Frequently Asked Questions - Insurance Companies

Q1   We find some articles saying that life insurance companies are having difficulties in their business due to negative spread and might go insolvent. How are their actual situations?

A1

It is true that Chiyoda Life Insurance, Kyoei Life Insurance and Tokyo Life Insurance applied for aid under the Special Law concerning Reorganization of Financial Institutions and others between fall in 2000 and spring in 2001. And their failures were attributed to mainly their negative spread (the deficit created by the difference in the guaranteed interest rate to policy holders and the actual investment yields). This may be the reason why such stories were reported. However, some of these reports seem to emphasize only one of the causes for failure and do not present the entire image properly. Life insurance companies make long term investments with insurance premiums that do not need to be paid for the time being as well as claim payments for deaths and illness. The profits from basic insurance business operations of life insurance companies are classified broadly as interest gains (the difference between the guaranteed interest and the actual interest), mortality gains (the difference between the assumed mortality rate and the actual one), or expense savings (the difference between the assumed expense in business operation and the actual one). With the continuing record-low interest rate, life insurance companies have been experiencing difficult business environment due to negative spread (interest loss). However, it is necessary to note that the profits from basic insurance business operation shows that life insurance companies in general are making profits even after offsetting the negative spread. Under these circumstances, life insurance companies have been expanding the scope of disclosure on their business operation and assets, and the FSA continues to make efforts for appropriate supervision.

Q2   What is the scheme for protection of insurance policyholders when an insurance company has become a failure?

A2

The scheme for protection of insurance policyholders is as follows;
(1)	Insurance contract covered by compensation upon failure
	a.   Life insurance: All life insurance contracts (individual insurance, individual annuity, group insurance, group annuity) b.   Non-life insurance: Compulsory automobile liability insurance, automobile insurance, fire insurance (when the policyholders are individuals or small- and medium-sized enterprises), earthquake insurance, accidental insurance, etc.
(2)	Limit for compensation   90% of the policy reserve (the reserve for future payment of the insurance claims etc.) will be compensated. (100% for compulsory automobile liability insurance and earthquake insurance).

Note:

In case of failure, contract provisions, such as guaranteed interest rate may be altered.