Establishment of Funding Rules for IBNR Reserves of Non-life Insurance Companies

The Financial Services Agency (FSA) published a draft document on funding rules for Incurred But Not Reported (IBNR) reserves of non-life insurance companies and the enhancement of actuaries' involvement and checking services, etc. on February 27, 2006 and invited public comments from the said date to March 27, 2006. Five public comments were received in total from members of the General Insurance Association of Japan (GIAJ), the Foreign Non-Life Insurance Association of Japan (FNLIA) and individuals.

1.
Overview of Amendments
  Among the reserves for outstanding claims in non-life insurance companies, Incurred But Not Reported (IBNR) reserves(Note 1) had to be calculated previously by such methods as "calculating the shortfall in the reserve which was not identified at the time when the reserve for outstanding claims was initially set aside by comparing the reserve for outstanding claims set aside in a particular fiscal year with the actual claims and normal reserves for outstanding claims recognized a year later and recognizing it as IBNR reserves in consideration of the rate of increase of loss incurred"under the provision of Ministry of Finance's Official Notification No.234. However, there are problems with this calculation method, including the failure to sufficiently identify shortfalls for so-called "long-tail"(Note 2) insurance products, which require more than one year for claims to be paid from the occurrence of an insured event.
Therefore, the FSA decided to establish funding rules for IBNR reserves for such insurance products backed by a more precise actuarial calculation method based on the statistical analysis of data on incurred claims with respect to each accident year.
In addition to the calculation of IBNR reserves, considering that actuarial fields are becoming more important than ever in non-life insurance companies, as exemplified by the increasing importance of estimating the policy reserves, etc. of non-life insurance companies in an appropriate and rational manner, the scope of non-life insurance companies required to appoint actuaries has been expanded and Cabinet Order, etc. have been established to enhance actuaries' involvement and checking services.

(Note 1) What are "reserves for outstanding claims"and "IBNR reserves"?
Reserves for outstanding claims are one of the insurance liabilities based on insurance contracts. Pursuant to the provisions of the Insurance Business Law, claims, reimbursements, etc. which became payable under insurance contracts in each fiscal year but have not yet been accounted for as expenditure must be declared by insurance companies as "reserves for outstanding claims".
Reserves for outstanding claims consist of two components, namely, "normal reserves for outstanding claims in which the amount payable with respect to an already-reported event is estimated individually"and "IBNR reserves calculated by estimating the claims, etc. for which the reasons for making a payment prescribed in an insurance contract are deemed to exist already even though the existence of such reasons has not yet been reported"at the end of the fiscal year. IBNR reserves must be calculated by using the calculation method set forth in the official notification specified by the FSA Commissioner.
IBNR is the acronym for Incurred But Not Reported.

(Note 2) What is "long tail"?
The expression "long tail"is used to describe the long period of time taken to have claims paid from the occurrence of an insured event.

2.
Description of Amendments
(1) New Funding Rules for IBNR Reserves
    Previously, the FSA had provided for voluntary automobile insurance, personal accident insurance and other specific types of insurance that fall in insurance categories in which it is mandatory to set aside IBNR reserves, and required that the amount of the IBNR reserves be calculated by using a specific formula and set aside accordingly. The scope of insurance categories in which it is mandatory to set aside IBNR reserves has been expanded, to include all insurance contracts except compulsory automobile liability insurance and earthquake insurance. Furthermore, the FSA required that each underwriting classification be screened in a certain way with respect to each insurance type (hereinafter referred to as "calculation unit"), and required that if the insurance products are deemed "long tail"and important as a result of screening, the IBNR reserves be calculated based on statistical estimation, and if the insurance products are deemed otherwise, an amount calculated by using a specific formula be set aside.
The FSA amended the Comprehensive Guideline for Supervision of Insurance Companies to incorporate the approach to screening.
 
(2)
Actuaries
    (i)   Non-life Insurance Companies required to Appoint Actuaries
        Non-life insurance companies required to appoint actuaries were previously limited to companies dealing in insurance types which involve the calculation of premium reserves (savings-type insurance) and long-term third-sector insurance. The scope of non-life insurance companies required to appoint actuaries has been expanded, in order to include all non-life insurance companies as a fundamental rule, except non-life insurance companies which specialize in either compulsory automobile liability insurance or earthquake insurance.
   
