FSA Newsletter June 2006

Supervisory Guideline for Small-claims and Short-term Insurance Businesses
(So-called Unlicensed Cooperatives)

On April 1, 2006, a "small-claims and short-term insurance business" system was introduced as a new measure to protect policyholders, etc.
Upon its introduction, the viewpoints to be taken by supervisory authorities—the Financial Services Agency (FSA) and Local Finance Bureaus—in dealing with small-claims and short-term insurance businesses were systematically defined and compiled in the form of a document titled "Supervisory Guideline for Small-claims and Short-term Insurance Businesses", which is regarded as a supplementary issue to the Comprehensive Guideline for Supervision of Insurance Companies.
Specifically, it describes the perspectives, etc. on items to be evaluated in supervision, namely, (i) governance, (ii) financial soundness and (iii) operational appropriateness. As the registration of businesses and other such affairs are handled by the respective Local Finance Bureaus, it also states the points to be considered, etc. in the clerical process. The outline is shown in the

Appendix.
As small-claims and short-term insurance businesses are expected to vary widely in terms of insurance products, company size, etc., the perspectives on structural aspects especially to ensure financial soundness and operational appropriateness will be determined according to the actual circumstances of the business rather than requiring that all the perspectives be applied across the board. Due consideration will be given to avoid the mechanical/uniform implementation of the Supervisory Guidelines.

Overview of Government Ordinances, etc. for Introduction of Policyholder Protection Rules for Cooperatives Previously Not Governed by Any Laws

The Law for the Partial Amendment of the Insurance Business Law, etc. (2005 Law No. 38, hereinafter referred to as "Amended Law") promulgated on May 2, 2005 was mainly about two amendments: (i) amendment aimed at dealing with cooperatives previously not governed by any laws; and (ii) amendment aimed at reviewing the policyholder protection system, etc.
Among the two, (i) amendment aimed at dealing with cooperatives previously not governed by any laws specifically included:

	a.	Reviewing the scope of application of "insurance businesses"and as a general rule, regulating by the Insurance Business Law so-called cooperatives that were not governed by any laws; and
	b.	Establishing a new regulatory framework ("small-claims and short-term insurance business", here in after referred to as "SSIB") such as a registration system for businesses which provide only small-claims and short-term insurance on the condition that the size of the business is within a certain limit.

In response, draft amendments to the Enforcement Ordinance, Enforcement Regulation, etc. of the Insurance Business Law were published and public comments were invited for the purpose of providing for matters left to government ordinances, Cabinet orders, etc. in the Amended Law. Based on comments, etc. on the draft received during the public consultation period, government ordinances, etc. were promulgated on March 10, 2006 and enforced on April 1, 2006.

Major amendments are outlined below.
1. Enforcement Date of the Law for the Partial Amendment of the Insurance Business Law, etc.
The Amended Law came into force on April 1, 2006, and the "SSIB"system was launched on the same date.

2. Insurance excluded from Definition of "Insurance Business"
Insurance excluded from the definition of "insurance business"refers to: insurance provided by local authorities with respect to a business or its executives and/or employees within its jurisdiction; insurance provided by a company or its consolidated subsidiaries, etc. with respect to the company, its subsidiaries, its executives, employees, etc.; insurance provided by a vocational school or some miscellaneous school with respect to its students; and insurance provided with respect to 1,000 parties or less, etc. However, insurance provided to 1,000 parties or less is included in the definition of "insurance business" if: it is provided by two or more organizations that are closely related to each other with respect to more than 1,000 parties in total; it involves reinsurance underwriting; or the total annual premiums received from one individual exceeds ¥500,000.

3. Insurance Period, Cap on Claims, etc. of Insurance which can be Underwritten by SSIBs

(1) The insurance period of insurance which can be underwritten by SSIBs is one year in the case of life insurance, medical insurance, etc. and two years in the case of non-life insurance. The cap on claims is as follows.

(i)	Ordinary severe disability or death:	¥3 million
(ii)	Hospitalization benefits, etc. in the event of illness or injury:	¥800,000
(iii)	Severe disability or death due to injury:	¥6 million
(iv)	Non-life insurance:	¥10 million

Various provisions have been established for adjustment purposes, such as restricting the benefits in the event of death in cases where benefits have been paid for severe disability.

(2) In cases where a SSIB underwrites multiple insurance contracts for one insured person, the total amount of claims under all insurance contracts must be no more than ¥10 million, and the total amount of claims according to the insurance categories referred to in (1)(i) through (iv) must be no more than the respective amounts set forth in those categories.
However, if insurance referred to in (1)(iv) includes personal liability insurance in which insured events are expected to have a particularly low incidence (excluding those relating to driving an automobile), a cap of ¥10 million is set separately.

(3) SSIBs are not permitted to underwrite insurance under which more than 100 people are insured in total per policyholder (in the case of multiple insurance, this refers to the sum total).

