Unofficial and Provisional Translation
Readers are advised to refer to the original Japanese
text before quoting from this document.

Outline of the Amendment Bill of the Insurance
Business Law and the Special Law Concerning
Reorganization Proceedings of Financial Institutions

March  2000

This bill will (1) simplify the process of demutualization, encouraging mutual insurance companies to recapitalize and restructure, (2) develop bankruptcy legislation to enable the application of reorganization proceedings to mutual insurance companies, so that (a) proceedings can be initiated promptly before an insurer falls into excessive debt, (b) rights can be adjusted through judicial procedures, and (c) provision of insurance guarantees can be continued, and (3) maintain the function of the Life Insurance Policyholders Protection Corporation by funding it with additional contributions from the insurance industry and with the introduction of fiscal measures.


Amendment of the Insurance Business Law

1. Demutualization (conversion from a mutual insurance company to a joint stock company)

(1) Introduction of a system for the bulk sale of odd-lot shares
- As an exception to the Commercial Code, a system for the bulk sale of odd-lot shares will be introduced, so that proceeds from the sale will be granted as compensation to members who are allocated odd-lot shares.

Note: In case of demutualization, members are allocated shares in proportion to their contribution to the net asset formation of the company, as compensation for the forfeiture of their rights. However, the Commercial Code prescribes that the minimum issue value must be ¥50,000 or over, which causes an extremely large number of members who make small contributions to receive odd-lot shares.

(2) Enhancement of capital on conversion to a joint stock company
- Enhancement of capital through issuance of shares will be made possible at the time of conversion and immediately after the conversion.

2. Special measures to protect policyholders (system for resolving failed insurers)

(1) Prompt initiation of proceedings
- Insurance companies will be required to report to the supervisory authority when continuing their insurance business is difficult in view of their operations and assets.
Note: An example of such a case is; when a company cannot add to its policy reserves or formulate and implement a rational plan for management improvement, even when a future cash flow analysis indicates that policy reserves will be insufficient in the future.

(2) Strengthening of insurance administrators' authority
- Insurance administrators will be (a) vested with the authority to conduct investigations of failed insurance companies, with possible penalties for non-compliance, and (b) required to take necessary civil and criminal legal measures in order to clarify the responsibility of managers and former managers of failed insurance companies for their failure.
- Insurance administrators will be required to include policies for consolidating and rationalizing the operations of failed insurance companies, in the plans they draw up for the management of these insurers.

(3) Expedition of resolution of failed insurers
- Systems allowing provisional resolutions and court subrogation authorization in lieu of special resolutions (required by the Commercial Code or other legislation) will be introduced.

(4) Alteration of the terms of policies
- Alteration of the terms of policies will be allowed not only in cases of mergers and transfer of insurance policies, but also in cases where companies that include insurance holding companies acquire shares of a failed insurer.

(5) Expansion and strengthening of operations of the Policyholders Protection Corporation

(a) Expansion of operations
- Policyholders Protection Corporation will be allowed to be installed as an insurance administrator or an insurance administrator's proxy.
- A "bridge insurer" (a subsidiary established by the Policyholders Protection Corporation) will be allowed to assume the policies of failed insurance companies when no successor institution can be found.
- Policyholders Protection Corporation will be allowed to purchase insurance claims against failed insurance companies.
- Policyholders Protection Corporation will be allowed to purchase assets of failed insurance companies and, as a temporary measure, entrust the Resolution and Collection Corporation (RCC) with the purchase and recovery of such assets.


(b) Expansion of the scope of financial assistance
- Policyholders Protection Corporation will be allowed to provide financial assistance not only in the form of grant, but also in the form of assets purchase and sharing of losses incurred after the transfer of policies ("loss sharing").
- Policyholders Protection Corporation will be allowed to provide financial assistance not only in the case of full transfer of policies but also in the case of partial transfer, and also in the case of acquisition of shares of failed insurance companies by companies that include insurance holding companies.

(c) Expansion of types of financial assistance
- In addition to providing financial assistance in the case of transfer of policies from a failed insurance company to a successor insurance company, Policyholders Protection Corporation will be allowed to provide financial assistance in the case of <1> assumption of insurance policies (transfer of policies from a failed insurance company to a bridge insurer) and re-assumption of insurance policies (transfer of policies from a bridge insurer to another insurance company), and <2> re-transfer of insurance policies (transfer of policies from the Policyholders Protection Corporation to an insurance company).

(6) Priority to life insurance policyholders
- Life insurance policyholders will be granted general preferential rights regarding insurance claims on their policies.

3. Funding of the Life Insurance Policyholders Protection Corporation

(1) Perpetuation of government guarantees
- Provisions that enable government guarantees to be provided for Life Insurance Policyholders Protection Corporation's borrowing will be perpetuated. (Under the current legislation, such provisions are effective only until the end of March 2001).
Note: Provisions on borrowing from the Bank of Japan will remain effective only until the end of March 2001 as at present.