(ii)
Enhancement of Actuaries' Involvement and Checking Services
        Under the Insurance Business Law, etc., actuaries are required to be involved in actuarial matters relating to the calculation method of premiums, etc. Previously, actuaries of non-life insurance companies were required to be involved only in savings-type insurance and long-term third-sector insurance contracts. The scope of their involvement has been expanded, to include all insurance contracts except compulsory automobile liability insurance and earthquake insurance. The scope of their checking services regarding the appropriateness, sufficiency, etc. of policy reserves has also been expanded, to include all insurance contracts except compulsory automobile liability insurance and earthquake insurance.
In addition, the appropriateness of IBNR reserves of non-life insurance companies, which was previously not subject to actuaries' checking services, has been added to their list of checking services considering that their estimation affects the soundness of insurance companies and due to the introduction of actuarial statistical estimation as a result of the latest amendments.
   
(iii)
Stricter Qualification Requirements for Actuaries
        The calculation method of premiums and policy reserves is becoming increasingly sophisticated and complex, following the deregulation of premiums and the diversification of insurance products in recent years. Furthermore, advanced knowledge and experience are required more than ever before, in order for actuaries to execute their involvement and checking services, in response to the introduction of statistical estimation of catastrophe reserves for risks of natural disasters and the IBNR reserves. In consideration of these circumstances, the FSA specified full membership of the Institute of Actuaries of Japan and a certain level of practical experience as necessary qualifications of actuaries.
Furthermore, the FSA amended the Comprehensive Guidelines for Supervision of Insurance Companies to encompass matters that need to be considered when appointing actuaries at insurance companies, the approach to developing a structure for the fulfillment of actuaries' duties, perspectives of supervision regarding the fulfillment status of actuaries' duties, etc.
 
(3)
Other Amendments (Comprehensive Guideline for Supervision of Insurance Companies)
    In addition to establishing funding rules for IBNR reserves of non-life insurance companies, the FSA made the following amendments.
    (i) Perspectives on Reversal of Reserves for Price Fluctuations
        In response to suggestions that the description of the perspectives on the reversal of reserves for price fluctuations is unclear, the FSA made amendments for the purpose of clarifying the description. (The amendments were aimed at clarifying the description, not at revising the approach.)
    (ii) Treatment of Reference Loss Cost Rate
        In the case of insurance products using a reference loss cost rate calculated by the Non-Life Insurance Rating Organization of Japan, if the same reference loss cost rate is used even if it has been revised more than a year ago, the rate used is deemed to be unique to the insurance company and not based on a reference loss cost rate. Therefore, the FSA made amendments to incorporate a requirement that a report or data be submitted on the reasonableness and appropriateness of the rate to be continuously used under Article 128 of the Insurance Business Law.

3.
Timing of Application, etc.
  The amended Cabinet Order, the amended Official Notification, etc. came into force (became applicable) on May 1, 2006.
The new funding rules for IBNR reserves of non-life insurance companies and provisions relating to actuaries are applicable to fiscal year 2006 and thereafter.
[return to Contents]

Overview of Government Ordinances, Ministerial Ordinances, etc. on Revision of Safety Net for Insurance Companies

I. Purpose and Course
  The Law for Partial Amendment of the Insurance Business Law, etc. promulgated on May 2, 2005 and enforced on April 1, 2006 (2005 Law No.38, hereinafter referred to as "Amending Law") was mainly about two amendments: (i) amendment aimed at dealing with cooperatives not governed by any laws; and (ii) amendment aimed at revising the policyholder protection system, etc.
Among the two, in order to make the necessary amendments, etc. associated with the enforcement of (ii) amendment aimed at revising the policyholder protection system, etc., the draft amendment of government ordinances, ministerial ordinances, etc. was released to the public on October 12, 2005, promulgated based on the comments, etc. on the draft received during the public consultation period and enforced on April 1, 2006.
This article outlines the government ordinances, ministerial ordinances, etc. relating to the revision of the safety net for insurance companies: firstly, an overview of the government ordinance (see Chapter II below), and secondly, an overview of the ordinance of the Cabinet Office and the Ministry of Finance, the Cabinet Office ordinance, etc. (see Chapter III below).
The policyholder protection system, which used to be commonly referred to as a "safety net for insurance", is referred to as a "safety net for insurance companies" in this article based on the view that it is deemed appropriate to do so in conjunction with the fact that due to (i) amendment aimed at dealing with cooperatives not governed by any laws as stated above, those who are engaged in insurance business but not insurance companies (including foreign insurance companies, etc., hereinafter the same) and not to the objective of financial aid, etc. of insurance policyholders protection corporations ("small-claims and short-term insurance businesses" referred to in Article 2, Paragraph 18 of the Insurance Business Law revised under the Amending Law (hereinafter referred to as "new Insurance Business Law"), "specific insurance businesses"referred to in Article 2, Paragraph 3 of the Supplementary Provisions to the Amending Law, etc.) came into existence.

