oversight

International Trade: Implementation and Monitoring of the U.S.-Japan Insurance Agreements

Published by the Government Accountability Office on 1999-09-24.

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


September 1999
                   INTERNATIONAL
                   TRADE

                   Implementation and
                   Monitoring of the
                   U.S.-Japan Insurance
                   Agreements




GAO/NSIAD-99-209
Contents



Letter                                                                                            3


Appendixes             Appendix I Questionnaire on the Status of Implementation of
                         the U.S.-Japan Insurance Agreements                                     22
                       Appendix II Analysis of Company Questionnaires on the Status
                         of Implementation of the U.S.-Japan Insurance Agreements                61
                       Appendix III U.S. Trade Representative’s Key Monitoring and
                         Enforcement Decisions                                                   79
                       Appendix IV U.S. Government Actions Regarding One U.S.
                         Insurer                                                                 90
                       Appendix V   Objectives, Scope, and Methodology                          110
                       Appendix VI GAO Contacts and Staff Acknowledgments                       113


Related GAO Products                                                                            114


Tables                 Table 1: Selected Key Commitments of the 1994 U.S.-Japan
                         Insurance Agreement                                                     63
                       Table 2: Selected Key Commitments of the 1996 U.S.-Japan
                         Insurance Agreement                                                     68


Figures                Figure 1: U.S. Company Views on U.S. Government Monitoring and
                         Enforcement Efforts                                                     18
                       Figure 2: Results of Approved Applications Submitted by U.S.
                         Companies in Japan Since the 1996 Agreement Was Signed                  71
                       Figure 3: Results of Approved Applications by Type, Submitted by U.S.
                         Companies in Japan Since the 1996 Agreement Was Signed                  72
                       Figure 4: U.S. Companies' Views on Future Effects of Insurance
                         Agreements                                                              75
                       Figure 5: Primary Sector Sales and Market Share Since the 1994
                         Agreement Was Signed                                                    77
                       Figure 6: Third Sector Sales and Market Share Since the 1994
                         Agreement Was Signed                                                    78
                       Figure 7: Time Line of Events Related to “Minute” and Yasuda-INA
                         Deal, 1993-96                                                           92
                       Figure 8: Text of the December 21, 1996, “Minute”                         96
                       Figure 9: Time Line of Events Related to “Minute” and Yasuda-INA
                         Deal, 1996-97                                                           99




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Contents




Figure 10: Time Line of Events Related to “Minute” and Yasuda-INA
  Deal, 1997-Present                                                    104




Abbreviations

ACCJ       American Chamber of Commerce in Japan
ACLI       American Council of Life Insurance
AFLAC      American Family Life Assurance Company
AIG        American International Group
FSA        Financial Supervisory Agency
JFTC       Japan Fair Trade Commission
MOF        Ministry of Finance
MOFA       Ministry of Foreign Affairs
NEC        National Economic Council
USTR       U.S. Trade Representative
WTO        World Trade Organization



Page 2                                  GAO/NSIAD-99-209 International Trade
United States General Accounting Office                                                          National Security and
Washington, D.C. 20548                                                                    International Affairs Division



                                    B-283294                                                                                       Leter




                                    September 24, 1999

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

                                    Dear Mr. Chairman:

                                    The Japanese insurance market is the world's second largest after the
                                    United States, with $334 billion in annual premiums in Japanese fiscal year
                                    1997. The foreign share of this market in Japan is 3.7 percent, compared to
                                    a foreign share of the U.S. insurance market of 10.7 percent in 1996.1 In
                                    order to improve foreign access to the Japanese insurance market, the
                                    United States and Japan have signed two bilateral insurance agreements, in
                                    1994 and 1996.2 The United States had two key objectives in negotiating
                                    these agreements: (1) to ensure that Japan deregulated its primary
                                    insurance market, comprised of life and non-life (property/casualty)
                                    insurance and (2) to ensure that Japan provides U.S. companies with a
                                    reasonable period of time to compete in a deregulated primary sector
                                    before opening the “third” sector to increased Japanese competition where
                                    U.S. firms have a substantial presence. The third sector is comprised of
                                    specialized life and non-life products such as cancer, hospitalization, and
                                    personal accident insurance.

