oversight

U.S.-Japan Trade: The Japanese Insurance Market

Published by the Government Accountability Office on 1999-03-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                     United States General Accounting Office

GAO                  Report to the Chairman, Subcommittee
                     on Trade, Committee on Ways and
                     Means, House of Representatives


March 1999
                     U.S. - JAPAN TRADE

                     The Japanese
                     Insurance Market




GAO/NSIAD-99-108BR
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548                                                                                    Leter




                   National Security and
                   International Affairs Division                                                                            Leter




                   B-282164

                   March 15, 1999

                   The Honorable Philip M. Crane
                   Chairman, Subcommittee on Trade
                   Committee on Ways and Means
                   House of Representatives

                   Dear Mr. Chairman:

                   U.S. insurers have raised concerns about Japan’s implementation of
                   bilateral insurance agreements entered into with the United States in 1994
                   and 1996. In recent years, Japan has taken some actions to deregulate its
                   insurance market, both in accordance with these agreements and as part of
                   its overall efforts at financial deregulatory reform. However, some U.S.
                   insurance industry representatives have stated that the measures taken to
                   date are insufficient. The U.S. and Japanese governments differ regarding
                   the extent to which the agreements have been implemented.

                   At your request, we are currently assessing the implementation of the
                   insurance agreements, as well as U.S. government monitoring and
                   enforcement efforts. This interim report responds to your request for
                   information on (1) the size of the Japanese insurance market; (2) the U.S.
                   insurance company presence in and concerns regarding this market; and
                   (3) the business, regulatory, and other events that have affected the
                   Japanese insurance market in the 1990s. We expect to issue our final
                   report in August 1999.



Results in Brief   The Japanese insurance market is the second largest insurance market in
                   the world after the United States, with $334 billion in annual premiums paid
                   to insurance companies operating in Japan in fiscal year 1997. 1 The
                   Organization for Economic Cooperation and Development (OECD)2
                   reports that foreign market share grew in Japan, from 2.4 percent in 1990 to
                   3.7 percent in 1996, the most recent year for which such data are available.



                   1The 1997 Japanese fiscal year covers the period from April 1, 1997, to March 31, 1998. The premiums
                   for this period in yen were 40,965 billion. We averaged the exchange rates for the four quarters of the
                   period to obtain a rate of 122.7 yen to the dollar.

                   2
                     The OECD is an international forum for monitoring economic trends and coordinating economic
                   policy among 29 countries, including the United States and Japan.




                   Page 1                                           GAO/NSIAD-99-108BR Japan’s Insurance Market
B-282164




By comparison, foreign penetration of the U.S. insurance market in 1996
was almost three times greater.

Currently, 13 U.S. majority-owned insurance companies operate in Japan,
with 81 percent of the $10.961 billion in premiums generated by these
companies in fiscal year 1997 attributable to two insurance providers—the
American Family Life Assurance Company of Columbus (AFLAC) and the
American International Group (AIG).3 AFLAC is the largest U.S. provider
of niche insurance products (such as cancer insurance), and AIG is the
largest U.S. provider of standard life insurance and non-life insurance
products (such as automobile insurance). CIGNA4 is the next largest U.S
provider in the Japanese insurance market, followed by Prudential Life
Insurance Company, Ltd. Of total U.S. premiums, over 60 percent are
attributable to niche products, with AFLAC accounting for $4.582 billion, or
67 percent, of U.S. niche product sales in fiscal year 1997. U.S. insurers in
Japan are concerned about the following issues: (1) Japan’s degree of
deregulation of its market for standard insurance products, (2) Japanese
firms’ increased activities in the market for niche insurance products,
(3) Japan’s level of transparency in approving new insurance products and
making other regulatory decisions, (4) the sufficiency of staffing of Japan’s
regulatory offices, (5) Japan’s handling of how insurance industry
contributions are being determined for a new fund to protect policyholders
from company failures, and (6) an impasse between the United States and
Japan over the timing of a grace period during which U.S. and other
insurers could gain a competitive foothold in important segments of the
Japanese insurance market.

 Several business, regulatory, and other events have affected the Japanese
insurance market in the 1990s.

• Japan passed an “Insurance Business Law” in 1995, which went into
  effect in April 1996. The first major revision of Japan’s insurance laws in
  more than 50 years, this legislation, among other things, permitted life
  insurance companies to form non-life subsidiaries and non-life
  insurance companies to form life subsidiaries.


3AFLAC is a U.S. company based in Columbus, Georgia. AIG, a U.S.-owned entity, owns 100 percent of
three insurance companies in Japan and 50 percent of a joint venture with a Japanese company.

4
  CIGNA, a U.S. company, owns 100 percent of CIGNA Accident and Fire Insurance Company, Ltd., a
non-life insurance company in Japan, and 90 percent of INA Himawari Life Insurance Company, Ltd., a
life insurance company in Japan.




Page 2                                         GAO/NSIAD-99-108BR Japan’s Insurance Market
             B-282164




             • The failure of a major Japanese life insurance company in 1997 spurred
               some other Japanese insurers to find foreign partners. For example, a
               U.S. firm, GE Capital, formed a joint venture with failing Toho Mutual
               Life Insurance Co., in which GE Capital owns 90 percent of the business
               and Toho owns 10 percent. The new venture sells mostly standard life
               insurance policies.
             • In 1997 and 1998, as part of its overall effort to deregulate its insurance
               market and implement the 1994 and 1996 agreements with the United
               States, Japan began allowing insurers greater flexibility in setting rates
               for liability, commercial fire, and automobile policies.

             Additionally, in 1997, Japan agreed to include key commitments contained
             in the 1996 agreement as part of its obligations under a World Trade
             Organization (WTO) financial services agreement. As a result, these
             commitments apply to all WTO members. The WTO can therefore be a
             forum for resolving disputes related to these commitments.



Background   The insurance market in Japan is divided into three sectors. The first
             sector consists of standard life insurance products; the second sector
             consists of standard non-life insurance products (mostly automobile and
             fire policies). These two sectors combined are called the “primary” sector.
             In addition to the primary sector, a “third” sector of the Japanese insurance
             market includes certain life and non-life niche products such as cancer
             insurance and personal accident insurance.

             In 1994 and 1996, the United States and Japan signed agreements to reduce
             barriers that impede market access for competitive foreign insurance
             providers in the Japanese market. The 1994 and 1996 agreements also
             generally preserved foreign companies’ presence in the third sector by
             linking deregulation of that sector to substantial deregulation of the larger,
             primary sector. Under the 1996 agreement, once the government of Japan
             has met specific criteria to deregulate the primary sector, foreign insurers
             will have a 2-1/2 year period to gain a competitive foothold before the third
             sector is opened to new competition. The U.S. and Japanese governments
             are currently at an impasse over whether this 2-1/2 year period has begun.
             The Japanese government has stated that the required primary sector
             deregulation was completed on schedule and that the 2-1/2 year interim
             period began July 1, 1998. The U.S. government has stated that it does not
             support the initiation of the 2-1/2 year countdown because Japan has not
             fully implemented all the specific actions to deregulate the primary sector
             called for in the 1996 agreement.



             Page 3                               GAO/NSIAD-99-108BR Japan’s Insurance Market
                  B-282164




Agency Comments   We discussed a draft of this report with knowledgeable officials from the
                  Office of the U.S. Trade Representative (USTR) and the U.S. embassy in
                  Japan. They agreed with the information presented and made some
                  technical comments, which were incorporated in the report as appropriate.



Scope and         In order to obtain information on the size of the Japanese insurance
                  market, we reviewed statistical data from the OECD and from Japanese
Methodology       sources. The Japanese sources were two annual publications: Statistics of
                  Life Insurance Business in Japan and The Statistics of Japanese Non-Life
                  Insurance Business (Tokyo, Japan: Hoken-kenkyujo [Insurance Research
                  Institute], 1993-97). We did not verify the published firm and market
                  information. Several different concepts of premium income are available
                  to portray insurance operations in Japan. Our tables and graphs use the
                  “premium income” of life insurance companies and the “net direct
                  premium” (including savings premiums) of non-life insurance companies.
                  These premiums are net of cancellations and other returns and exclude
                  reinsurance. The measures used show total premiums received from
                  policyholders.

                  In order to determine the U.S. company presence in and U.S. concerns
                  about the Japanese insurance market, we interviewed company and
                  industry association officials and looked at the Japanese statistical sources
                  mentioned above. We converted yen data from these sources by averaging
                  the exchange rates for the four quarters of Japan’s 1997 fiscal year—April 1,
                  1997-March 31, 1998—to obtain a rate of 122.7 yen to the dollar. Our
                  computations include prorated premiums for INA Himawari Life Insurance
                  Company, Ltd., which is 90-percent owned by CIGNA, and Japan
                  International Accident & Fire Insurance Co. Ltd., which is a 50/50 joint
                  venture with AIG.