II.
Overview of the Government Ordinances
1. Introduction
    The Government ordinances relating to the revision of the safety net for insurance companies are aimed at making necessary amendments, etc. associated with the revision of the financing measures of the Life Insurance Policyholders Protection Corporation of Japan under the Amending Law.
 
2.
Overview
    (1)   Definition of Tokurei Members
        Revised financing measures under the Amending Law are temporary measures (Article 1-2-14, Paragraph 1 of the Supplementary Provisions to the new Insurance Business Law) targeted at life insurance companies (including foreign life insurance companies, etc., hereinafter the same) which received an order to place operations of an insurance company and management of its assets under Insurance Administrator as referred to in Article 242, Paragraph 1 of the Insurance Business Law during the three-year period between April 1, 2006 and March 31, 2009 and other life insurance companies set forth in government ordinances ("Tokurei members"referred to in Article 1-2-14, Paragraph 1 of the Supplementary Provisions to the new Insurance Business Law). The revised Enforcement Ordinance of the Insurance Business Law amended by the Government Ordinance (hereinafter referred to as "new Enforcement Ordinance") defined life insurance companies set forth in government ordinances as life insurance companies concerning which the commencement of corporate reorganization proceedings was filed for during the said three-year period, etc. (Article 8-5 of the Supplementary Provisions to the new Enforcement Ordinance).
   
(2)
Criterial Date for Balance of Debt of Life Insurance Policyholders Protection Corporation, etc.
        The ground design of the revised financing measures under the Amending Law is to enable the government to provide assistance, assuming that expenses required to provide financial assistance, etc. in the event of the bankruptcy of a Tokurei member are paid by contributions made by life insurance companies as a fundamental rule, in cases where the sum of the balance of debt of the Life Insurance Policyholders Protection Corporation of Japan (referred to as "LIPPC" in (2) hereunder) and the expected amount of such expenses exceeds the amount set forth in government ordinances in consideration of LIPPC's balance in the long run, on the condition that the fear under the provision of Article 1-2-14, Paragraph 1 of the Supplementary Provisions to the new Insurance Business Law is recognized (the said Paragraph).
The new Enforcement Ordinance has determined the amounts, etc. constituting the ground design as follows, having been delegated by the new Insurance Business Law (the said Paragraph).
       
  (i) Criterial Date for Balance of LIPPC's Debt The criterial date for the balance of LIPPC's debt was set on the day on which the approval of the Tokurei member's reorganization plan was approved by the court (Article 8-6 of the Supplementary Provisions to the new Enforcement Ordinance). As government assistance is a last resort, focusing on the fact that the balance of debt decreased along with repayments, the criterial date was set as late as possible, insofar as the criterial date adopted was deemed to be sufficiently clear-cut in legal terms as a constituent of the said groud design.
  (ii) Treatment of Accrued Contributions, Delinquency Charges and Surplus Cash
If there are any contributions not paid by the due date or delinquency charges as of the criterial date of the balance of LIPPC's debt (referred to in (i) above), government assistance is a last resort, so the balance of debt is determined by assuming that the amount equivalent to such accrued contributions and delinquency charges has been appropriated to pay back the debt (Article 8-7, Item 3 of the Supplementary Provisions to the new Enforcement Ordinance).
Cases in which there is surplus cash in the policyholder protection funds as of the criterial date of the balance of debt are also treated in the same manner (Article 8-7, Item 2 of the said Supplementary Provisions).
  (iii) Amount in Consideration of LIPPC's Balance in the Long Run
The amount set forth in government ordinances in consideration of LIPPC's balance in the long run is ¥460 billion (purview of Article 8-8 of the Supplementary Provisions to the new Enforcement Ordinance).
As the aforementioned provisions alone might unjustly impose a heavy burden on LIPPC if the consecutive criterial dates of the balance of debt (referred to in (i) above) are close to each other in the event of a series of bankruptcies of multiple life insurance companies, necessary provisions have been established to prevent such unjust imposition from arising (proviso of Article 8-8 of the said Supplementary Provisions).
   