                                    In light of concerns that have been raised with your Subcommittee about
                                    the agreements' implementation and the executive branch's actions related
                                    to enforcement of the agreements, you asked us to examine (1) the views
                                    of U.S. insurance companies operating in Japan regarding the agreements'
                                    implementation and impact on their ability to compete in the Japanese


                                    1
                                     For more information on the Japanese insurance market, see U.S.-Japan Trade: The
                                    Japanese Insurance Market (GAO/NSIAD-99-108BR, Mar. 15, 1999). This report provides
                                    details on the size of the Japanese insurance market, U.S. insurance company participation
                                    in and concerns regarding that market, and time lines of recent events affecting the market.
                                    2
                                     These agreements , “Measures by the Government of the United States and the Government
                                    of Japan Regarding Insurance,” October 11, 1994, and “Supplementary Measures by the
                                    Government of the United States and the Government of Japan Regarding Insurance,”
                                    December 24, 1996, can be viewed from the following Department of Commerce World Wide
                                    Web site: http://www.mac.doc.gov/japan/source/menu/menu.html (cited Sept. 13, 1999).




                                    Page 3                                              GAO/NSIAD-99-209 International Trade
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                   market; (2) the roles and efforts of the Office of the U.S. Trade
                   Representative and the Departments of Commerce, State, and the Treasury
                   in monitoring and enforcing the agreements, and U.S. government views on
                   whether Japan has met its commitments under the agreements; and
                   (3) U.S. insurance industry views on U.S. government monitoring and
                   enforcement efforts. As you requested, we are also providing you with
                   information on U.S. government actions related to one U.S. insurer and its
                   Japanese partner, including the creation of a limited exception to the 1996
                   agreement and our views on certain aspects of this exception. (See app.
                   IV).

                   In conducting our work, we prepared a survey that builds upon a similar
                   survey we created in 1996 for all U.S. insurance providers operating in
                   Japan. (See app. I). For this report, we surveyed the 13 U.S. majority-owned
                   insurance companies operating in Japan. In addition, we surveyed the three
                   U.S. brokers recently licensed in Japan.3 Detailed company and broker
                   survey results are discussed in appendix II. We also met with senior U.S.
                   and Japanese government and industry officials in Japan and the United
                   States.



Results in Brief   Our 1999 survey of the 13 U.S. insurance companies and 3 brokers in Japan
                   revealed that all but 2 think that Japan has made moderate or better
                   progress4 overall in implementing the 1994 and 1996 insurance agreements.
                   Our analysis of survey results shows that Japan has met most of its
                   transparency (openness), procedural protection, and deregulation
                   commitments. Overall, most U.S. companies reported that the agreements
                   have had a positive effect on their ability to compete in Japan. This view is


                   3
                    Five of the 13 U.S. majority-owned insurers in Japan are life insurers, while 8 are non-life
                   insurers. Three of these 13 companies are owned by American International Group (AIG),
                   and 2 were owned by CIGNA Corporation at the time of our survey. CIGNA's
                   property/casualty company in Japan was sold to ACE INA effective July 1999. Two U.S.
                   insurance providers (American Family Life Assurance Company [AFLAC] and AIG)
                   accounted for 81 percent of all U.S. insurance premiums generated in Japan in fiscal year
                   1997. Of the three brokers included in our survey, one is a British company whose
                   shareholders have been primarily other U.S. companies since November 1998. Brokers are
                   intermediaries between individuals or entities purchasing insurance products and insurance
                   providers. Brokers provide another distribution channel for insurance products and
                   promote competition in the marketplace.
                   4
                    Specifically, in our survey these companies reported that Japan had implemented the
                   provisions of the two agreements to a “moderate,” “great,” or “very great” extent.




