FSA Newsletter October 2005

The ''Program for Future Financial Reform,'' which the Financial Services Agency released to the public in December of last year, mentions in the list of the measures to be taken the establishment of rules for technical provision and performance monitoring etc. with respect to so-called third-sector products in areas of medical care, health care and long-term care insurance etc., so that insurance claims etc. should be paid in a timely and appropriate fashion under adequate risk management.
In response to this, the Agency deliberated on the issue through a series of sessions, starting in February of this year, held by the ''Study Team on Funding Rules for Policy Reserves and Performance Monitoring etc. for Third-Sector Products,'' and subsequently drew up a document titled ''Funding Rules for Policy Reserves and Performance Monitoring etc. for Third-Sector Products'' and released it to the public on June 28. The main items summarized in this document are described on the following page.

<Characteristics of Third-Sector Products>

Susceptible to influences from external factors such as public healthcare policies and unforeseen actions on the part of policyholders
In Japan, mainstream products are those with lifetime coverage. Therefore, they entail long periods of coverage.

Products come with long-term uncertainty

<Current Situations and Problems>

Funding of standard Policy Reserve Incidence rates to be used, e.g., hospitalization rate, are determined by each company
Funding of contingency Reserve Risks are calculated in a unified and mechanical fashion
After-the-fact analysis of incidence rates Analysis methods and post-analysis measures are determined by each company.

Debates have been inadequate as to the appropriateness of these situations or what an effective structure might be.

It is necessary to discuss and establish adequate risk management methods and rules for Policy Reserves

Ensuring soundness in financial affairs of insurance companies

Sounder policyholders protection

(No

te) In addition to the above, insurance companies also need to work steadily on strengthening their risk management systems and enhancing the functions of Actuaries, as well as considering the introduction of a structure whereby agreement terms can be revised, within a scope not inconveniencing policyholders, in the case of unexpected events.

Our plan ahead is, upon carefully examining the items summarized above, to take legislative measures etc. as soon as possible with a view of having them come into force from the fiscal year 2006.

The ''Study Team on Insurance Product Sales and Solicitation'' (Chair: Professor Shuya Nomura, CHUO UNIVERSITY Faculty of Law), which is organized under the auspices of the Financial Services Agency (FSA), recently (July 8) put together and released to the public a document entitled ''Interim Summary of Issues: How Information Should be Supplied When Selling and Soliciting Insurance Products.''

Background Leading up to Examination by the Team

Considering the fact, among other facts, that there are still a large number of complaints about sales and solicitation activities in the insurance industry and that product features have become difficult for consumers to understand due to more diversified and complicated product lineups, the ''Program for Further Financial Reform'' set forth that the issue of ''how explanation etc. should be provided to customers in insurance sales and advertisements etc.'' should be examined from a viewpoint of improving protection of and convenience for users.
In order to examine the aforementioned issue in a professional and practice-oriented fashion, the FSA organized the ''Study Team on Insurance Product Sales and Solicitation'' in April of this year with membership including experts and service users, and proceeded with the examination work focusing mainly on further sorting out and specifying important information that should be explained clearly and carefully and approaches to apply when giving explanations to customers. Recently, the Team's examination results were put together in the form of the following interim summary of issues.
For your information, the Team has three set areas of examination: (1) further sorting out and specifying important information that should be explained clearly and carefully and approaches to apply when giving explanations to customers, (2) compliance with the suitability rule in relation to insurance agreements and (3) permission of proper comparative advertisements that stimulate fair competition. The Interim Summary of Issues addresses area (1), while examination of the issues of (2) suitability rule and (3) approval of comparative advertisements are scheduled to continue in the future, in that order.

Overview of Interim Summary of Issues

(1)

Important Information to be Explained in Particular
The following points were raised on the subject of explanation to be provided when selling and soliciting insurance products:

(i)

The fact that the volume of information supplied to consumers has become too large due to more diversified and complicated insurance product lineups and an increased volume of information to be explained, paradoxically, hinders customers from understanding the products.

(ii)

The fact that different companies supply different pieces of information may result in consumers reaching different degrees of understanding of insurance products, at the same time making it difficult for them to compare products of multiple companies.