(3)
Recognition Procedures, etc. in the Event of Bankruptcy of a Tokurei Member
        As the provisions on the procedures for providing government assistance to LIPPC have been delegated to government ordinances (Article 1-2-14, Paragraph 2 of the Supplementary Provisions to the new Insurance Business Law), provisions for the said procedures have been established (Article 8-9 of the Supplementary Provisions to the new Enforcement Ordinance), and the authority to recognize the "fear" set forth in Article 1-2-14, Paragraph 1 of the Supplementary Provisions to the new Insurance Business Law-which is a requirement for government assistance-was retained by the Prime Minister instead of being delegated to the FSA Commissioner (Article 14-2 of the Supplementary Provisions to the new Enforcement Ordinance).
   
(4)
Abolition of Exceptions to Cap on LIPPC's Debt
        As financing measures targeted at Tokubetsu members (Article 1-2-13, Paragraph 2 of the Supplementary Provisions to the Insurance Business Law) was to "redevelop a safety net worth ¥500 billion for bankruptcies between fiscal 2003 and fiscal 2005 (industry's share:¥100 billion, government's share: ¥400 billion)", an exception had been made so that the cap on LIPPC's debt would be ¥960 billion for some time instead of the original ¥460 billion (Article 37-4 of the Enforcement Ordinance of the Insurance Business Law) (Article 13 of the Supplementary Provisions to the Enforcement Ordinance of the Insurance Business Law prior to the revision by the Government Ordinance). The new Enforcement Ordinance has abolished this exception in conjunction with the revision under the Amending Law, in other words, limited the exception to that relating to Tokubetsu members (Article 13 of the Supplementary Provisions to the new Enforcement Ordinance).

III.
Overview of the Ordinance of Cabinet Office and Ministry of Finance, the Cabinet Office Ordinance, etc.
  1. Introduction
The Ordinance of the Cabinet Office and the Ministry of Finance, the Cabinet Office Ordinance, etc. concerning the revision of the safety net for insurance companies can be narrowed down to the following three and are explained in the following order:
   
-   Revision of compensation rate, etc. in consideration of types of insurance contracts, such as non-life insurance contracts, the assumed rate of interest, etc. (see Section 2 below);
-   Establishment of provisions for "performance-linked insurance contracts"(see Section 3 below); and
-   Other amendments (see Section 4 below).
 
2.
Revision of Compensation Rate, etc. in Consideration of Types of Insurance Contracts, such as Non-life Insurance Contracts, the Assumed Rate of Interest, etc.
   
(1) Revision of Safety Net for Non-life Insurance Companies
  (i) Amendment of Scope of Contracts as the Object of Compensation relating to Non-life Insurance Companies
    a. Expansion of Scope of Contracts as the Object of Compensation (Types of Insurance Contracts)
      The report titled "On Revision of the Policyholder Protection System"released by the Second Subcommittee of the Financial System Council on December 14, 2004 (hereinafter referred to as "Second Subcommittee's Report") states that "it is deemed appropriate to… abolish the classification of non-life insurance by insurance type". In response, the scope of contracts as the object of compensation concerning non-life insurance companies (including foreign non-life insurance companies, etc., hereinafter the same) was set to encompass direct insurance contracts in general in Japan (Article 50-3, Paragraph 1 of the revised Order on Special Measures, etc. to Protect Insurance Policyholders, etc. amended by the Ordinance of the Cabinet Office and the Ministry of Finance (hereinafter referred to as "new Protection Order"); see also Item b. and Section 3(3) below).
    b. Maintenance of Provisions on Scope of Contracts as the Object of Compensation (Attributes of Policyholders)
      The Second Subcommittee's Report states that "it is deemed appropriate to compensate an insurance contract in which the policyholder is an individual or a small enterprise (such as companies with no more than 20 employees) who is generally considered to have limited ability to collect information, etc. and strongly require protection". Accordingly, insurance contracts (excluding household earthquake insurance contracts and compulsory automobile liability insurance contracts) in the so-called second sector (non-life insurance) excluding automobile insurance enjoy compensation only if the policyholder is an individual, "small corporation"or an association for condominium management (Article 50-3, Paragraph 1, Item 6, Article 50-3, Paragraph 2 and Article 50-3, Paragraph 3 of the new Protection Order).
  (ii) Scope of "Specific Contracts as the Object of Compensation"
    The following insurance contracts are specific contracts as the object of compensation under the provision of Article 245, Item 2 of the new Insurance Business Law under which "operations relating to cancellation of specific contracts as the object of compensation"need not be suspended even after receiving an order to place operations of an insurance company and management of its assets under Insurance Administrator ("contracts as the object of compensation with little need of being sustained for the purpose of protecting policyholders, etc. as set forth in ordinances of the Cabinet Office and the Ministry of Finance"(Article 1-6-3, Paragraph 1 of the new Protection Order)).
   