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more positive than what companies reported in our 1996 survey. 5
Nevertheless, almost half the companies expressed concerns over Japan's
implementation of key commitments such as expediting approval of
insurance products and rates and limiting the activities of large Japanese
companies in the specialized third sector.

The Office of the U.S. Trade Representative is the principal agency
responsible for monitoring and enforcing the insurance agreements, with
assistance primarily from the U.S. embassy in Tokyo. The U.S. Trade
Representative also receives assistance from the Departments of
Commerce and State, with a lesser level of assistance by the Departments
of the Treasury and Justice. The U.S. Trade Representative and U.S.
embassy monitoring efforts include obtaining information on the
agreements' implementation from industry groups and individual U.S.
insurance companies, as well as consulting with the Japanese government.
In conducting their monitoring and enforcement work, U.S. government
officials have noted Japanese progress in implementing the agreements.
However, they have also identified a few issues, which are similar to those
cited by some U.S. companies, where they believe Japan has not fully met
its commitments. Japan, on the other hand, believes that it has fully
implemented both agreements.

More U.S. insurance companies expressed favorable views of U.S.
government actions to monitor the insurance agreements than reported
favorable views of enforcement efforts. About half (7 of 13) of all U.S.
insurers and 2 of the 3 brokers we surveyed reported that U.S. government
efforts to monitor the agreements have been effective; with regard to
enforcement, about one-third of the companies and no brokers reported
that U.S. government efforts have been effective. Around one-third of the
companies reported that U.S. government monitoring and enforcement
efforts have been as effective as ineffective. Three major U.S. insurers
expressed concerns over U.S. government monitoring and enforcement



5
 Our 1996 survey of U.S. insurance companies operating in Japan found that while these
companies reported that many provisions of the 1994 agreement had been implemented to
varying degrees, the agreement had little effect on their ability to compete in the Japanese
market. U.S. firms noted their continued inability to differentiate the types of coverage they
could offer and to set the rates they could charge. For more information on the results of
this survey, see U.S.-Japan Trade: U.S. Company Views on the Implementation of the 1994
Insurance Agreement (GAO/NSIAD/GGD-97-64BR, Dec. 20, 1996). Further, comparisons
between the results of our 1996 and 1999 surveys are contained in appendix II.




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             efforts concerning the protection of various U.S. company interests in the
             third sector.



Background   The first U.S.-Japan insurance agreement was signed on October 11, 1994,
             and was concluded under the United States-Japan Framework Agreement.6
             In negotiating the insurance agreement, the U.S. government sought to
             establish that deregulation of the large primary sector of the Japanese
             insurance market, where U.S. firms had experienced only limited success,
             would be required before deregulation of the smaller third sector, where
             foreign companies have a substantial presence, would occur. According to
             the Office of the U.S. Trade Representative (USTR), while the third sector
             accounted for roughly 5 percent of the total Japanese insurance market in
             Japanese fiscal year 1997, foreign market share for this sector was over 40
             percent—much higher than in the traditional, primary insurance market.
             U.S. government and industry officials believed that the lack of U.S.
             company success in the larger primary sector was the result of a heavily
             regulated environment that did not allow for new market entry, product
             innovation, or price competition.

             In the 1994 agreement, the United States met its negotiating objective of
             establishing that primary sector deregulation would be required before
             third sector deregulation would occur. Under the agreement, Japan agreed
             to avoid “radical change” in the third sector until foreign insurance
             companies were granted a “reasonable period” to compete in a significantly
             deregulated primary sector market, although the terms “radical change”
             and “reasonable period” were not defined in the agreement. The agreement
             recognized that Japan was in the process of reforming its insurance sector,
             noting that the reform would be based on promoting competition and
             enhancing efficiency through deregulation and liberalization. Consistent
             with this reform initiative, the agreement included specific commitments
             by Japan to deregulate the primary sector. For example, the agreement
             provided that insurance companies would be afforded greater flexibility in
             establishing the price (rate) they would charge to customers for certain
             product lines. In addition, the agreement stated that Japan would expedite
             and simplify the application review process for the approval of insurance


             6
              The United States-Japan Framework for a New Economic Partnership (“Framework
             Agreement”) was signed by the two countries in 1993. Under the agreement, the United
             States and Japan agreed to focus on eliminating sector-specific and structural market access
             barriers and addressing macroeconomic issues.