The Summary presents a view that taking the following measures should be effective in an attempt to rectify the situations described above:

(i)

Setting important pieces of information, limited to such a volume that would not discourage normal consumers from trying to understand them.

(ii)

Specifying a minimal list of important information by product category.

The Summary also presents a view that in order to specify important pieces of information, information should be sorted out into the following groups and then supplied to customers:

(i)

''Policy overview'': Information necessary for customers to understand the details of a given insurance product

(ii)

''Warning information'': Information that insurance companies should supply to customers as warning

The following suggestions are presented for the ''policy overview'' and ''warning information'' ideas:

(i)

With respect to the content of ''policy overview'' and ''warning information,'' a framework should be set in the form of law or regulation etc. and the industry should establish self-imposed guidelines for detailed lists by product category.

Taking protection-oriented products as an example, the following framework might be set:

[(Proposed) Framework of ''Policy Overview'']

[(Proposed) Framework of ''Warning Information'']

How the product works

Period of insurance

Coverage details (e.g., main events insured, main exclusions)

(No	te) If there is any unusual policy exclusion, such a fact should be noted in particular.

Insurance terms (e.g., coverage amounts)

Main riders that can be added, together with their overviews

Insurance premiums (if there are any optional riders, their premiums should be shown individually)

Method and period of insurance premium payment

Cooling-off information

Duty of disclosure (consequences of violation)

Coverage commencement date

Main exclusions

(No	te) If there is any unusual policy exclusion, such a fact should be noted in particular.

Grace period for insurance premiums, policy lapse and revival etc.

Cancellation and cash surrender value

Safety net

Any pieces of information that are specifically required by law or regulation etc. to be supplied to customers as warning (e.g., direct policy transfer program, explanation required under the Law on Sales of Financial Products).

(ii)

From a viewpoint of ensuring effectiveness, required information needs to be limited to a certain volume in terms of the total information being supplied, i.e., ''policy overview'' and ''warning information,'' put together (for example, someone suggested that it should desirably be limited to such a volume that roughly covers both sides of an A3 sheet of paper)

(iii)

A document describing ''policy overview'' and ''warning information'' would need to contain the contact information of the insurance company's section responsible for handling complaints and consultation and also a statement that customers may bring complaints to the industry-run service charged with handling complaints and consultation.

(2)

Timing of Information Supply
The following suggestions are presented with respect to timing of information supply:

(i)

A document describing the ''policy overview'' would desirably be issued ''well in advance'' of the signing of the policy.

(ii)

The ''warning information'' would desirably be described in the same document as the ''policy overview'' and be issued ''well in advance.'' In consideration, however, of a point raised by some members that the very effect of the warning increases after, rather than before, a consumer decides to purchase the policy, an insurance company which prints the ''policy overview'' and ''warning information'' on separate sheets should also be permitted to issue the ''warning information'' document at the time of application.

(3)

Method of Description
The following ideas are presented with respect to method of description:

(i)

The description must be easy for consumers to understand. The following approaches should be effective for that purpose:

-		Good readability and highlighting techniques (e.g., font size, layout of information)
-		Technical term reviewing, standardization of terms used
-		Expressions and presentations that can draw the attention of consumers (e.g., Q&A format)
-		Use of figures, charts and tables
-		Document separation etc.

(ii)

It is necessary to give feed back on consumers' comments to the method of description by, for instance, conducting on a regular basis analysis of complaints and subjects of consultation etc. brought from consumers and reflecting the findings on the way in which information is described on documents.

(4)

Method of Explanation
The following ideas are presented with respect to method of explanation:

(i)

The following matters need to be explained orally:

-		Importance of reading the document describing the ''policy overview'' and ''warning information''
-		Importance of reading the portion of the said document that contains information that is particularly disadvantageous to customers, such as main policy exclusions

(ii)

With respect to policy exchanges or conversions in particular, it is necessary to explain orally that ''policy exchanges or conversions etc. might result in a disadvantage to policyholders.''

(5)

Method of explanation etc. Commensurate with Means of Solicitation
The Summary presents a view that it is necessary to ensure that, as a general rule, the same level of explanation should be provided in the case of non-interpersonal (via phone, postal mail or Internet etc.) sales as that set for cases of interpersonal sales.