-   Household earthquake insurance contract (Article 1-6-3, Paragraph 1, Item 4 of the new Protection Order)
-   Second-sector contracts as the object of compensation (except household earthquake insurance contracts and compulsory automobile liability insurance contracts) (the said Paragraph, Item 4)
-   So-called overseas travel accident insurance contracts in which the past health conditions, etc. of the insured are not included in the important facts, etc. that should be declared by the policyholder, etc. upon taking out insurance ("specific overseas travel accident insurance contracts"(the said Paragraph, Item 3))
-   So-called personal accident insurance contracts with an insurance period of one year or less in which the current or past health conditions, etc. of the insured are not included in the important facts, etc. that should be declared by the policyholder, etc. upon taking out insurance ("short-term personal accident insurance contracts"(the said Pargraph, Item 1))
-   The savings component of so-called third-sector insurance contracts (excluding specific overseas travel accident insurance contracts, short-term personal accident insurance contracts and the following contracts) (the said Paragraph, Item 2)
   
-   Savings-type personal accident insurance contracts with annuity payments (the said Paragraph, Item 2, Subitem i)
-   So-called asset-building ("zaikei") personal accident insurance contracts (the said Paragraph, Item 2, Subitem ro)
-   So-called personal accident insurance contracts for defined-contribution pension plan (the said Paragraph, Item 2, Subitem ha)
  (iii) "Operations relating to Cancellation of Specific Contracts as the object of Compensation"
    The period during which "operations relating to cancellation of specific contracts as the object of compensation"can be carried out even after receiving an order to place operations of an insurance company and management of its assets under Insurance Administrator (Article 245, Item 2 of the new Insurance Business Law) was set at three months from the day on which the insurance company which received the said order suspends the operations (excluding those set forth in each item of Article 245 of the said Law) in consideration of the suggestions made in the Second Subcommittee's Report (refer to (iv) below), etc. (purview of Article 1-6-2, Paragraph 1 of the new Protection Order).
In order to protect policyholders, etc., if the last day of the said period falls on a holiday, the said day is to be counted out (proviso of the said Paragraph), and the FSA Commissioner is required to publicly announce the said period and the last day without delay after the suspension of the operations referred to above (Article 1-6-2, Paragraph 2 of the new Protection Order).
  (iv) Compensation Rate of "Specific Contracts as the Object of Compensation"
    The Second Subcommittee's Report states that:
"in consideration of such characteristics, it is deemed appropriate to guarantee the payment of claims in full for the occurrence of insured events under non-life insurance contracts for a certain period after the bankruptcy, and introduce a framework that encourages policyholders to smoothly and promptly switch to other sound insurance companies in the meantime.
It is deemed appropriate to set the period during which the payment of claims is guaranteed in full at around three months, considering that it gives policyholders grace to cancel their contracts with the failed insurance company and take procedures to switch to other insurance companies."
In response to this, the compensation rate of claims for insured events which occurred during the period concerning specific contracts as the object of compensation stated in (iii) above was set at 100% (proviso of Article 1-6, Paragraph 1, Item 3, proviso of Article 1-6, Paragraph 1, Item 6, etc. of the new Protection Order).
The Second Subcommittee's Report states that even "considering that the expenses incurred by the policyholder protection system will increase due to the guarantee of the payment of claims in full for a certain period", "assuming that there is no surrender charge for early cancellation, even if the current compensation rate at 90% is reduced to, say, around 80%, the compensation level is deemed to be sustainable virtually at the current level for many policyholders who are expected to switch to other insurance companies in the early stages after the bankruptcy of an insurance company". Accordingly, the compensation rate for specific contracts as the object of compensation is set at 80%, excluding the compensation rate of claims for insured events which occurred during the period referred to in (iii) above (purview of Article 1-6, Paragraph 1, Item 3, the said Paragraph, Item 4, purview of the said Paragraph, Item 6, purview of Article 50-5, Paragraph 1, Item 3, the said Paragraph, Item 4, purview of the said Paragraph, Item 6, etc. of the new Protection Order).