                  In order to identify the business, regulatory, and other events that have
                  affected the Japanese insurance market in the 1990s, we examined the text
                  of the 1994 and 1996 agreements, official U.S. statements of policy on
                  U.S.-Japan relations and the Japanese insurance market, industry position
                  papers, reports by the Japan Economic Institute and the Japan Economic
                  Almanac on insurance, and Japanese and U.S. insurance industry
                  publications.

                  We conducted our work between October 1998 and March 1999 in
                  accordance with generally accepted government auditing standards.



                  Page 4                              GAO/NSIAD-99-108BR Japan’s Insurance Market
B-282164




Briefing Section I provides more information on the size of Japan’s
insurance market; Briefing Section II details U.S. company presence in and
concerns regarding this market; and Briefing Section III describes in
greater depth the business, regulatory, and other events that have affected
the market in the 1990s. Appendix I highlights key steps Japan has taken to
deregulate its insurance market and agreements it has made on insurance;
Appendix II provides a more detailed list of these and other events,
including Japanese regulatory measures, bilateral and multilateral
activities, and Japanese and U.S. business actions.


We are sending copies of this report to Senator Joseph R. Biden, Senator
Robert C. Byrd, Senator Pete V. Domenici, Senator Jesse A. Helms, Senator
Frank R. Lautenberg, Senator Patrick J. Leahy, Senator Joseph I.
Lieberman, Senator Mitch McConnell, Jr., Senator Ted Stevens, and Senator
Fred Thompson, and to Representative Dan Burton, Representative Sonny
Callahan, Representative Sam Gejdenson, Representative Benjamin A.
Gilman, Representative John R. Kasich, Representative Sander M. Levin,
Representative David R. Obey, Representative Nancy Pelosi,
Representative John M. Spratt, Jr., Representative Henry A. Waxman, and
Representative C.W. (Bill) Young in their capacities as Chair or Ranking
Minority Member of Senate and House Committees and Subcommittees.
We are also sending copies of this report to Ambassador Charlene
Barshefsky, U.S. Trade Representative; the Honorable William M. Daley,
Secretary of Commerce; the Honorable Madeleine K. Albright, Secretary of
State; the Honorable Lynn Bragg, Chairman of the International Trade
Commission; the Honorable Jacob Lew, Director, Office of Management
and Budget; and to the firms we contacted in preparing this report. Copies
will also be made available to others upon request.




Page 5                             GAO/NSIAD-99-108BR Japan’s Insurance Market
B-282164




If you or your staff have any questions about this report, please contact me
at (202) 512-4128.

Sincerely yours,




Benjamin F. Nelson, Director
International Relations and Trade Issues




Page 6                              GAO/NSIAD-99-108BR Japan’s Insurance Market
B-282164




Page 7     GAO/NSIAD-99-108BR Japan’s Insurance Market
Contents



Letter                                                                                              1


Briefing Section I                                                                                 10
                         OECD Shares of Insurance Market Premiums, 1988-96                         10
Size of Japan’s          Japan’s Insurance Market, Fiscal Years 1992-97                            12
Insurance Market         Japan’s Share of OECD Life Insurance Market, 1996                         14
                         Japan’s Share of OECD Non-Life Insurance Market, 1996                     16
                         Foreign Market Share in the Japanese and U.S. Insurance Markets,
                             1990-96                                                               18


Briefing Section II                                                                                20
                         U.S. Firms in Japan’s Insurance Market, Fiscal Year 1997                  24
U.S. Company             U.S. Insurance Company Premium Distribution by Sector in Japan,
Presence in and               Fiscal Year 1997                                                     26
                         U.S. Firms in Japan’s Primary Insurance Sector, Fiscal Year 1997          28
Concerns Regarding       U.S. Firms in Japan’s Third Insurance Sector, Fiscal Year 1997            30
the Japanese Insurance   Areas of Concern for the U.S. Insurance Industry                          32
Market

Briefing Section III                                                                               34
                         Timeline of Recent Business Events in Japan’s Insurance Market            34
Recent Events            Timeline of Recent Regulatory Events in Japan’s Insurance Market          36
Affecting Japan’s        Timeline of Developments Affecting U.S.-Japan Insurance Agreements        38
Insurance Market

Appendix I                                                                                         40
Key Insurance
Deregulation Steps and
Agreements on
Insurance by Japan,
1992-98




                         Page 8                            GAO/NSIAD-99-108BR Japan’s Insurance Market
Appendix II                                                                                          41
List of Events Relating
to Japan’s Insurance
Market, 1990-Present

Appendix III                                                                                         50
Major Contributors to
This Report

Tables                    Table II.1: U.S. Life Insurance Companies in Japan, Fiscal Year 1997       20
                          Table II.2: U.S. Non-Life Insurance Companies in Japan, Fiscal
                            Year 1997                                                                22




                          Abbreviations

                          AFLAC         American Family Life Assurance Company of Columbus
                          AIG           American International Group
                          ALICO         American Life Insurance Company
                          OECD          Organization for Economic Cooperation and Development
                          USTR          U.S. Trade Representative
                          WTO           World Trade Organization




                          Page 9                             GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section I

Size of Japan’s Insurance Market                                                                                             onISn
                                                                                                                                 igB
                                                                                                                                   efctri




                         OECD Shares of Insurance Market
                         Premiums, 1988-96
                2500



                2000



                1500
                                                                                                       O ther O EC D
                                                                                                       Japan
                                                                                                       U SA
                1000



                 500



                     0
                     1988   1989   1990    1991      1992      1993      1994      1995      1996




                                      Note: “Other OECD” excludes the United States and Japan.
                                      Source: Insurance Statistics Yearbook, 1997 and 1998 editions (OECD, 1997 and 1998)




                                      Page 10                                      GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section I
Size of Japan’s Insurance Market




The global insurance market has grown over the last decade, from a total of
$1,337 billion in premiums for Organization for Economic Cooperation and
Development (OECD) countries in 1988 to $ 2,051 billion in 1996, the most
recent year for which such data are available.1 Japan is the second largest
insurance market after the United States, with an 18 percent share of the
OECD market in 1996. The Japanese are high per capita consumers of
insurance. Only the populations of Luxembourg and Switzerland buy more
insurance on a per capita basis.




1
  We have not taken into account insurance premiums from non-OECD countries, since data for these
countries are not readily available.




Page 11                                       GAO/NSIAD-99-108BR Japan’s Insurance Market
                                                Briefing Section I
                                                Size of Japan’s Insurance Market




                                    Japan’s Insurance Market, Fiscal Years
                                    1992-97
                                      Insurance Market Measured in Dollars and Yen
                            41500                                                                    450




                                                                                                           Premiums in U.S. dollars, billions
                            41000
Premiums in yen, billions




                                                                                                     400
                            40500

                                                                                                     350
                            40000
                                                                                                                                                Yen
                            39500                                                                                                               U.S. Dollar
                                                                                                     300

                            39000
                                                                                                     250
                            38500

                            38000                                                                    200
                                     1992   1993      1994        1995        1996        1997




                                                Source: Statistics of Japanese Non-Life Insurance Business and Statistics of Life Insurance Business
                                                in Japan, 1993-97 editions. Dollar premiums computed using International Monetary Fund quarterly
                                                exchange rates corresponding to the Japanese fiscal year.




                                                Page 12                                        GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section I
Size of Japan’s Insurance Market




When measured in both yen and dollars, the Japanese insurance market
grew steadily from 39,132 billion yen ($314 billion) in fiscal year 1992 to a
high of 41,294 billion yen ($428 billion) in fiscal year 1995. It then dropped
to 40,266 billion yen ($357 billion) the following year. The dollar and yen
trends diverge, however, in fiscal year 1997, with the yen-denominated
market showing an increase to 40,965 billion yen while the
dollar-denominated market shrank further, to $334 billion.

Some of the differences in the dollar- and yen-denominated premium trends
are due to changes in the exchange rate. The yen rose continuously against
the dollar from fiscal year 1992 through the first quarter of fiscal year 1995
but then proceeded to fall. It went from 96.44 yen to the dollar in fiscal
year 1995 to 122.70 yen to the dollar in fiscal year 1997.




Page 13                              GAO/NSIAD-99-108BR Japan’s Insurance Market
          Briefing Section I
          Size of Japan’s Insurance Market




Japan’s Share of OECD Life Insurance
Market, 1996

                                                   27%


    44%                                                                  Japan
                                                                         USA
                                                                         Other OECD


                                        29%




          Note: “Other OECD” excludes the United States and Japan.
          Source: Insurance Statistics Yearbook, 1998 edition (OECD, 1998). Market share is based on total
          OECD premiums.