(6)

Agent Supervision and Education
As, in most cases, it is an agent who actually supplies information, some member pointed out that it is important to further enhance agent supervision and education efforts.

(7)

Assuring Effectiveness (Enforcement) of Rules

(i)

As measures that can be applied for the time being, suggestions were made that the following actions might be taken:

-		Supervision by public authorities
-		Actions by insurance companies (establishing an internal structure, enhancing the section responsible for handling complaints and consultation, ensuring that products are developed in consideration of what explanation should be provided at the time of solicitation)
-		Further development and enhancement of complaint and dispute settlement support functions and structures of the industry
-		Release of the number of complaints etc.

(ii)

As mid-term issues, suggestions were made that, among other suggestions, the industry should act as a self-regulatory body and extra-judicial dispute settlement systems should be further enhanced.

(8)

How to Provide an Explanation to Have Policyholder's duty of Disclose Properly
The Summary presents a view that it is necessary for insurance companies to take sufficient steps in accordance with the ''Guidelines for Steps to Take to Have Policyholder's Disclose Properly,'' which was developed by the Life Insurance Association of Japan, to have policyholders etc. duty of disclose properly.

(9)

Consumer Outreach Activities
The Summary presents a view that an appropriate action for the Japan Institute of Life Insurance etc. would be to create industry-wide reference material (a buyers' guide) by putting together, in an easy-to-understand fashion, pieces of information that consumers must pay attention to in purchasing an insurance product and post them on homepages etc. of the respective insurance companies, business associations and the FSA. Suggestions were made that further efforts should desirably be made, as a consumer education attempt, to provide financial education regarding insurance products etc. right from the compulsory schooling stage.

The Financial Services Agency (FSA) recently (July 8) released to the public a document entitled ''Basic Guidelines and Plan for Financial Inspections for Program Year (PY) 2005,'' in which its policies on the conduct of inspections during the program year 2005 are clearly presented, together with the scheduled number of inspections. An overview of these guidelines and plan for inspections is as follows.
(Note) Program year 2005: July 2005 to June 2006

FSA achieved in PY 2004 the targets set forth in its Program for Financial Revival, designed to normalize the non-performing loans (NPLs) problems in major banks. Building upon this achievement, the FSA has announced its new Program for Further Financial Reform, which placed an emphasis on enhancing the protection of customers' interest and the strength of Japanese financial system, through the initiative of the private sector.
The financial inspection shall, in this context, be effected in pursuit of the best interest of public users and of the national economy. FSA's mission shall thus be ensuring efficiency, transparency, and effectiveness of its inspections, while promoting the efforts of financial institutions towards a voluntary and sustained improvement in their managements. To this end, the FSA conducts inspections based on the Financial Inspection Basic Guidelines (FIBG), and will introduce the Financial Inspection Rating System (FIRST) for deposit-taking financial institutions.
In thus taking new actions, the Agency is committed to conducting inspections upon specifying the following four priorities in inspections so as to pay attention to the circumstances surrounding financial institutions today and to ensure their soundness and proper management:

	(i)		Protecting the interest of public users For the interest of public users of financial institutions, the FSA inspection will focus on customer protection management of the institutions, especially protection of privacy information, accountability obligation, appropriate execution of contracts, and a due treatment of public complaints. The FSA will also examine obligations of institutions related to disclosure of public information, as well as information security in financial transactions.
	(ii)		Assisting the revival of SMEs and of regional economies In order to help achieve the revival of small-and medium-sized enterprises (SMEs) and the vitalization of regional economies, the FSA's focus will be on the efforts by regional financial institutions in assisting local SMEs, with due respect to the business reality of such SMEs.
	(iii)		Focus on process-checking For the past years, the FSA's inspections had placed a strong focus on asset quality of financial institutions. Now that the major banks' NPLs problem has been all but normalized, the FSA intends to shift its focus to a wider perspective, i.e. process-checking on overall management quality, including compliance of regulations and risk management, while giving due regard to the unique business reality of each financial institution.
	(iv)		Globalization and structural changes in financial activities The FSA will inspect financial institutions in line with the Guidelines for Financial Conglomerate Supervision, and will focus on compliance with anti-money laundering laws and regulations.