(2)
Revision of Compensation Rate according to Assumed Rate of Interest in Insurance Contracts
  (i) Definition of "Contracts assuming a High Rate of Interest"and "Base Interest Rate"
Article 245, Item 1, Article 270-3, Paragraph 2, Item 1, etc. of the new Insurance Business Law clearly states that the compensation rate may vary with the rate of interest assumed in the insurance contract. Accordingly, "contracts assuming a high rate of interest"to which a low compensation rate should be applied are defined as "insurance contracts whose assumed rate of interest serving as the basis of calculation of… the premiums or policy reserves… have consistently exceeded the base interest rate over the past five years (limited to those with an insurance period… exceeding five years)" (Article 50-5, Paragraph 3 of the new Protection Order).
The "base interest rate"in the above definition is "…the rate set by the FSA Commissioner and the Minister of Finance with respect to each type of license, which is based on and exceeds the annual average investment yield over the past five business years (referring to the investment yield calculated by dividing the sum of the investment yield in each of the past five business years by five) of all licensed insurance companies… by license type (Article 1-6, Paragraph 4, Item 2 of the new Protection Order). Specifically, it is set at 3% per annum for life insurance companies as well as for non-life insurance companies (Article 2 of on the Notification of the FSA Commissioner and the Minister of Finance concerning contracts assuming a high rate of interest).
  (ii) Compensation Rate and "Compensation Deduction Rate"of "Contracts assuming a High Rate of Interest"
On February 16, 2005, the Second Subcommittee of the Financial System Council approved the policy to "make the compensation rate of policy reserves under the policyholder protection system for contracts assuming a high rate of interest lower than that for other contracts." Accordingly, if contracts as the object of compensation with a compensation rate of 90% ("direct life insurance contracts, etc."(Article 1-6, Paragraph 2 of the new Protection Order)) correspond to "contracts assuming a high rate of interest"((i) above), the compensation rate of such contracts as the object of compensation was set at "90% minus the compensation deduction rate"(the said Paragraph, Article 50-5, Paragraph 2, etc. of the new Protection Order).
The "compensation deduction rate"refers to "…the rate calculated as set forth by the FSA Commissioner and the Minister of Finance based on the portion of the assumed rate of interest that exceeds the base interest rate"(Article 1.6.4.1 of the new Protection Order). Specifically, it is set forth as "the sum of the assumed rate of interest in each of the past five years minus the base interest rate in each year divided by two"(Article 1 of the said Notification).
   

[Example] Assumed rate of interest in each of the past five years was 5% per annum /
Base interest rate was 3% per annum
Compensation deduction rate = (5－3)×5÷2 = 5
Compensation rate = 90 － 5 = 85%
    However, compensation by insurance policyholders protection corporations is nothing but a "top-up"based on a system especially established for the protection of policyholders in the bankruptcy proceedings under bankruptcy laws. Therefore, if "90% minus the compensation deduction rate"falls below the expected payment rate assuming bankruptcy proceedings under bankruptcy laws ("expected base payment rate"), the expected payment rate becomes the compensation rate (Article 50-5, Paragraph 2 and the said Article, Paragraph 5 of the new Protection Order).
 
3.
Establishment of Provisions on "Performance-linked Insurance Contracts"
   
(1) Scope of "Performance-linked Insurance Contracts"and Other Insurance Contracts requiring Establishment of Special Accounts
  Provisions have been established for insurance contracts for which there is an obligation to establish special accounts under Article 118, Paragraph 1 of the new Insurance Business Law ("performance-linked insurance contracts (i.e., insurance contracts which promise the policyholder to pay insurance benefit and other benefits based on the results of investing the money received as premiums) and other contracts set forth by Cabinet Office ordinances) (Articles 74 and 153 of the revised Enforcement Regulation of the Insurance Business Law amended by the Cabinet Office Ordinance (hereinafter referred to as "new Enforcement Regulation")).
As the provisions are extremely technical, the table below shows what kind of insurance contracts are actually included in the provision of each item of Article 74 of the new Enforcement Regulation.
   
   

(2)
Establishment of Provisions on Management of Special Accounts for "Performance-linked Insurance Contracts"
  As a prerequisite condition to explicitly providing that in the reorganization plan of an insurance company more favorable terms and conditions for creditors' rights based on performance-linked insurance contracts can be set than for those based on other insurance contracts (Article 445, Paragraph 3 of the revised Law on Exceptions, etc. to Reorganization Procedures for Financial Institutions, etc. amended by the Amending Law), Article 118, Paragraph 3 of the new Insurance Business Law was newly established to delegate the "method of managing assets belonging to special accounts and other necessary matters relating to special accounts"to Cabinet Office ordinances. In response, the establishment of the following system was made obligatory for the purpose of managing assets belonging to special accounts for performance-linked insurance contracts ("specific special accounts"(Article 75-2, Paragraph 1 of the new Enforcement Regulation)) by distinguishing them from assets belonging to general accounts and assets belonging to special accounts other than specific special accounts (the said Article and Article 154-2 of the new Enforcement Regulation).
  -   Segregated custody in a clear and distinct manner
  -   Development of a system to ensure that the aforementioned segregated custody is implemented by the custodian of assets belonging to specific special accounts
  -   Obligation to prepare and store prescribed books and records
  Necessary transitional provisions have also been established (Article 2 of the Supplementary Provisions to the amending Cabinet Office Ordinance).
It is acceptable to store and prepare the aforementioned books and records in electronic format (Appendices 1, 2 and 3 of the revised Enforcement Regulation concerning Financial Laws and Regulations under the Jurisdiction of Cabinet Office of Law on Use of Information and Communication Technology for Storage, etc. of Documents by Private Business Operators, etc. amended by the amending Cabinet Office Ordinance)