          Page 14                                       GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section I
Size of Japan’s Insurance Market




Japan was the world’s second largest life insurance market in 1996,
accounting for 27 percent of OECD premiums in that year, the latest period
for which such data are available. The United States, at 29 percent in 1996,
was the largest market. In 1995, Japan was the world’s largest life
insurance market, with just under 33 percent of OECD premiums. The
United States ranked second in that year, with 27 percent of premiums.




Page 15                             GAO/NSIAD-99-108BR Japan’s Insurance Market
          Briefing Section I
          Size of Japan’s Insurance Market




Japan’s Share of OECD Non-Life
Insurance Market, 1996
                                        11%



    40%
                                                                         Japan
                                                                         USA
                                                                         Other OECD

                                               49%




          Note: “Other OECD” excludes the United States and Japan.
          Source: Insurance Statistics Yearbook, 1998 edition (OECD, 1998). Market share is based on total
          OECD premiums.




          Page 16                                       GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section I
Size of Japan’s Insurance Market




Japan was also the world’s second largest non-life insurance market in
1996, with 11 percent of OECD premiums in that year. The United States
was the dominant market, accounting for almost 50 percent of OECD
premiums in 1996. Japan’s share of OECD premiums was slightly larger in
1995, with 13 percent of premiums. The U.S. share at that time was
48 percent.




Page 17                            GAO/NSIAD-99-108BR Japan’s Insurance Market
               Briefing Section I
               Size of Japan’s Insurance Market




Foreign Market Share in the Japanese and
U.S. Insurance Markets, 1990-96
   12

   10

    8

    6                                                                       Japanese Market
                                                                            U.S. Market
    4

    2

    0
        1990     1991     1992      1993     1994     1995      1996




               Source: GAO calculations of direct business premium data from the Insurance Statistics Yearbook,
               1997 and 1998 editions (OECD, 1997 and 1998).




               Page 18                                       GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section I
Size of Japan’s Insurance Market




The foreign share of the U.S. insurance market was almost three times
greater than that of Japan in 1996, the most recent year for which such data
are available. The foreign share of Japan’s insurance market has grown
from 2.4 percent in 1990 to 3.7 percent in 1996. Foreign penetration in the
U.S. insurance market also rose during this period, from 6.8 to 10.7 percent.
The growth rate of foreign penetration in both countries’ insurance
markets during this period is about the same.




Page 19                             GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section II

U.S. Company Presence in and Concerns
Regarding the Japanese Insurance Market                                                                                                             nIoSn
                                                                                                                                                        B
                                                                                                                                                        iegfctri




Table II.1: U.S. Life Insurance Companies in Japan, Fiscal Year 1997

 Dollars in millions
                               Year entered                Total direct              Standard products             Niche products
 Company name                  Japanese market             premiums                  (primary sector)              (third sector)
 American Family Life          1974                        $4,823                    5% of business:               95% of business:
 Assurance Company of                                                                term,   wholea                cancer, with some
 Columbus (AFLAC)                                                                                                  hospitalization, nursing
                                                                                                                   care, and other illness
                                                                                                                   products
 American Life Insurance       1972                        $2,035                    64% of business:              36% of business:
 Company (ALICO)                                                                     whole, term,     endowmenta   hospitalization
 (owned by American
 International Group [AIG])
 Prudential Life Insurance     1988                        $912                      84% of business:              16% of business:
 Company, Ltd.                                                                       whole, term, endowment,       supplementary ridersb
                                                                                     variablea
 INA Himawari Life Insurance   1982                        $720                      78% of business:              22% of business:
 Company, Ltd.                                                                       term, whole,     endowmenta   medical, cancer, other
 (90%-owned by CIGNA)
 GE Edison Life                Formed new joint            About $537c               97% of business:              3% of business:
 (90%-owned by GE Capital)     venture with Toho           (4/1/98-9/30/98)          endowment, annuities,         medical
                               Mutual Life on 4/1/98                                 whole, termb

                                            a
                                                These are different types of standard life insurance policies.
                                            bSupplementary      riders provide additional coverage.
                                            c
                                             We averaged the exchange rates for the two quarters of this period to obtain a rate of 137.87 yen to
                                            the dollar.
                                            Sources: Aide Memoir: Japan Insurance Issues, (Dec. 4, 1992), International Insurance Council
                                            (Washington, D.C.); GE Edison; Insurance Statistics of Life Insurance Business in Japan 1997 (Tokyo,
                                            Japan: Insurance Research Institute); life insurance products and primary/third sector percentages
                                            provided by each company.


                                            Although there are fewer U.S. life insurance companies than non-life
                                            companies in Japan, the life companies’ cumulative premium volume is
                                            greater than that of the non-life companies. American Family Life
                                            Assurance Company of Columbus (AFLAC), a life insurance company, is by
                                            far the largest U.S. insurance company in Japan, with $4,823 million in
                                            premiums in fiscal year 1997. According to AFLAC’s 1997 annual report,
                                            AFLAC is also the largest foreign insurer in Japan, as well as the fourth
                                            most profitable foreign company there after IBM, Coca-Cola, and Amway.



                                            Page 20                                              GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section II
U.S. Company Presence in and Concerns
Regarding the Japanese Insurance Market




As of March 1998, AFLAC’s Japan operations accounted for about
70 percent of its business.

Whereas AFLAC’s business is predominantly in the niche, or “third” sector,
where it sells cancer insurance, the other U.S. life insurance companies
concentrate their activities in the primary sector. An additional U.S.
company, GE Capital, entered the Japanese insurance market in April 1998
by forming a joint venture with the failing Toho Mutual Life Insurance Co.,
in which GE Capital owns 90 percent and Toho owns 10 percent of the
business. The joint venture is called GE Edison Life.




Page 21                                   GAO/NSIAD-99-108BR Japan’s Insurance Market
                                           Briefing Section II
                                           U.S. Company Presence in and Concerns
                                           Regarding the Japanese Insurance Market




Table II.2: U.S. Non-Life Insurance Companies in Japan, Fiscal Year 1997

 Dollars in millions
                                   Year entered               Total direct          Standard products             Niche products
 Company name                      Japanese market             premiums             (primary sector)              (third sector)
 AIU Insurance Company             1946                       $1,889                53% of business:              47% of business:
 (owned by AIG)                                                                     auto, fire, casualty,         personal accident
                                                                                    marine & transit              (includes travel)
 CIGNA Accident and Fire           1950                       $441                  65% of business:              35% of business:
 Insurance Company, Ltd.                                                            auto, fire, casualty,         personal accident,
                                                                                    marine, transit, other        overseas travel
 American Home Assurance Com-      1960                       $129                  20% of business:              80% of business:
 pany                                                                               fire, auto, casualty,         personal accident
 (owned by AIG)                                                                     marine & transit              (includes travel)
 Japan International Accident &    1989                       $96                   15% of business:              85% of business:
 Fire Insurance Co. Ltd                                                             casualty, property,           personal accident
 (50%-owned by AIG)                                                                 auto, energy, marine,         (includes travel)
                                                                                    other
 Lumbermens Mutual Casualty        1981                       $12                   76% of business:              24% of business:
 Company (Kemper)                                                                   casualty, auto, fire,         personal accident
                                                                                    marine & transit
 Liberty Mutual Insurance          1995                       $11                   80% of business:              20% of business:
 Company                                                                            casualty, auto, marine        personal accident
 (Liberty International)                                                            & transit, fire
 Unum Japan Accident               1994                       $7                    0%                            100% of business:
 Insurance Company                                                                                                long-term disability 90%;
                                                                                                                  short-term disability &
                                                                                                                  personal accident 10%
 Federal Insurance Company         1973                       $6                    70% of business:              30% of business:
 (Chubb)                                                                            casualty, fire, marine &      property, liability, accident
                                                                                    transit, auto
 Allstate Property and Casualty    Divested 2 other           Operational, but      Auto
 Insurance Japan Company Ltd.      companies in 11/97 &       no significant
                                   created new company        sales yet
                                   in spring '98

                                           Sources: Aide Memoir: Japan Insurance Issues (Dec. 4, 1992), International Insurance Council
                                           (Washington, D.C.); Liberty, Unum, and Allstate; Insurance Statistics of Non-Life Insurance Business in
                                           Japan 1997 (Tokyo, Japan: Insurance Research Institute).




                                           Page 22                                          GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section II
U.S. Company Presence in and Concerns
Regarding the Japanese Insurance Market




American International Group (AIG), which owns companies on both the
life and non-life sides of the Japanese insurance market, dominates U.S.
participation on the non-life side, with more than four times the premium
volume in fiscal year 1997 of CIGNA, the next largest U.S.
non-life insurance provider.

