Press Conference by the Commissioner

(Excerpt)

3 December, 2001

Q.

First, I would like to ask about the big losses in non-life insurance companies due to overseas reinsurance contracts. I suppose the Financial Services Agency has started to research from various angles. What have you found by now?

A.

We have just started research, so at present we don't have any results yet. However, as I said in the statement at the Diet, a reinsurance business receives reinsurance premiums every fiscal year when it is contracted. Usually, these reinsurance will be pleased out to be covered by further re-reinsurance during the same year. The difference between ceded premiums received for reinsurance and paid for re-reinsurance will appear as surplus.

When we inspect Japanese non-insurance companies investing in such reinsurance businesses, we look at the reinsurance operations from this point of view. As long as unpredictable incidents such as the 11th September attack do not occur, these companies will accumulate surplus every year. Of course, companies can go on without preparing for the worst scenario. Insurance companies should consider the worst-case scenario, taking into account the probability of such cases and up to how much they could pay. This is called capping. We carry out inspections after checking how high the capping is set, and whether it is adequate in light of the asset volume of the concerned company. Of course we check this strictly when we inspect, but we feel that our inspections may have not been sufficient from fully checking this viewpoint. Therefore, we are now reviewing carefully taking this viewpoint into account, and when the company operates reinsurance business by investing in a reinsurance company, then what the largest risk would be and whether it is adequate to the asset volume of the company are to be considered.

Q.

In this case, a limit was set based only on the net amount of undertaking, but we take it that you suggest that there should be a limit based on the gross amount. This time, the contract apparently indicates that it is based on the net amount. We wonder, since you didn't question this point, if you admitted the contract based only on the net amount.

A.

To be precise, we inspected the company in question in 1995. During this inspection, we had actually pointed out such risk. I disclose this information exceptionally, because this is a matter of inspection regarding a failed financial institution. We had pointed out the risk. It is regrettable that, despite the given report of our findings, the company had not taken appropriate measures against the risk.

Q.

In addition, there are contracts still in effect where a plane crash could cause a billion-yen-damage to the concerned company. These contracts require a six-month prior notice to cancel the contract, and such non-life insurance companies remain listed on a market. Though I think the companies should be allowed to continue their operations, they exist and their stock prices are declining--this situation looks very instable. As the relevant authorities, do you have any plan to take proper measures?

A.

I suppose you are referring to the insurance companies, other than failed Taisei, that have contracted with the agency in question, Fortress RE, Inc., I have not yet confirmed the details of the contracts.

I was informed of it only by newspaper reports. As I said before, a reinsurance company must minimize risks it bears, that is, the company most normally has to reinsure when it takes reinsurance risks. If such re-reinsurance does not constitute true re-reinsurance but just a borrowing-lending relation, risks are not diversified. I think this type of situation involves serious problems. This may not be a straight answer to your question, but I understand that you are asking if it is OK that these insurance companies remain listed though they bear such risks over some period, say, six months. We believe there would be no immediate problem; Should this be the case, that the size and the soundness of the relevant companies.