June 15, 2011
Financial Services Agency

Results of the Field Tests of Economic-Value Based Solvency Regime

The Financial Services Agency (FSA) has conducted field tests covering all insurance companies, with a view to introducing an economic value-based solvency regime, and has summarized the results as follows.

I. Background

In June 2010, the FSA announced the implementation of field tests of the economic value-based solvency regime (hereinafter referred to as the Tests) and requested financial institutions to implement them.

All insurance companies (47 life insurance companies and 50 non-life insurance companies) covered by the Tests replied to a questionnaire survey regarding the results of the Tests by December 2010. As we have completed the work of sorting out the replies, we are publishing the survey results.

II. Purpose

To request all insurance companies to calculate the value of insurance liabilities based on economic value and grasp the status of their preparation as well as practical issues and problems that may arise in the process of calculation.

III. Summary of the Results

  • 1.Regarding the economic value-based calculation of insurance liabilities

    • (1) Many companies recognize that the economic value-based calculation of insurance liabilities is important as it contributes to the promotion of asset liability management (ALM) and the enhancement of risk management by enabling the consistent management of assets and liabilities.

    • (2) Many companies supported the introduction of a solvency regime based on the economic value-based calculation of insurance liabilities in light of the consistency with the economic value-based risk management that they have been promoting as well as developments related to the IFRS (International Financial Reporting Standards) and overseas regulations.

      However, as ALM may not produce sufficient effects due to the inadequate development of the market for hyper-long-term bonds that correspond to long-term insurance liabilities, some companies called for consideration to be given to this point when the solvency margin is introduced.

  • 2.Practical issues and challenges

    In the Tests, the following practical issues and challenges came to light.

    • Many insurance companies pointed out that estimating future cash flow (cash flow must be calculated for each of all contracts in force for the whole of the insured period) as part of the calculation of insurance liabilities imposes a heavy burden of calculation work. In light of this, it is necessary to consider the introduction of a simplified calculation 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.
    • Regarding the internal model approach, there is still room for improvement in the reliability of measurement. However, as many insurance companies are already conducting measurement using internal models, it is necessary to establish the criteria for regulatory approval before introducing regulation.

[Direction of future examination]

  • As described above, a variety of issues and challenges were recognized. Of the recognized issues and challenges, practical ones, such as the economic value-based calculation of insurance liabilities and the use of internal models in risk measurement, the FSA will conduct further examination in cooperation with expert organizations, such as the Institute of Actuaries of Japan and the Non-Life Insurance Rating Organization of Japan.
  • Abroad, too, debate on a framework predicated on the introduction of the economic value-based calculation of insurance liabilities has been proceeding. For example, the IAIS is working on the standard for economic value-based calculation, and “Solvency II” is planned to be introduced in Europe in January 2013. It is important to establish a regulatory framework with a high level of risk sensitivity that is suited to the Japanese insurance market while paying sufficient attention to these developments.
  • The introduction of the solvency regime predicated on the economic value-based calculation of insurance liabilities requires corresponding revisions of the business management and risk management methods that have until now been used by insurance companies. Therefore, the FSA will make steady efforts to establish a new framework through continuous dialogue with relevant parties while sufficiently enhancing predictability by indicating a roadmap in advance, for example, so as to ensure a smooth introduction.


Financial Services Agency
Tel +81-(0)3-3506-6000 (main)
Insurance Business Division, Supervisory Bureau (ext. 3770)

PDF(Attachment) Field Tests of Economic Value-Based Solvency Regime (Summary of the Results) (PDF:202KB)

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