Of the eight wholly U.S.-owned and one 50-percent U.S.-owned non-life
insurance companies, the largest company, AIG’s AIU Insurance Company,
splits its business almost evenly between the primary and third sectors.
Third sector non-life products consist primarily of personal accident and
disability insurance. Of the remaining eight companies, four conduct a
majority of their business in the primary sector; three concentrate their
business in the third sector; and one, Allstate, divested itself of all but
5 percent of its existing insurance business in Japan in November 1997 and
created a new entity there in early 1998. The new company sells
automobile insurance, a primary sector product, but has not yet reported
any significant sales. Company officials stated that it does not plan any
advertising or other sales attempts until April 1999.

CIGNA reports that it is currently negotiating the sale of its worldwide
property and casualty business, including CIGNA Accident and Fire
Insurance Company, Ltd., in Japan, and is examining the possibility of
getting into the Japanese pension and healthcare insurance markets.




Page 23                                   GAO/NSIAD-99-108BR Japan’s Insurance Market
       Briefing Section II
       U.S. Company Presence in and Concerns
       Regarding the Japanese Insurance Market




U.S. Firms in Japan’s Insurance
Market, Fiscal Year 1997
  6


  5


  4


  3


  2


  1


  0




       Source: Statistics of Life Insurance Business in Japan, 1997; Statistics of Japanese Non-Life
       Insurance Business, 1997. We calculated prorated premiums for AIG and CIGNA based on the
       percentage of U.S. ownership.




       Page 24                                        GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section II
U.S. Company Presence in and Concerns
Regarding the Japanese Insurance Market




The two largest U.S. insurance providers, AFLAC and AIG, together earned
81 percent of total U.S. insurance company premiums in Japan in fiscal
year 1997. The CIGNA-owned companies and Prudential combined
accounted for 18 percent. The remaining four companies—Lumbermen’s
Mutual Casualty Company (Kemper ), Liberty Mutual Insurance Company
(Liberty), Unum Japan Accident Insurance Company (Unum), and Federal
Insurance Company (Chubb)—together earned less than 0.5 percent.

GE Edison Life is not shown in this chart because it did not enter the
market until after fiscal year 1997. It earned about $0.5 billion during its
first 6 months of operation (Apr.-Sept. 1998). Extending this trend over a
12-month period would make its annual premium volume about $1 billion,
or slightly less than that of the CIGNA-owned companies combined.




Page 25                                   GAO/NSIAD-99-108BR Japan’s Insurance Market
          Briefing Section II
          U.S. Company Presence in and Concerns
          Regarding the Japanese Insurance Market




U.S. Insurance Company Premium Distribution by
Sector in Japan, Fiscal Year 1997

   100%
    90%
    80%
    70%
    60%
    50%                                                                           Primary sector
                                                                                  Third sector
    40%
    30%
    20%
    10%
     0%




          Source: Statistics of Life Insurance Business in Japan, 1997; Statistics of Japanese Non-Life
          Insurance Business, 1997. We calculated prorated shares for AIG and CIGNA based on the
          percentage of U.S. ownership.




          Page 26                                         GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section II
U.S. Company Presence in and Concerns
Regarding the Japanese Insurance Market




Only Unum and AFLAC conducted all or most of their business in the third
sector in fiscal year 1997. However, given the size of the two largest U.S.
insurance providers in Japan, AFLAC and AIG, and their respective shares
of premiums attributable to third sector sales in that year, over three-fifths
of all U.S. premiums were earned in the third sector in fiscal year 1997.

Allstate and GE Edison Life were not included in this chart because there
are no comparable, fiscal year 1997 data for these companies. Both
companies have told us that their products fall completely or almost
completely within the primary sector.




Page 27                                   GAO/NSIAD-99-108BR Japan’s Insurance Market
        Briefing Section II
        U.S. Company Presence in and Concerns
        Regarding the Japanese Insurance Market




U.S. Firms in Japan’s Primary
Insurance Sector, Fiscal Year 1997
  2.5

    2

  1.5

    1

  0.5

    0




        Source: Statisctics of Life Insurance Business in Japan, 1997; Statistics of Japanese Non-Life
        Insurance Business, 1997. We calculated prorated premiums for AIG and CIGNA based on the
        percentage of U.S. ownership.




        Page 28                                        GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section II
U.S. Company Presence in and Concerns
Regarding the Japanese Insurance Market




The AIG-owned companies combined dominated the U.S. insurers in the
primary sector in fiscal year 1997. With $2.345 billion in primary sector
premiums in that year (56 percent of the U.S. total), AIG’s primary sector
business was almost three times that of any other U.S. insurer. The
CIGNA-owned companies combined ranked second, with 19 percent of the
U.S. total. Unum did not derive any of its premiums from primary sector
products in fiscal year 1997.




Page 29                                   GAO/NSIAD-99-108BR Japan’s Insurance Market
        Briefing Section II
        U.S. Company Presence in and Concerns
        Regarding the Japanese Insurance Market




U.S. Firms in Japan’s Third Insurance
Sector, Fiscal Year 1997
    5
  4.5
    4
  3.5
    3
  2.5
    2
  1.5
    1
  0.5
    0




        Source: Statistics of Life Insurance Business in Japan, 1997; Statistics of Japanese Non-L:ife
        Insurance Business, 1997. We calculated prorated premiums for AIG and CIGNA based on the
        percentage of U.S. ownership.




        Page 30                                        GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section II
U.S. Company Presence in and Concerns
Regarding the Japanese Insurance Market




With regard to the third sector, AFLAC led the U.S. insurers, earning
$4.582 billion in third sector premiums in fiscal year 1997, or 67 percent of
the U.S. premiums in this sector. The AIG-owned companies’ combined
third sector premiums for the year were less than 40 percent of AFLAC’s, or
26 percent of the U.S. total. The remaining six companies together
accounted for less than 7 percent of the U.S. total.




Page 31                                   GAO/NSIAD-99-108BR Japan’s Insurance Market
             Briefing Section II
             U.S. Company Presence in and Concerns
             Regarding the Japanese Insurance Market




   Areas of Concern for the
   U.S. Insurance Industry
Japanese Primary Sector Deregulation

Third Sector Activities of Japanese Insurers

Transparency

Staffing of Regulatory Offices

Policyholder Protection Corporations

Timing of Opening the Third Sector




             The U.S. insurance industry has expressed several concerns over
             implementation of the 1994 and 1996 insurance agreements with Japan and
             developments in the Japanese insurance market. First, U.S. insurance
             company representatives in Japan have been concerned that primary
             sector deregulation falls short of meeting some of the requirements of the
             agreements. For example, they have identified cases where the approval of
             new product and new premium rate applications has taken longer than the
             standard 90 days committed to by Japan in the 1996 agreement. Also,



             Page 32                                   GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section II
U.S. Company Presence in and Concerns
Regarding the Japanese Insurance Market




insurance industry executives have questioned the adequacy of reform of
organizations that calculate premium rates for certain risks for
non-life insurance products in Japan.

In addition, U.S. insurance companies are concerned that Japanese
activities in the third sector are increasing even though both agreements
restrict most such activities. U.S. company representatives report that
Japanese insurance providers are expanding their distribution channels in
the life area of the third sector (cancer insurance) and offering significant
discounts in the non-life area (group personal accident insurance).

U.S. insurance industry representatives have also stated that Japan’s
process of implementing laws regarding insurance, approving new
products, and making other decisions affecting insurance companies is
often unclear. For example, insurance companies have little opportunity to
comment on regulatory decisions before they are finalized by the Japanese
government. In addition, Japan has few written guidelines on how
insurance companies can obtain approval for issuing new types of policies
and/or new rates for these and existing policies. Moreover, U.S. insurance
industry representatives have said that Japanese regulatory agencies do not
have adequate staff to approve insurance products and rates in a timely
manner.

Although not covered by the agreements, U.S. companies have also been
concerned about the creation of “policyholder protection corporations”
through which insurance companies will be required by the Japanese
government to contribute to a fund to protect policyholders from insurance
company failures. U.S. insurance company executives are concerned that
these corporations may not equitably distribute among Japanese and
foreign insurance providers the cost of absorbing future insurance
company insolvencies.

Finally, U.S. insurance industry representatives have expressed concern
that the Japanese and U.S. governments disagree on when the third sector
will be opened to new competition from Japanese insurance providers.