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products and rates by gradually introducing expedited approval systems
for certain products. Japan also agreed to make its regulatory process more
transparent by, for example, publishing and making publicly available the
standards that insurance regulators will apply in reviewing applications for
approval of new insurance products.

During subsequent negotiations in 1996, the two governments reached an
interim understanding in September, in which Japan agreed to allow direct
sales of automobile insurance to consumers by mail or telephone and
established restrictions on sales by subsidiaries of large Japanese insurers
of some third sector insurance products. The commitment to allow direct
sales of automobile insurance is referred to in the final December 1996
agreement (discussed below), while third sector commitments were largely
superseded by measures contained in the December 1996 agreement.

The second agreement was signed on December 24, 1996. This agreement
was negotiated in response to U.S. insurance company concerns that the
Japanese government was preparing to allow large Japanese insurers
increased access to the third sector through their subsidiaries in violation
of the 1994 agreement. The 1996 agreement further defined restrictions on
third sector entry by Japanese companies, and it clarified when these
restrictions would be lifted by more explicitly linking them to substantial
deregulation of Japan's larger, primary sector. Specifically, the agreement
listed five deregulation criteria for the primary sector that would have to be
met by July 1, 1998, in order to start a 2.5-year countdown toward opening
the third sector no later than 2001. These criteria reflected specific
deregulation commitments in the agreement, such as allowing for greater
pricing flexibility for automobile insurance and applying a system to
expedite marketing of additional products. The two governments
recognized that if, on July 1, 1998, there were disagreement about whether
the criteria had been met, each side would be able to act in accordance
with its own view of whether the criteria had been met. The U.S.
government has stated that, in the case of disagreement over
implementation, it can invoke various trade remedies.

On July 1, 1998, USTR announced that, in its view, Japan had not fully
implemented key agreement commitments including two of the five
primary sector deregulation criteria. As a result, USTR did not (and still
does not) support initiation of the 2.5-year countdown to open the third
sector to increased competition in 2001. The Japanese government stated
that it believed it had fully implemented all commitments, including the five
primary sector deregulation criteria. Thus, in its view the 2.5-year “clock”



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                     began on July 1, 1998, and restrictions on the ability of large Japanese
                     insurance companies to operate in the third sector will be lifted on
                     January 1, 2001.

                     The agreement also contains a commitment by Japan to take steps to
                     increase the number of staff responsible for processing insurance
                     applications.

                     In 1998, Japan enacted legal and regulatory changes that affected the
                     insurance industry:

                     • Japan reorganized its financial regulatory system and created the
                       Financial Supervisory Agency (FSA). Responsibility for licensing,
                       application processing, surveillance, and inspection of the insurance
                       industry was shifted from the Ministry of Finance (MOF) to FSA in June.
                     • Japan agreed to include most of the commitments contained in the 1996
                       agreement as part of its obligations in the World Trade Organization
                       (WTO) financial services agreement. The WTO can therefore be a forum
                       for resolving disputes related to these commitments. The commitments,
                       which were codified in Japanese legislation that took effect on July 1,
                       1998, included deregulating the primary sector and restricting sales of
                       certain third sector products by Japanese insurers.



Companies Reported   In our January 1999 survey, almost all of the U.S. companies (12 of 13) and
                     brokers (2 of 3) operating in Japan reported that overall, the Japanese
Most Commitments     government had implemented the 1994 and 1996 agreements to a moderate
Met and Believe      or greater extent. Our analysis of company responses to our survey
                     indicates that the Japanese government has implemented most of its
Agreements Improve   commitments to improve transparency and procedural protections and
Their Ability to     deregulate the insurance market. Most of the companies (10 of 13) and
Compete, but Some    brokers (2 of 3) reported that both agreements had enhanced their ability
                     to compete in Japan, and a few companies attributed increased sales and
Concerns Remain      market share to actions taken by Japan under the agreements. Companies,
                     however, reported that a few of the agreements' commitments in the areas
                     of transparency, deregulation, and third sector protections had not been
                     fully implemented.




