduced for deposit-taking financial institutions, including banks, to encourage them to continue improving their business operations, and to enhance the effectiveness of inspections by assigning grades to each institution based on the inspection results.
Insurers are rated based on governance compliance, insurance solicitation, customer protection, enterprise risk management, underwriting risk management, asset investment risk management, and operational risk management. The rates they can get are:
• Grade A: A strong management system has been established by the management.
• Grade B: A sufficient management system has been established by the management.
• Grade C: The management system is insufficient and needs to be improved.
• Grade D: The management system is defective or seriously defective.
Regulations revamp to meet customer needs
With the changes in Japan’s social and economic structures, including the declining fertility rate and the ageing population, Mr Mori said the need for insurance and sales channels has become more diverse.
He said the Japanese Financial System Council is discussing how insurers’ products and business activities should be regulated from the perspective of meeting a variety of consumers’ needs, with the aim to revise current regulatory requirements where necessary. It is also looking at how disclosure of information on insurance products and contracts should be regulated to make sure customers have access to necessary and clear information.
“Taking into account such a discussion, the FSA continues to make efforts to develop a better system for the regulation and supervision of insurers,” said Mr Mori.
Mind your risk abroad
Japanese insurers continue their foray and expansion into other shores, mostly in Asia’s emerging markets, and their overseas moves are expected to be boosted by the amended Insurance Business Law, which allows them to acquire insurance groups abroad.
To support them in this effort, the FSA tries to create a comfortable environment for Japanese insurance groups abroad by, among other things, urging relevant markets to relax their regulations.
But with the changing risk landscape in the region and Japanese insurers’ recent experience in the aftermath of the Thai floods, the FSA is closely looking at how they are managing their risks. They are required to have in place a risk management system that corresponds to the risks they take, including the concentration of such risks, said Mr Naruki Mori. To ensure this, the FSA monitors them through regular inspections and supervisory activities.
“It is also necessary for their market risk management to be monitored carefully, considering that global financial market turmoil has not ended yet,” he said.