Page 33                                   GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section III

Recent Events Affecting Japan’s Insurance
Market                                                                                                                    IonS
                                                                                                                             B
                                                                                                                             igecftri




                        Timeline of Recent Business Events in
                        Japan’s Insurance Market


                                                                                               1998 -
            1994            1996            1997             1997             1998             present




       Unum            CIGNA            AIG offers       Third sector     GE Capital        Expanded
       licensed for    Accident and     differentiated   activities by    enters the        activities and
       disability      Fire Insurance   auto rates       INA/Yasuda       Japanese          new
                       Company, Ltd.                     raise concerns   market            connections
                       licensed to                       by some U.S.                       by U.S. firms
                       sell personal                     firms                              announced
                       accident
                       insurance;
                       two
                       companies
                       receive
                       authorization
                       to make direct
                       sales to
                       customers




                                           Page 34                              GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section III
Recent Events Affecting Japan’s Insurance
Market




Since 1994, U.S. companies have entered new lines of business and
introduced innovative products and marketing techniques in Japan’s
insurance market, such as direct marketing of auto insurance to consumers
via mail and phone. More recently, after the failure in 1997 of Nissan Life, a
number of connections with Japanese firms have been announced,
including GE Capital’s partnering in 1998 with ailing Toho Mutual Life.
Deregulation in Japan’s insurance market is also expanding opportunities
for U.S. firms outside the insurance industry. For example, Citigroup, the
largest financial group in the United States, has announced plans to enter
the insurance market in Japan as early as 2001, when a ban will be lifted on
banks selling insurance. Other U.S. companies currently negotiating deals
with Japanese insurance providers include a discount broker that may
provide online sales of insurance products and a firm specializing in
managing earthquake risks.




Page 35                                     GAO/NSIAD-99-108BR Japan’s Insurance Market
                           Briefing Section III
                           Recent Events Affecting Japan’s Insurance
                           Market




               Timeline of Recent Regulatory Events in
               Japan’s Insurance Market



    1990            1995                     1997                 1998                1998




                  Japanese                                                          Rating
Japanese                                  Rate                 Commercial
                  government                                                        organization
government                                differentiation      fire rate
                  passes                                                            reform; new
study of                                  allowed for auto     flexibility
                  insurance                                                         oversight bodies
insurance                                 and liability        allowed
                  business law                                                      formed
reform begun                              insurance




                           Page 36                                     GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section III
Recent Events Affecting Japan’s Insurance
Market




Japan began examining fundamental reform of insurance sector regulation
in the early 1990s. In 1995, the Japanese government passed an “Insurance
Business Law,” which represented the first major revision of Japan’s
insurance laws in more than 50 years. This legislation allowed for greater
flexibility in the insurance industry by permitting life insurance companies
to form non-life subsidiaries and non-life insurance companies to form life
subsidiaries, by partially liberalizing premium rates, and by allowing for
other new activities. The U.S.-Japan insurance agreements of 1994 and
1996 addressed the scope and timing of deregulation. The agreements
created opportunities in the primary sector to adjust rates for certain
products to take risk into account and to simplify new product and rate
approval. Automobile, liability, and commercial fire policies are among
those eligible for these changes. In July 1998, Japan removed the
requirement that non-life insurers use rates established by industry groups
known as “rating organizations” to set their rates. These agreements also
delayed opening the third sector to new competition until substantial
deregulation of Japan’s primary sector had occurred. The changes in
Japan’s insurance market are part of a larger effort to modernize Japan’s
financial markets. New, more independent oversight bodies have been
established to deal with insolvency in the banking and insurance sectors.




Page 37                                     GAO/NSIAD-99-108BR Japan’s Insurance Market
                            Briefing Section III
                            Recent Events Affecting Japan’s Insurance
                            Market




              Timeline of Developments Affecting
              U.S.-Japan Insurance Agreements



                                                                                              March
 1993         1994           1995            1996           1997              1998            1999




U.S.-Japan   Insurance   Concerns           Second       Japan agrees       July 1 decision   United States
framework    agreement   emerge over        insurance    to include         on                and Japan
agreement    signed      implementation     agreement    insurance          whether 2-1/2     agree to hold
concluded                of 1994            signed       commitments        year grace        consultations
                         agreement                       in World           period can        under the
                                                         Trade              start; impasse    agreements in
                                                         Organization       over start of     April 1999
                                                         (WTO)              grace period
                                                         financial
                                                         services
                                                         agreement




                            Page 38                                     GAO/NSIAD-99-108BR Japan’s Insurance Market
Briefing Section III
Recent Events Affecting Japan’s Insurance
Market




In 1993, the United States and Japan concluded a “Framework for a New
Economic Partnership,” which addressed sectoral, structural, and
macroeconomic obstacles to market access in Japan. Under this
framework, the United States and Japan concluded their first bilateral
agreement on insurance in 1994. A principal goal of the agreement was to
ensure that Japanese insurance reform was carried out in a way that would
not discriminate against the interests of foreign insurance providers. In
1995, U.S. insurance companies in Japan raised concerns over increasing
third sector activities by Japanese firms. These concerns led to a second
agreement, which was concluded in December 1996. Since July 1, 1998, the
United States and Japan have been at an impasse over whether the
2-1/2 year grace period before opening the third sector to new competition
from Japanese insurers should have already started. In March 1999, the
two governments agreed to resume consultations in April on general issues
regarding the implementation of the agreements.

In the international arena, Japan in 1997 included insurance as part of its
agreement on financial services in the World Trade Organization (WTO). A
multilateral forum could therefore be available to settle disputes involving
insurance. As part of this agreement, Japan placed many commitments it
made in its 1996 agreement with the United States in a legally binding,
multilateral framework. The WTO Financial Services Agreement took
effect on March 1, 1999.




Page 39                                     GAO/NSIAD-99-108BR Japan’s Insurance Market
Appendix I

Key Insurance Deregulation Steps and
Agreements on Insurance by Japan, 1992-98                                                                                       AppIexndi




Date                Steps and agreements
June 1992           Government of Japan’s Insurance Advisory Council issues proposals for deregulating insurance market
July 10, 1993       U.S.-Japan framework agreement concluded
October 11, 1994    1994 U.S.-Japan insurance agreement signed
April 1, 1996       Revised Insurance Business Law enters into effect in Japan
August 27, 1996     Licenses granted to 17 Japanese insurance subsidiaries for “mutual entry” into previously closed
                    markets
October 1, 1996     Direct marketing of automobile insurance to consumers permitted
November 11, 1996   “Big Bang” financial reform initiative announced by Japan
December 24, 1996   1996 U.S.-Japan insurance agreement signed
January 1, 1997     Sixteen products added to list of products that can be marketed upon prior notification to government
                    authorities (“notification system”)
September 1, 1997   Auto insurance rate differentiation permitted to reflect risks
December 13, 1997   Japan agrees to include provisions of the 1996 U.S.-Japan insurance agreement in its schedule of
                    commitments for the World Trade Organization (WTO) Agreement on Financial Services
April 1, 1998       Threshold lowered for commercial fire insurance
June 22, 1998       Financial Supervisory Agency takes over approval of insurance products and rates from the Ministry of
                    Finance
July 1, 1998        Rating organization reform legislation goes into effect

                    U.S. Trade Representative (USTR) says primary sector deregulation is not complete so it does not
                    support start of 2-1/2 year grace period leading to third sector opening
July 2, 1998        Japan says remaining restrictions on entry into and operations by Japanese firms in the third sector will
                    be lifted effective January 1, 2001
November 4, 1998    Japan says it cannot agree to meet on insurance, as requested by the United States
November 14, 1998   Japan Fair Trade Commission study states that end of “radical change” limits in third sector is desirable
November 20, 1998   Insurance raised in Clinton-Obuchi summit
December 1, 1998    Privately funded policyholder payment protection corporations established
January 26, 1999    Deputy U.S. Trade Representative says requests to meet with officials at Japan’s Ministry of Finance
                    and Financial Supervisory Agency were denied; Deputy USTR meets with these Japanese officials the
                    next day
February 15, 1999   The USTR says WTO Agreement on Financial Services “establishes powerful new disciplines to ensure
                    Japan fulfills its obligations” in the insurance sector
February 23, 1999   Forty-four Members of Congress urge President Clinton to address Japan’s failure to implement
                    U.S.-Japan insurance agreement
March 1, 1999       WTO Agreement on Financial Services enters into force
March 4, 1999       U.S. and Japanese governments agree to hold consultations under the insurance agreements in April
                    1999




                                  Page 40                                       GAO/NSIAD-99-108BR Japan’s Insurance Market
Appendix II

List of Events Relating to Japan’s Insurance
Market, 1990-Present                                                                                                               ApIpexndi