(2) Government subsidies
- Providing government subsidies to Life Insurance Policyholders Protection Corporation, within an amount designed by the budget, to cover part of or all of the costs of resolution of life insurers which will have failed prior to the end of March 2003, will be made possible. For this, however, it has to be judged that funding the costs entirely by contributions from life insurers could make it difficult to maintain confidence in the insurance industry by worsening the financial situation of insurers, and thereby may cause unexpected confusion in the financial markets or in the people's lives.
Notes: - The Life Insurance Policyholders Protection Corporation's borrowing limit will be raised by ¥500bn, from the current limit of ¥460bn to ¥960bn.
- The industry's contributions to the Life Insurance Policyholders Protection Corporation will be raised by ¥100bn, from the current level of ¥460bn to ¥560bn.

- If the Life Insurance Policyholders Protection Corporation receives government subsidies and makes a profit from the resolution of failed insurance companies, it will be required to transfer such profits to the government, up to the amount received as government subsidy.
Note: Special measures concerning financial assistance (e.g. full protection of death benefits) will remain effective only until the end of March 2001, as at present.

4. Other amendments

- In having the Institute of Actuaries of Japan set assumptions basis of policy reserves and other matters, the supervisory authority will grant the Institute a designated status to enable it perform the necessary supervisory duties.
- In order to promote the steady reform of the financial system, banks and trust banks will be permitted to sell certain insurance products.

 

Amendment of the Special Law Concerning the Reorganization Proceedings of Financial Institutions

1. Reorganization proceedings

(1) Application of reorganization proceedings to mutual insurance companies
- Application of reorganization proceedings to mutual insurance companies will be allowed.

(2) Special measures for reorganization proceedings of insurance companies (both mutuals and joint stock companies)
- Provisions that allow exceptions to the rules on serving notice to policyholders will be introduced and the Policyholders Protection Corporation will be allowed to act as procedural proxy.
- The supervisory authority will be allowed to file application for the initiation of reorganization proceedings, when there is a risk of bankruptcy caused by excessive debts or insolvency.
- The reorganization administratorsí right to cancel policies will be limited in order to protect policyholders.
- Payment of insurance claims up to a certain limit (90% of the insured amount unless otherwise stipulated; equivalent to the ceiling on compensation) will be allowed even if reorganization proceedings are under progress.
- Reorganization plans will be allowed to include differential terms among policyholders (e.g. with respect to reductions in the assumed rate of interest), introduction of early cancellation deductions, protection of premiums paid after the commencement of reorganization proceedings, and conversion from a mutual company to a joint stock company.

2. Bankruptcy proceedings

- Special provisions similar to those concerning reorganization proceedings (e.g. allowing the Policyholders Protection Corporation to act as a proxy) will be introduced for bankruptcy proceedings.

 

Other Matters

1.Enforcement dates

(1) This law will take effect as prescribed by government ordinance on a date no later than three months after the date of promulgation.
(2) The provisions that perpetuate government guarantees on borrowing by the Life Insurance Policyholders Protection Corporation and the provisions that allow sale of certain insurance products by banks and trust banks will take effect on April 1, 2001.

2. Review of the measures

- The government will be required to review the system for protecting policyholders as amended by this law, within three years after this law takes effect, taking into account the state of implementation of the system concerning special measures to protect policyholders and the soundness of management of insurance companies. When considered necessary, the government will be required to take necessary measures, in order to maintain confidence in the insurance industry.

3. Other matters

Other necessary provisions will be introduced.

 


Problems and Measures to Protect Life Insurance Policyholders

Problems

Measures

Weak management bases of
mutual insurance companies

Demutualization of mutual insurance companies
  1. Recapitalization
  2. Restructuring (demutualized insurers can become subsidiaries of holding companies)
  3. Diversification of methods to resolve failed insurers. (Successors will be able to acquire stocks of the failed insurers.)

Negative spread
(between investment returns
and guaranteed yield)

Development of bankruptcy legislation regarding insurance companies
  1. Application of reorganization proceedings to mutual insurance companies.
  2. Prompt initiation of reorganization proceedings before insurance companies fall into excessive debt, in order to keep the resolution cost low.
  3. Adjustment of rights through judicial procedures. (Preferential rights of insurance policyholders, cut in general claims, lowering of guaranteed yield, etc.)
(Note) Continuance of providing guarantee is necessary in life insurance. (Age or health condition may prevent policyholders of a failed insurer to purchase insurance with the same terms and conditions from other insurers.

Maintenance of the function of
the Life Insurance
Policy-holders Protection
 Corporation

Funding of the Policyholders Protection Corporation (including introduction of fiscal measures)
  1. Perpetuation of the provisions that enable government guarantees.
(The current provisions are temporal, effective only until March 2001.)
  2. Introduction of temporal provisions that enables government subsidies. (Subsidies will be used only for failures occurred before the end of March 2003.)
(Note) -The Policyholders Protection Corporationís borrowing limit will be raised by ¥500bn, from the current ¥460bn to ¥960bn.
-The insurance industryís contribution for the Policyholders Protection Corporation will be raised by ¥100bn, from the current ¥460 to ¥560bn.

Strengthening of the Safety-net for Life Insurance Policyholders


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