(3)
Exclusion from Definition of Contracts as the object of Compensation
  The Second Subcommittee's Report states that "it would be desirable to develop a system that makes it possible to deal with, in particular, group annuity insurance with no minimum benefit guarantee without diminishing the policy reserves assuming strict segregated custody, so that the assets for such insrance would substantially be preserved even in the event that an insurance company goes bankrupt, in order to maintain consistency with pension trusts which are similar financial instruments. It is deemed appropriate to exclude such insurance from the scope of the policyholder protection system if such a system is realized". On February 16, 2005, the Second Subcommittee of the Financial System Council approved the policy to "develop a system that makes it possible to deal with group annuity insurance, etc. accounted for in special accounts (limited to that with no minimum benefit guarantee) without diminishing the policy reserves while obliging strict segregated custody and to exclude such insurance from the scope of compensation under the policyholder protection system." With this in mind, the portion of performance-linked insurance contracts which relates to specific special accounts has been excluded from the definition of contracts as the object of compensation (Article 50-3, Paragraph 1 of the new Protection Order).
 
4.
Other Amendments
   
(1) Establishment of Provisions on Policy Reserves as a Subject of Financial Aid for Compensation of Policy Reserves and Policy Reserves which Serve as Basis of Calculation of Contributions by LIPPC Members
  (i) Clarification of Scope of Policy Reserves as a Subject of Financial Assistance for Compensation of Policy Reserves
      In response to comments received in the course of public consultation (refer to Chapter I. above), "policy reserves" as a subject of financial aid for compensation of policy reserves (Article 270-3 of the Insurance Business Law) were clearly defined as individual "policy reserves" in the context of amounts to be set aside for the insured under individual insurance contracts, NOT "policy reserves" under supervisory law which are accounted for as liabilities by insurance companies pursuant to the Insurance Business Law (Article 50-4, Paragraph 1, Item 1 of the new Protection Order).
  (ii) Maintenance of Provisions on Policy Reserves which Serve as Basis of Calculation of Contributions by LIPPC Members
      Considering that so-called policy reserves for minimum guarantee risks of variable annuity insurance, etc. do not correspond to "policy reserves" as a subject of financial aid for compensation of policy reserves according to (i) above, in order to strike a balance between benefits and burdens, half of the amount of such policy reserves is excluded from the "policy reserves" serving as the basis of calculation of contributions by LIPPC members (Article 25-2, Paragraph 1, Item 2 of the new Protection Order). Necessary transitional provisions have been established (Paragraph 4 of the Supplementary Provisions to the amending Ordinance of the Cabinet Office and the Ministry of Finance).

(2)
Amendments to Improve Transparency of Insurance Policyholders Protection Corporations
  The Second Subcommittee's Report states that "it has been suggested that it is important to make the procedures within the corporations transparent and further enhance the disclosure of information, in order to prevent the demerits of conflict of interest from arising and to discipline the operation of the corporations". In response, the following improvements were sought with respect to the transparency of insurance policyholders protection corporations.
 
-   The establishment of provisions on disclosure of the composition, proceedings, etc. of the steering committee and the assessment and examination board, disclosure of proceedings, etc. (Articles 8-5, 12-2, 15-5, 19-2 and 37 of the new Protection Order)
-   Extension of display period of financial statements, etc. of insurance policyholders protection corporations (Article 39.2 of the new Protection Order)
  Necessary transitional provisions have been established (Paragraphs 2, 3 and 5 of the Supplementary Provisions to the amending Ordinance of the Cabinet Office and the Ministry of Finance).