Date                Event
Spring 1990         Japanese study on revisions to the Insurance Business Law launched.
1991                Japan Economic Almanac 1991 reports that despite years of avoiding competition in premium rates or
                    dividend payments, in fiscal year 1990, “the top five life insurers broke ranks for the first time over
                    policyholder dividends.”
June 1992           Advisory panel presents recommendations for deregulating Japan’s insurance market; a panel is
                    formed in September to consider legal changes.
July 7, 1993        Yasuda Fire & Marine Insurance Co., Ltd. purchases a 10-percent interest in INA Life Insurance Co., a
                    subsidiary of CIGNA. INA subsequently changes its name to “INA Himawari Life Insurance Company,
                    Ltd.,” effective January 1, 1997.
July 10, 1993       The United States and Japan enter into a Framework for a New Economic Partnership (framework
                    agreement) to increase foreign firms’ access to the Japanese market. Addressing sectoral, structural,
                    and macroeconomic obstacles, agreements reached under the framework are to incorporate
                    quantitative and qualitative criteria for monitoring and implementing each agreement reached.
November 12, 1993   Japan’s Administrative Procedure Law enacted to ensure fairness and enhance the transparency of
                    government administrative operations.
July 15, 1994       Journal of Commerce reports that Unum Japan Accident Insurance Co., Unum Corp.'s Japanese
                    affiliate, received its operating license from the Ministry of Finance and will sell group long-term
                    disability insurance, a new product in Japan's market.
October 11, 1994    “Measures by the Government of the United States and the Government of Japan Regarding
                    Insurance" signed (1994 agreement) under the framework agreement.

                    • The agreement's goal is to increase market access and sales for competitive foreign insurance
                      suppliers in Japan through enhanced regulatory transparency, strengthened antitrust enforcement,
                      and deregulation of specific aspects of Japan's insurance business. Simplified and expedited
                      approval of new products and rates, limited freedom to set flexible rates for non-life products,
                      establishment of broker system, and wider access to public corporations are among the specific
                      liberalization measures promised.
                    • Limits on third sector entry and activity are also included. Specifically, Japan is to avoid "radical
                      change” in the third sector until substantial deregulation of the primary sector is achieved and a
                      “reasonable period” has been provided for medium to small and foreign insurers to compete in a
                      deregulated environment in the primary sector.

                    The USTR writes to Chairman of the International Insurance Council, a U.S. trade association,
                    summarizing oral assurances by Japan that (1) current administrative practices limiting the third sector
                    presence of existing large Japanese life and non-life companies will continue, (2) similar restrictions will
                    apply to these firms’ subsidiaries, and (3) the “reasonable period of time” stated in the agreement
                    "means three years."
March 31, 1995      End of Japanese fiscal year 1994. Profits and returns of life insurers—Japan’s largest institutional
                    investors—drop. Several firms report losses for the first time in the postwar period.
June 7, 1995        Revised Insurance Business Law enacted, to enter into effect April 1, 1996.
September 1995      First U.S.-Japan review of the 1994 insurance agreement takes place.
December 4, 1995    U.S. Secretary of the Treasury and the USTR express concern to Japan's Minister of Finance over
                    implementation of the 1994 insurance agreement.
February 29, 1996   Ministry of Finance issues enforcement regulations regarding the Insurance Business Law and
                    ministerial ordinances regarding non-life insurance rating organizations.




                                  Page 41                                      GAO/NSIAD-99-108BR Japan’s Insurance Market
                                     Appendix II
                                     List of Events Relating to Japan’s Insurance
                                     Market, 1990-Present




Date                   Event
March 1996             Press reports indicate that newly formed CIGNA Accident and Fire Insurance Co., Ltd., was
                       provisionally licensed to write personal accident insurance policies. CIGNA had sold property and
                       casualty policies through its branch operations since 1985 but says the new subsidiary will boost sales
                       by designing products for the Japanese market.
April 1, 1996          Insurance Business Law enters into effect, the first major revision of Japan’s insurance laws in more
                       than 50 years. Among other things, it permits “mutual entry” through subsidiaries between life and
                       non-life insurance companies, establishes an insurance policyholder protection fund, permits insurance
                       brokerage, and partially liberalizes premium rates.
May 1996               Non-life insurers remove restrictions on commissions paid to insurance agents selling policies targeting
                       corporations.
August 26, 1996        Yasuda, a 10-percent equity owner in CIGNA’s INA Life, announces its intention to acquire a majority
                       interest in INA Life.
August 27, 1996        Ministry of Finance grants licenses to 17 Japanese insurance companies’ subsidiaries—11 non-life
                       insurance companies’ subsidiaries receive life insurance licenses, and 6 life insurance companies’
                       subsidiaries receive non-life insurance licenses.
September 30, 1996     The United States and Japan reach interim agreement that precludes new subsidiaries of major
                       Japanese insurance companies from entering third sector through December 31. The USTR
                       announcement highlights a “downpayment on deregulation”: Japan’s decision to approve direct
                       marketing for auto insurance to consumers via mail or phone (“direct response system”). By
                       December 15, 1996, two firms had received approval of applications to provide insurance through a
                       direct response system; in 1998, auto insurance was reported to account for about half of the premium
                       income of Japanese non-life insurers.
October 1, 1996        Ministry of Finance publicly announces its decision to permit premium payments via credit card.
November 11, 1996      Japan announces its "Big Bang" initiative aimed at reforming Japan's financial sector to be "free, fair,
                       and global" by 2001. It will liberalize cross-border capital transactions, widen the scope of financial
                       instruments, improve the quality and variety of financial services, enhance efficiency and diversity of
                       financial markets, diversify corporate funding options, and strengthen the transparency and safety of
                       financial markets.
December 15, 1996      Negotiations on the U.S.-Japan supplemental measures for the 1994 insurance agreement are
                       concluded.
December 18-24, 1996   At the request of the United States, U.S. and Japanese officials negotiate the text of an unsigned,
                       undated record of understanding (“minute”). Current and former USTR officials state that this document
                       is intended to ensure that (1) the 1996 Supplementary Measures will not prevent CIGNA from carrying
                       out its preexisting business plan to sell a majority interest in INA to Yasuda; (2) INA will continue to have
                       only a very limited presence in the third sector if the transaction goes forward; and (3) other large
                       Japanese non-life insurers will be prevented from similarly entering the third sector. Language in the
                       “minute” reconfirms the Japanese government’s commitment to faithfully implement the 1994 Measures
                       and the 1996 Supplementary Measures, inclusive of measures to avoid radical change in the third
                       sector.




                                     Page 42                                       GAO/NSIAD-99-108BR Japan’s Insurance Market
                                  Appendix II
                                  List of Events Relating to Japan’s Insurance
                                  Market, 1990-Present




Date                Event
December 24, 1996   The United States and Japan sign the “Supplementary Measures by the Government of the United
                    States and the Government of Japan Regarding Insurance.” (1996 agreement)

                    • Key provisions set more specific limits on entry into and sales in the third sector, a time frame of
                      2-1/2 years after substantial deregulation before the opening of the third sector, and an explicit formula
                      for determining by July 1, 1998, whether substantial deregulation has occurred before removing
                      measures to avoid radical change in the third sector.
                    • Among the agreement’s liberalizing provisions, non-life subsidiaries of life insurance providers can sell
                      personal accident insurance as of January 1, 1997, subject to specific limits. Japan also agreed to
                      (1) permit differentiation of rates, forms, and distribution of auto insurance; (2) expand by 16 the list of
                      products for which automatic approval will generally occur within a short period after notification of
                      authorities (the “notification system”); (3) further deregulate commercial fire insurance; (4) eliminate
                      obligations by members to use rates calculated by the rating organizations to set certain non-life
                      premiums; and (5) to approve, within 90 days after submission, applications for products whose forms,
                      rates, or distribution are new or different.

                    Exchange of letters between the USTR-Designate and the Ambassador of Japan, confirming
                    agreement that, in the event the United States and Japan do not reach a common view of whether the
                    criteria for starting the 2-1/2 year grace period for terminating third sector protections have been met by
                    the decision point of July 1, 1998, each side retains its “right to act in conformity with its view as to
                    whether the criteria had been met."
January 1, 1997     As called for in the 1996 agreement, 16 products, including several classes of liability products, are
                    added to list of policies that can be offered at risk-weighted rates upon notification to regulators.
April 1997          Nissan Mutual Life Insurance Co. fails.
June 1997           Nippon Life Insurance Co. and U.S. investment manager Putnam Investments, Inc., join to develop
                    financial products.

                    Final report of the Japanese Insurance Council issued.

