Regulatory Developments Substantial progress has been made in the regulatory environment of the insurance sector in recent years. Sales of insurance products through the bank channel have been partially deregulated, privatisation of Japan Post has begun, and the Financial Services Agency (FSA) is taking action to improve consumer protection that should result in the customer having a better understanding of product features, risks and fees. New reserving regulations were introduced for separate account products in 2005, and the FSA has launched a review of solvency margin standards which should result in methodologies that better reflect the wide range of product designs and improve risk management. The EBC welcomes FSA plans to allow banks to sell all life and non-life insurance products from December 2007, and looks forward to this distribution channel operating under the same rules as other channels without unnecessary anti-pressure sales measures. Despite these developments in the regulatory environment, further work is required to reflect modern risk management techniques and for this sector in Japan to come into line with international standards. Enhancing the regulatory environment for the insurance industry is critical to future development, particularly ensuring a level playing field for all sellers of insurance. Issues such as the privatisation of Japan Post, bringing Kyosai into the insurance framework, addressing solvency calculations, streamlining the product approval process, and clear and consistent application of rules and regulations are beneficial for the domestic financial business industry, consumers and Japan's ability to retain foreign investment Prospects for EU-Japan Economic Integration An Economic Integration Agreement should create freedom of capital and service provision to the market. Unless common rules are created, companies operating in both Japan and the EU will not be able to operate effectively. In recent years, the life insurance industry has seen growth in the medical and variable annuity sectors, the latter following the initial stage of bank assurance deregulation. The market share of foreign affiliates in Japan is increasing, but they continue to encounter regulatory obstacles that can limit efficient development of their businesses. An example of this is the rigid reserving and solvency regulations on variable annuity and variable life insurance products. The harmonisation of Japanese solvency and accounting methods with international standards is a priority that would have a direct positive impact on the ability of European companies to do business in Japan. Priorities
Key Issues and Recommendations ■ Creating a level playing field by establishing common rules for all actors Yearly status report: some progress. Japan Post was officially privatised in October 2007, however the government is still the only stockholder. The Postal Privatisation Committee has focused on the need to make Japan Post profitable by allowing the expansion of product lines. The Committee has acknowledged the need to strengthen compliance and risk management functions within the Japan Post Life Insurance Company (Kampo), but has not made this a priority. The implementation plan for privatisation also leaves many questions unanswered. A special section has been created within the FSA to deal with privatised Japan Post insurance and bank companies, but these privatised entities are not regulated by the same divisions as industry competitors. Despite amendments to the Insurance Business Law (IBL) to bring FSA supervision to the insurance business of unregulated Kyosai, the system remains inconsistent with some Kyosai still regulated under tailor-made laws. Recommendation:
■ Solvency calculations Yearly status report: limited progress. Japanese solvency calculation methodologies inhibit product innovation and are a misleading indicator of the relative financial health of the insurers. Harmonisation with global best practices would force insurers to use modern simulation techniques to model risks (including operational risks), make senior management more aware of the risks faced, and resolve the mismatch between assets (which are marked to market) and liabilities (which are not). The establishment of the FSA Working Party on Solvency was a welcome development, but has not led to firm recommendations. What is needed now is a roadmap to solvency reform, with a clear and transparent process and open dialogue with the industry. Adopting a principles-based scheme would increase management awareness of risk and freedom to innovate in relation to emerging trends. Recommendation:
■ Policyholder protection corporation (PPC) reform Yearly status report: no progress. Debate has not yet begun on how to reform the life PPC in 2009. Recommendation:
■ Product approval process Yearly status report: no progress. The FSA product approval process is overly lengthy, and FSA availability is limited. This results in product development delays and makes effective planning difficult. Recommendation:
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