(3)
Amendments to Ensure that Policyholders, etc. Understand Insurance Policyholders Protection Corporations System
  (i) Duty to Provide Explanation upon Solicitation
      The Second Subcommittee's Report states that "it is necessary to exercise ingenuity so that an easy-to-understand explanation is provided to policyholders about the system upon solicitation after the reform of the system."With this and introduction of a compensation deduction rate system for contracts assuming a high rate of interest (see Section 2(2) above) in mind, an obligation was imposed to provide an explanation of the scope of contracts as the object of compensation upon solicitation for direct insurance contracts in Japan (upon solicitation for direct life insurance contracts, etc. (see Section 2(2)(ii) above) with an insurance period of more than five years, an explanation of the scope of contracts as the object of compensation and the compensation deduction rate system for contracts assuming a high rate of interest) by issuing a document or by other such appropriate means (Article 53, Paragraph 1, Item 8 of the new Enforcement Regulation).
  (ii) Ensuring Understanding in Actual Bankruptcy Procedures
      The Second Subcommittee's Report states that "in the event of revising the contract terms in actual bankruptcy procedures, an easy-to-understand explanation should be provided to policyholders regarding, for example, the impact of such revision on the face amount, etc. of each insurance contract in concrete terms." Taking this into account, the following matters were added to the list of notes to be appended to the public notice on transfer of insurance contracts, etc. and the public notice on the revision of contract terms (Article 251, Paragraph 1, Article 255, Paragraph 1 and Article 255-4, Paragraph 1 of the Insurance Business Law) (Article 1-10, Item 2, Subitems i and ro and Article 1-13, Item 3, Subitems i and ro of the new Protection Order).
     
-   Matters relating to the application of the compensation deduction rate system to direct life insurance contracts, etc. corresponding to contracts assuming a high rate of interest (see Section 2(2)(ii) above)
-   Matters concerning the relationship between the revision of contract terms and changes in the rights of policyholders, etc. over insurance benefits, etc. (including illustration of the said matters)
  (iii) Disclosure of Amount of Contributions made by Each Insurance Company
      The Second Subcommittee's Report states that:
"the policyholder protection system is a framework to protect policyholders, etc. of a failed insurance company based on the corporations' financial assistance, etc. in the event of the bankruptcy of an insurance company, and as a fundamental rule, the expenses must be incurred by other insurance companies.
However, the insurance company's burden is deemed to ultimately lead to policyholders' burden. This is rational considering that the purpose of the system is to protect policyholders, but it has been suggested that efforts should be made to provide a more intelligible explanation to improve the policyholders' understanding, including explicitly stating the burden."
In consideration of the above, the amount of contributions made by each insurance company (Article 265-33, Article 1 of the Insurance Business Law) was added to the list of matters to be stated in the explanatory documentation (Article 111 of the Insurance Business Law, so-called disclosure materials) (Appendix to the new Enforcement Regulation concerning Article 59-2, Paragraph 1, Item 3, Subitem ha thereof (life insurance companies related) and Appendix to the new Enforcement Regulation concerning Article 59-2, Paragraph 1, Item 3, Subitem ha thereof (non-life insurance companies related)). Necessary transitional provisions have been established (Article 3 of the Supplementary Provisions to the amending Cabinet Office Ordinance).

(4)
Expansion of Scope when Application for Bridging, etc. of Insurance Contracts is Possible
  The Second Subcommittee's Report states that:
"Under the existing system, it is possible for the corporation to underwrite an insurance contract only if there are no prospects for the appearance of a white-knight insurance company. However, it has been pointed that, especially in the event of the bankruptcy of a non-life insurance company, there is a problem in that even if speedy processing is required due to the large number of short-term contracts, etc., there is a risk of having trouble finding a white-knight insurance company and not being able to commence procedures at an early date. Taking such a problem into account, it is deemed appropriate to enable the corporation to decide on underwriting in the early stages after the bankruptcy if it is rationally determined that it would be appropriate to commence procedures promptly."
In response, cases in which it is possible to apply for bridging, etc. of insurance contracts have been delegated to the ordinances of the Cabinet Office and the Ministry of Finance (Article 267, Paragraphs 1 and 2 of the new Insurance Business Law). Accordingly, "cases in which it is difficult to execute the transfer, etc. of insurance contracts due to the lack of prospects for a white-knight insurance holding company, etc. to gain approval as the principal insurance shareholders, etc. of the failed insurance company at an early date and the lack of prospects for a white-knight insurance companyor a white-knight insurance holding company, etc. to appear except the aforementioned white-knight insurance holding company, etc."were added to the list of cases in which it is possible to apply for bridging, etc. of insurance contracts, and necessary provisions were established (Article 48-2, Item 2 and Article 48-3, Item 2 of the new Protection Order).
[return to Contents]
[Next Page]