                    Legislation establishing Japanese Financial Supervision Agency approved.
June 11, 1997       A press statement issued by the U.S. delegation after the first review of the 1996 measures says that
                    changes to Japan’s rating system must be transparent and must make it easier for insurance providers
                    to deliver innovative and competitively priced insurance services to Japanese consumers. The time
                    required for obtaining approval for products and the denial of meaningful opportunities for foreign firms
                    to participate in deliberations of the Insurance Council are also of concern, it says.
June 19, 1997       The United States and Japan establish the Enhanced Initiative on Deregulation and Competition Policy.
                    The focus will be on both sectoral issues (telecommunications, medical devices and pharmaceutical
                    products, housing and construction products, and financial services) and structural issues (competition
                    policy, distribution, transparency, and other government practices).
September 1, 1997   Japan implements its commitment to begin approving applications for automobile insurance with rates
                    that vary according to risk. American Home Assurance Co., an AIG subsidiary, begins to offer auto
                    insurance rates that vary according to risk.
November 1997       Allstate Insurance sells all of its interests in a Japanese life insurance company and all but 5 percent of
                    its 50-percent stake in a Japanese property and casualty insurance business to its Japanese partner.
November 10, 1997   The United States transmits proposals for deregulation to Japan, including an easing of restrictions on
                    product innovation in the financial services market.
December 1997       First Chicago Tokio Marine Financial Products Ltd., a joint venture between First Chicago NDB Corp.
                    and Tokio Marine & Fire Insurance, is established to help companies in Japan and elsewhere in Asia
                    meet their growing risk-management needs.




                                  Page 43                                       GAO/NSIAD-99-108BR Japan’s Insurance Market
                                  Appendix II
                                  List of Events Relating to Japan’s Insurance
                                  Market, 1990-Present




Date                Event
December 13, 1997   Japan agrees to include provisions of the 1996 insurance agreement, including its third sector
                    provisions, in its binding commitments under the WTO Agreement on Financial Services.
January 1998        Zurich Insurance becomes second firm to offer auto insurance based on risk factors.
February 1998       GE Capital Services Corporation says it will establish a new life insurance company in partnership with
                    struggling Toho Mutual Life Insurance Co. GE will take over all new policywriting and pension
                    management business effective April 1 and hire 9,500 of Toho Mutual’s sales agents and other
                    personnel.
February 12, 1998   Ministry of Finance notification explains that Japan’s commitments under the WTO Agreement on
                    Financial Services prohibit sales of third sector products by acquired life subsidiaries of non-life
                    insurance providers.
February 13, 1998   Yasuda announces its decision to delay its majority purchase of INA until restrictions are lifted on sales
                    of third sector products by life subsidiaries of non-life insurance companies.
March 10, 1998      Amendments to Law Concerning Non-Life Insurance Rating Organizations and the Insurance Business
                    Law to reform rating organizations are submitted to the Japanese parliament. With two exceptions, the
                    rating organizations will publish only pure premium rates—actual cost of claims, but not all expenses
                    and profits—for referential use by rating organization members for all the fire, personal accident, and
                    automobile insurance lines covered by the rating organizations. Antitrust exemption will also be
                    abolished for rating organization activities for all product lines except compulsory automobile liability
                    insurance and household earthquake insurance.
March 27, 1998      Japanese cabinet transmits "freedom of information" legislation to parliament. The bill aims to increase
                    transparency and accountability of Japanese government bureaucracies.
March 31, 1998      In its annual report on foreign trade barriers, USTR gives a mixed review of Japan’s implementation of
                    insurance commitments.

                    • On the positive side, USTR states that Japan’s Ministry of Finance has, to varying degrees,
                      implemented its commitments under the October 1994 insurance agreement to enhance regulatory
                      transparency, strengthen antitrust enforcement, introduce a notification system for approval of
                      insurance rates and products, and undertake specific liberalization measures. Certain commitments
                      under the 1996 agreement were implemented on schedule. These commitments were to approve
                      applications for automobile insurance on the basis of risk; to reduce the threshold for offering flexible
                      rates for commercial fire insurance; and to expand the list of products, including several important
                      liability lines, to be included in the notification system.
                    • However, concern was expressed over implementation of commitments regarding large government
                      purchasers of insurance, foreign input into Japan’s insurance reform process, and increased activity
                      by Japanese insurance firms and subsidiaries in the third sector.
March 31, 1998      Japanese cabinet approves latest 3-year deregulation program for the Japanese economy. It
                    recommends a formal review of the insurance product approval process.
April 1998          Allstate Property and Casualty Insurance Japan, Company, Ltd. (Allstate Insurance Company’s newly
                    established subsidiary) receives a non-life insurance business license from the Ministry of Finance.

                    Great American Insurance Co., a Cincinnati, Ohio-based non-life insurer, opens an office in Tokyo.

                    ALICO, a subsidiary of AIG, becomes the first company to offer nonsmokers lower-cost life insurance.

                    Los Angeles-based TCW Asset Management Co. will help Yasuda Fire & Marine develop new
                    investment products.

                    AFLAC becomes the first foreign insurer to have offices in all of Japan’s 47 administrative districts.




                                  Page 44                                      GAO/NSIAD-99-108BR Japan’s Insurance Market
                                Appendix II
                                List of Events Relating to Japan’s Insurance
                                Market, 1990-Present




Date              Event
April 1, 1998     In line with 1996 agreement, commercial fire market is further deregulated by lowering the threshold
                  above which insurers can offer differentiated rates for commercial fire coverage, thereby making more
                  products eligible to be offered at flexible rates. The threshold was lowered from 20 billion yen to 7 billion
                  yen. It had previously been lowered from 30 billion yen.
April 2, 1998     USTR issues a press release stating that while the latest 3-year deregulation plan submitted by Japan
                  represents progress, it still falls short of U.S. expectations.
April 17, 1998    Unum reaches agreement with two major Japanese firms to expand distribution of its products.
                  Chiyoda Mutual Life Insurance will offer Unum’s policies to Chiyoda’s corporate life insurance
                  customers, and Dai-Ichi Kangyo will sell Unum’s long-term disability insurance at its branches.
April 24, 1998    American Council of Life Insurance provides USTR with requested analysis of current status of
                  implementation of the 1994 and 1996 agreements, highlighting fundamental aspects of the agreements
                  “where the Government of Japan has failed to live up to its promises.” It urges USTR to meet with
                  Japan’s Ministry of Finance before July 1 to review all pending issues and obtain agreement on what
                  actions are necessary to justify the start of the 2-1/2 year grace period.
May 1998          St. Louis-based Reinsurance Group of America, Inc., reaches a deal with Daihyaku Mutual Life
                  Insurance Co. to guarantee $38.6 billion worth of whole life and term life insurance policies in return for
                  part of the future premiums of those contracts.
May 15, 1998      The United States and Japan issue a joint status report on the Enhanced Initiative on Deregulation and
                  Competition Policy. Regarding insurance, the report highlights Japanese action to eliminate rate
                  setting, permit mutual entry, and strengthen the role of the Japan Fair Trade Commission.
June 3, 1998      Press reports indicate that U.S.-based specialist in earthquake risk management, EQE International, is
                  joining Tokio Marine & Fire Insurance Co., Ltd., and Mitsubishi Corporation. EQE’s extensive database
                  will be used to calculate premiums based on the risk of earthquake damage.
June 5, 1998      Japanese parliament passes legislation to implement Japan’s WTO financial services commitments.
                  The law is promulgated 10 days later and is scheduled to take effect December 1, 1998. The
                  legislation amends the 1995 Insurance Business Law, stating in part:

                   The provisions restrict entry into the third sector
                     (1) of a newly licensed insurer, whether original or subsidiary,
                     (2) of an existing insurer by means of transfer of business from, consolidation or merger with, or
                         acquisition of, another existing insurer, and
                     (3) of an existing insurer by means of extended or amended approval that has been already granted
                         to it;
                   for the time being to avoid radical change in the management environment, and to ensure robust
                   operation, of those insurers which rely to a greater extent on the third sector insurance.

                  American Chamber of Commerce in Japan transmits four position papers to USTR as input for
                  upcoming bilateral review of the agreements. The papers address the proposed new payment
                  guarantee system, radical change in the third sector, continued delays in approval of differentiated
                  products and rates, and rating organization reform. The Chamber notes that ministerial ordinances now
                  being finalized to implement the rating organization reform law will expand the businesses for which the
                  rating organization will calculate pure premium rates to include medical expense and nursing care
                  insurance. In addition, the Chamber raises concern that proposed collection and analysis of expense
                  data by the rating organizations could restrain competition and promote uniformity.
June 9-10, 1998   The fourth semi-annual working-level review of the insurance agreements takes place. U.S. embassy in
                  Tokyo says a number of “serious concerns” about Japanese implementation were raised.