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Most Transparency and    The 1994 agreement included specific commitments by the Japanese
Procedural Protections   government to provide greater regulatory transparency and improve
                         application processing procedures. Our analysis of company responses to
Commitments Met
                         our survey indicates that most of these commitments have been
                         implemented. For example, most companies (10 of 13) reported that they
                         have been given meaningful access to insurance regulators. Further, 10
                         companies reported that they had received equal treatment in insurance
                         industry groups. Ten companies also reported that they were not required
                         to coordinate their applications with other insurance providers (which may
                         be potential competitors) and that acceptance of their applications had not
                         been conditioned or delayed based upon whether they consulted with other
                         insurance providers, which had been experienced by some U.S. companies
                         in the past.


Most Deregulation        Our analysis of company responses to our survey indicates that Japan has
Commitments Met          implemented most of its deregulation commitments in the 1994 and 1996
                         agreements. Moreover, companies reported that several specific
                         commitments had been fully implemented.7

                         As part of the 1996 agreement, the Japanese government agreed to meet
                         five deregulation criteria: (1) processing applications for differentiated
                         types of automobile insurance within a 90-day period, (2) further
                         liberalizing commercial fire insurance, (3) expanding the “notification
                         system,”8 (4) removing the requirement to use insurance rates calculated by
                         rating organizations, and (5) processing applications within a 90-day period
                         for differentiated products or rates. The first four criteria apply only to
                         non-life insurers, while the fifth criterion applies to both life and non-life
                         insurers. According to the agreement, once all of these criteria are met, the
                         2.5-year countdown toward opening the third sector to increased
                         competition will begin.




                         7
                          In these instances, the commitments were considered met by all companies expressing an
                         opinion.
                         8
                          Under Japan’s notification system, a company notifies to the government its intention to
                         offer a specific product/rate in categories of risk that have been designated by Japan as
                         eligible to use the system. The company then waits 90 days while the notification is
                         reviewed by the government. If, after 90 days, no disapproval is received, the company can
                         then consider the product/rate approved and begin to offer it.




                         Page 9                                             GAO/NSIAD-99-209 International Trade
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In our January 1999 survey, companies reported that the Japanese
government had largely met the five primary sector deregulatory criteria.
All but one of the U.S. non-life companies expressing an opinion reported
that Japan had met the four criteria that apply only to non-life products
(processing of differentiated auto insurance within 90 days, further
liberalization of commercial fire insurance, expansion of the notification
system, and removal of the requirement to use rating organization rates).
This one company reported that expansion of the notification system was
incomplete.

Regarding the fifth criterion that requires approval of applications for
differentiated products or rates within a standard 90-day processing period
and applies to all insurance companies, over half of the companies (7 of
13), representing almost 60 percent of U.S. premiums in Japan, reported
that the Japanese government had met this commitment.9 This view is
consistent with our survey data on application processing, which showed
that of all approved applications submitted by U.S. insurance companies
since completion of the 1996 agreement, 95 percent were approved within
90 days of submission, while 5 percent took more than 90 days to receive
approval (though this information is insufficient for determining whether
these last cases constitute violations of the agreement).10

In addition, the 1994 and 1996 agreements included commitments by the
Japanese government to improve the distribution of insurance products
through the approval of a direct response system (for example, marketing
over the telephone) for automobile insurance and the licensing of brokers.
We found that the Japanese government implemented these commitments.




9
 Company shares (percentage) of total U.S. premiums generated in Japan were calculated
using premium data for Japanese fiscal year 1997 (Apr. 1997-Mar. 1998). Two surveyed
companies did not have sales in 1997 and were assigned a zero weight for computing the
premium proportions.
10
 Under Japanese regulation, the 90-day period can be suspended if the agency responsible
for processing applications requires a company to revise or supplement information on an
application. For these cases, we have no information as to whether the 90-day period was
suspended.