(4) As an interim measure, the cap on claims under insurance which can be underwritten by an existing business by reinsuring the excess portion over a period of seven years from the enforcement date is set at five times the respective amounts set forth in the insurance categories referred to in (1) (or three times the amount in the case of insurance referred to (1)(ii)).

4. Restrictions on Business Size

The limit of the size of SSIBs was set to be no more than ¥5 billion in annual premiums received (including commissions received from reinsurance companies when applying reinsurance and deducting reinsurance premiums).

5. Minimum Capital, Funds and Deposits

Minimum capital or funds of a small-claims and short-term insurance business and the amount of deposits to be paid upon the commencement of business are ¥10 million each. Deposits must be increased as the premium income increases, in increments of 5% of net premiums received.
As an interim measure to enable the smooth transition of existing businesses operating on a small scale, the minimum capital or funds of small organizations (with no more than 5,000 parties in total) and the amount of deposits to be paid by them are both halved from ¥10 million to ¥5 million for a period of seven years from the enforcement date.

6. Scope of Related Operations

Related operations which can be carried out by SSIBs with the Prime Minister's approval include insurance solicitation, investigation of insured events, preparation of documents, etc. on behalf of other small-claims and short-term insurance businesses or insurance companies.

7. Measures relating to Business Operations

SSIBs are obliged to take measures to make SSIB agents to provide an explanation upon insurance solicitation about the possibility of the revision of premiums, etc. for renewal-type insurance, about the insurance being outside the scope of the safety net and about the cap on the amount of claims under insurance that can be underwritten, by issuing documents or by other such appropriate methods.

8. Nature of Disclosure

SSIBs are required to disclose explanatory documentation on their operational and financial status to the same extent as insurance companies. SSIB whose capital, etc. exceeds ¥300 million is obliged to conduct an external audit.

9. Setting Aside Policy Reserves

SSIBs are required to set aside as much in policy reserves as insurance companies in order to protect policyholders. Calculation categories have been provided for according to the kind of insurance which can be underwritten by SSIBs.
In cases where an insurance contract is subject to reinsurance, policy reserves may not be set aside for the portion subject to reinsurance. In addition, the criteria for setting aside special contingency reserves have been relaxed as an interim measure, etc., in consideration of the burden of setting aside funds incurred by existing businesses.

10. Solvency Margin Standard

As in the case of insurance companies, a framework was established so that orders to take necessary supervisory measures can be issued (prompt corrective action) in the event that the solvency margin indicating the small-claims and short-term insurance business's ability to pay claims, etc. falls under 200%.

11. Other

Registration and application procedures, depositing procedures, scope of subsidiaries and other details of the system have been provided for in Cabinet orders and public notices.

A:		Of course, good financial results are better than bad ones, but the issue of public funds remains, and from our point of view, it is still not good enough because even if the financial results improved, the deposit interest rate remains at such low levels and banks are still not able to pay corporation tax. Therefore, the major banks must properly fulfill their financial intermediary function, which is the primary objective of the financial sector. Also, they should fulfill their financial mission to properly distribute resources in the Japanese economy by taking risks based on their own judgment.
(from the press conference following a cabinet meeting on Tuesday, May 23, 2006)

Q:	In relation to banks' financial results, reversal of bad debt reserves was huge at Mitsubishi UFJ Financial Group and other banks, and there are claims that their provisioning might have been excessive. What is your opinion on this?

A:		As provisioning was done in accordance with the standards at the time, I think no provisioning was done with the knowledge that it would be excessive from the start.
(from the press conference following a cabinet meeting on Tuesday, May 23, 2006)

Murakami Fund has submitted a notice of closing its investment advisory business in Japan to relocate to Singapore. At a time like this when there are various repercussions, their move seems to be elusive of the FSA. What is your view on such a move to relocate overseas by a Japanese business that appears to be elusive of the FSA?

A:		If they relocate to Singapore, the laws of Singapore will be applied, and Singapore is no heaven as its laws are rather strict. Furthermore, if Mr. Murakami and his group engage in various investment activities in Japan, they will be subject to Japanese laws and regulations as a matter of course. As for the tax law, taxes will be imposed according to the tax treaty between Singapore and Japan.
(from the press conference following a cabinet meeting on Tuesday, May 16, 2006)

A:		I think any company can conduct an audit per se as long as it has the capabilities, so it is not strange to consider establishing a new company. What matters is whether or not people with professional expertise required to conduct audits will come together, and it depends on whether or not they have strict values of some kind for such an extremely crucial social mission as audit, so it doesn't matter what kind of establishment they are in.
(from the press conference following a cabinet meeting on Friday, May 12, 2006)

A:		The FSA's basic administrative stance has been to take administrative action against any industry under its jurisdiction if undesirable acts are found in light of the facts, laws and regulations, no matter what company it is, regardless of its size, and we are committed to keeping this basic stance into the future.
(from the press conference following a cabinet meeting on Tuesday, May 23, 2006)