Under the Basic Plan for Financial Inspections for this program year, the FSA will conduct inspections of 320 deposit-taking financial institutions, 15 insurance companies, 10 securities companies etc. and 365 other financial institutions including non-bank money lenders, as well as 5 other institutions consisting of governmental financial agencies and Japan Post.

For further details, please refer to ''The Basic Guidelines and Plan for Financial Inspections in Program Year 2005 (July 8, 2005)'': you can have access to it from ''Press Releases'' on the Financial Services Agency's website.

On July 13, 2005, the Business Accounting Council Subcommittee on Internal Controls released to the public a document entitled ''Evaluation and Auditing Standards for Internal Control Reported in Financial Reports (Draft for Public Comment).''

The background leading up to the preparation and public release of the Standards (Draft for Public Comment) is as follows:

Since last year, incidents of improper conduct regarding the disclosure under the Securities and Exchange Law came to light one after another. These incidents raised doubts as to whether internal controls exercised by the companies were functioning effectively; from a perspective of strengthening internal controls reported in financial reports, the Financial Services Agency (FSA) accordingly requested the Business Accounting Council in the ''Actions Towards Securing Reliability of Disclosure System (Part Two),'' which the FSA put together and released to the public in December of last year, to set clear standards for evaluation by the management and examination by certified public accountants etc. with respect to the effectiveness of internal controls reported in financial reports. Responding to this request, the Business Accounting Council Subcommittee on Internal Controls held a total of 11 sessions since February of this year to deliberate on the issue.

The Draft for Public Comment prescribes methods and procedures to be applied by the management in conducting the work of evaluation and reporting and by certified public accountants etc. in conducting examinations with respect to the effectiveness of internal controls reported in financial reports and, taking into account an argument that requiring evaluation by the management and audits by certified public accountants etc. might be posing an excessive burden, proposes such measures that would not impose excessive evaluation and audit costs without compromising the original purpose, i.e., securing reliability of financial reports, by reference to the Subcommittee's study of the progress of a similar program in the U.S. which had already been introduced.

The FSA seeks comments from a broad range of interested parties in the general public until August 31, based on which the Subcommittee is set to begin deliberations with a view to completing the final version of the standards.

Considering the sentiment of the Japanese people of wanting a high level of personal information protection to be exercised in the financial sector and having seen the Personal Information Protection Law etc. come into force in April of this year, the supervisory authorities delivered a written request to deposit-taking financial institutions and other financial institutions operating in the areas of securities and insurance, respectively, to conduct blanket inspections of their personal information management systems and report the results to the supervisory authorities by the end of June.

Pursuant to this request, the financial institutions conducted inspections and audits to check for any leakage etc. of personal information concerning their customers that they were managing as of April 1 of this year; as a result, incidents, including losses, were found at many financial institutions, of which a summary was released to the public by the supervisory authorities on July 22.

Of the 1,069 financial institutions to which the supervisory authorities delivered the request, the number of institutions at which incidents, including losses, were found was 287 (26.8%). While, in terms of the number of customers, information losses etc. occurred with respect to approximately 6,780,000 customers in total, none of them was reported to have led to any improper use etc. resulting in damage to customers, or reported to contain high potential of leading to such a result.

This prompted actions on the part of the financial institutions: each and every one of those 287 financial institutions at which information losses etc. were found to have occurred has taken or is planning to take internal control-related measures for recurrence prevention purposes, including customer relations actions, such as establishing a section to receive inquiries, officer and employee guidance and education, or revision of operational flows.

We deeply regret that the recent blanket inspections resulted in the discovery of information losses etc. at so many financial institutions, even discounting the fact that these incidents had basically occurred before April 1, the date as of which the Personal Information Protection Law etc. came into force. As we believe that, now that the Personal Information Protection Law etc. has come into force, it is more important than ever for financial institutions, from a perspective of protecting personal information and securing users' trust in financial institutions, to manage customer information appropriately; we urge each financial institution to continue making efforts in appropriate customer information management.