                                Page 45                                       GAO/NSIAD-99-108BR Japan’s Insurance Market
                                   Appendix II
                                   List of Events Relating to Japan’s Insurance
                                   Market, 1990-Present




Date                 Event
June 11-12, 1998     High-level bilateral talks take place in Tokyo to assess Japan’s implementation of the 1994 and 1996
                     agreements. No agreement is reached on outstanding U.S. concerns regarding deregulating the
                     primary sector and avoiding radical change in the third sector.

                     Deputy USTR says U.S. participants notified their Japanese counterparts of the U.S. view that
                     conditions necessary to start the process of terminating third sector restrictions have not been met.
June 22, 1998        Financial Supervisory Agency takes over much of the Ministry of Finance’s supervisory and approval
                     responsibilities, processing all applications for new and modified insurance products in Japan, including
                     riders and rate revisions.
July 1, 1998         Legislation removing requirement to use premiums calculated by rating organizations in setting rates
                     becomes effective.

                     USTR press release states that insufficient progress has been made under the 1996 insurance
                     agreement in deregulating the primary sector of Japan's insurance market to warrant initiating the
                     2-1/2 year grace period for opening the third sector to new competition. It identifies two of the five
                     criteria established in the 1996 U.S.-Japan agreement that have not been fully implemented: reform of
                     rating organizations has not gone far enough to accomplish Japan’s stated objective of fundamental
                     reform, and applications for approval of new insurance products still face processing delays.
July 2, 1998         Japanese Minister of Finance officially confirms that, despite the U.S. position, remaining restrictions on
                     entry into and operations by Japanese firms in the third sector of Japan's insurance market will be lifted
                     effective January 1, 2001.
July 15, 1998        American Council of Life Insurance testifies before House Ways and Means Committee’s Subcommittee
                     on Trade, concluding that "the Japanese insurance market remains highly restrictive and difficult to
                     penetrate" for U.S. firms. The Council says Japan is not complying with the agreements because

                      (1) reform of rating organizations has not been meaningful or transparent,
                      (2) entry of new products and rates into the marketplace continues to be slowed by Japan's approval
                           process,
                      (3) the notification system operates in a vague and unpredictable manner,
                      (4) proposals for reform of payment guarantee systems (a) do not equitably distribute the cost of future
                           insolvencies and (b) minimize foreign participation in the systems' management, and
                      (5) inadequate staffing of relevant regulatory offices hampers full implementation of Japan's
                           commitments.

                     The Council also expresses concern over increased activities by Japanese firms and subsidiaries in the
                     third sector.
August 5, 1998       The USTR reports to Congress that the information the administration has to date does not support a
                     finding that actions by INA/Yasuda, a 90-percent U.S.-owned subsidiary, constitute a violation of the
                     insurance agreements' third sector provisions.
September 21, 1998   Nikkei Business reports that AFLAC and AIG’s subsidiary, ALICO, are among the healthiest large life
                     insurance companies in Japan. Both had high returns on total assets and, unlike the majority of
                     insurance companies, ALICO “expanded the value of its individual insurance contracts in 1997, using its
                     rating as a weapon.”

                     Separately, Nikkei Business reports that foreign firms had acquired 4.4 percent of the new contracts for
                     individual insurance in 1997, non-life firms acquired 3.7 percent, and other firms acquired 3.9 percent,
                     bringing the share of new entrants to 12 percent. This was up from the combined 3.4 percent share for
                     these new entrants in 1992, when existing Japanese life insurance firms accounted for 96.6 percent of
                     new contracts.




                                   Page 46                                      GAO/NSIAD-99-108BR Japan’s Insurance Market
                                  Appendix II
                                  List of Events Relating to Japan’s Insurance
                                  Market, 1990-Present




Date                Event
October 1998        American Chamber of Commerce in Japan issues a series of position papers on insurance, including
                    one on personal accident insurance, a non-life third sector product.
October 7, 1998     U.S. government submits over 270 deregulation proposals to Japan. They include a request that notice
                    and comment procedures be followed in regulations of the life and non-life policyholder protection
                    groups and the non-life rating organizations and that the burdensome and unpredictable nature of
                    approval processes by Japan's Ministry of Finance and Financial Supervisory Agency be rectified.
October 30, 1998    U.S. embassy Tokyo transmits a formal request for consultations under the U.S.-Japan insurance
                    agreement to the government of Japan.
November 2, 1998    In a Journal of Commerce op ed piece, a former USTR official urges amending U.S. trade law to require
                    USTR to draw an adverse inference under U.S. trade law against any country that refuses to enter into
                    meaningful consultations over a trade dispute.
November 4, 1998    Government of Japan notifies U.S. embassy Tokyo that Japan cannot agree to meet in response to the
                    U.S. request.
November 5, 1998    Sankei Shimbun article includes a statement by Ministry of Finance’s International Bureau that says a
                    secret memorandum between the United States and Japan related to Yasuda/INA (the December 1996
                    “minute”) does not exist and stresses that Japan’s policy is to deregulate the third sector effective
                    January 1, 2001.
November 14, 1998   Nihon Keizai Shimbun reports that a study by the Japan Fair Trade Commission on the insurance
                    industry finds deregulation has stimulated competition somewhat, but about half of the companies it
                    surveyed seek to preferentially award contacts to non-life insurance companies that hold their stock.
                    The Commission study indicates that early abolition of the radical change provisions of U.S.-Japan
                    agreements is desirable.
November 20, 1998   Deputy Secretary of the Treasury reports that one of the four economic issues raised by the U.S.
                    President with Japan’s Prime Minister was the need to carry through on trade agreements, including
                    insurance.
December 1, 1998    Series of financial deregulation steps take effect in Japan, including establishment of policyholder
                    protection corporations and easing of regulations on sales of investment trusts by banks and insurers.

                    Prudential Insurance Co. of America teams up with Mitsui Trust & Banking Co. in July to establish an
                    investment trust management firm in anticipation of the December 1 deregulation step.

                    AIG abandons plan to acquire Japan’s Aoba Life Insurance Co., which took over Nissan Mutual Life
                    Insurance Co.’s assets in October 1997.
December 2, 1998    Tokio Marine & Fire Insurance Co. and U.S. discount broker Charles Schwab & Co. are reported close
                    to a deal that will make Tokio Marine the first non-life insurance firm to enter Japan’s securities market.
                    Online sales of insurance products through the brokerage are reportedly under consideration.
December 4, 1998    CIGNA International Holdings and Yasuda Fire & Marine Insurance Co. announce plans to jointly enter
                    the pension business. The two companies will reportedly establish a joint venture in 1999.
December 8, 1998    News reports indicate that Citigroup, the largest financial group in the United States, has announced
                    plans to enter the insurance business in Japan as early as 2001, when a ban is lifted on banks selling
                    insurance.
January 26, 1999    In Tokyo, the Deputy U.S. Trade Representative says his requests to meet that week with officials at
                    Japan’s Ministry of Finance and Financial Supervisory Agency were denied. He states that the United
                    States is “deeply concerned” about Japan’s unwillingness to engage in discourse on the matter. Deputy
                    USTR meets with senior Ministry of Finance and Financial Supervisory Agency officials the following
                    day.




                                  Page 47                                      GAO/NSIAD-99-108BR Japan’s Insurance Market
                                  Appendix II
                                  List of Events Relating to Japan’s Insurance
                                  Market, 1990-Present




Date                Event
February 15, 1999   The USTR says that the entry into force of the WTO Financial Services Agreement establishes powerful
                    new disciplines to ensure Japan fulfills its obligations in the insurance sector—rights “we will not
                    hesitate to exercise” to ensure U.S. insurance providers receive the full market access benefits they are
                    entitled to in Japan.
February 23, 1999   Forty-four Members of Congress urge the President to insist upon Japanese compliance with “the core
                    provision” of the U.S.-Japan insurance agreement, which provides “that the 2-1/2 year countdown to the
                    opening of the third sector to large Japanese companies not begin until the primary insurance market is
                    fully opened to competition.”
March 1, 1999       WTO Agreement on Financial Services enters into effect.
March 4, 1999       U.S. and Japanese governments agree to hold consultations under the insurance agreements in April.




                                  Page 48                                     GAO/NSIAD-99-108BR Japan’s Insurance Market
Appendix II
List of Events Relating to Japan’s Insurance
Market, 1990-Present




Page 49                                    GAO/NSIAD-99-108BR Japan’s Insurance Market
Appendix III

Major Contributors to This Report                                                                   AIpIexndi




National Security and   Elizabeth Sirois, Assistant Director
                        Kay Halpern, Evaluator-in-Charge
International Affairs   Emil Friberg, Senior Economist
Division, Washington,   Kim Frankena, Senior Trade Specialist
D.C.

San Francisco Field     Leslie Holen, Senior Evaluator
                        Jose Péña, Senior Evaluator
Office




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