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Japan's Deregulatory          Most companies reported that the overall deregulatory actions taken by
Actions Promote               Japan to implement both the 1994 and 1996 agreements had a generally
                              positive effect on their ability to compete in Japan, and several cited
Opportunities for Some U.S.
                              specific examples of being able to introduce new products or rates that
Firms                         they viewed as beneficial. For instance, one non-life insurer reported that
                              obtaining approval to offer a differentiated type of automobile insurance
                              had a very positive effect on its ability to compete in Japan. Also, two
                              companies viewed the increased liberalization of commercial fire
                              insurance and the expanded notification system as positive.

                              Concerning Japan's actions to improve distribution channels for insurance,
                              of the three non-life insurers who had received approval to offer
                              automobile insurance through the direct response system, one reported
                              that this method of distributing insurance products had a very positive
                              effect on its ability to compete in Japan. In addition, two of the three
                              brokers reported that the Japanese government's decision to recognize
                              brokers had a very positive effect on their ability to compete in Japan,
                              though about half of the insurance companies reported that this event had
                              no effect. However, all brokers told us that they continued to face certain
                              obstacles in Japan, including a lack of price and product differentiation,
                              restrictions on the types of products they can offer, and restrictions on the
                              structure of their business operations.


A Few Key Transparency        Several companies reported concerns regarding Japan's implementation of
and Deregulation              a few commitments in key areas. Concerning one transparency
                              commitment, almost half of the companies (6 of 13) reported that the
Commitments Not Fully Met
                              Japanese government had done little to publish and/or make publicly
                              available licensing, product, and rate approval standards. Regarding
                              Japan's deregulation commitments, five companies expressed a belief that
                              Japan had not fully implemented its commitment to process applications
                              for differentiated products within 90 days. Three companies reported cases
                              where applications that were for new-to-market products or that used a
                              new distribution channel took longer than 90 days to receive approval.
                              Over half of the companies reported that in general Japan has done little to
                              expedite and simplify the application review process. Further, regarding a
                              commitment related to Japan's ability to meet its application processing
                              requirement, all 13 U.S. companies indicated that Japan had not increased




                              Page 11                                    GAO/NSIAD-99-209 International Trade
                            B-283294




                            the number of staff responsible for processing applications. Company
                            officials attributed problems with timely processing to this lack of
                            staffing.11


Concerns Expressed Over     Under the 1994 agreement, the Japanese government committed to avoid
Japan's Implementation of   “radical change” in the third sector until foreign, as well as small and
                            mid-sized Japanese, insurers had had a reasonable period of time to
Certain Third Sector
                            compete in a deregulated primary sector. Six companies, representing over
Protections                 80 percent of U.S. premiums, reported that the Japanese government had
                            not taken sufficient action to avoid “radical change” in the third sector.

                            The 1996 agreement included specific commitments by the Japanese
                            government to prohibit or substantially limit large Japanese insurers'
                            subsidiaries from marketing certain third sector products in the life and
                            non-life areas. In the life insurance area of the third sector, Japan
                            committed to prohibit Japanese subsidiaries from selling stand-alone
                            medical and stand-alone cancer insurance.12 Two U.S. life insurance
                            companies in Japan reported that the Japanese government had not met
                            this commitment. One U.S. life insurance company reported that the
                            Japanese government had failed to prevent Yasuda Fire and Marine, a large
                            Japanese company, from selling stand-alone cancer insurance through its
                            relationship with INA Himawari, a life insurance subsidiary in Japan of the
                            U.S. company CIGNA Corporation. (See app. IV for detailed information on
                            certain USTR actions related to these companies.) Another U.S. life
                            insurance company reported that a Japanese insurer, Tokyo-Anshin, was
                            effectively selling stand-alone cancer insurance even though the company
                            offers it as a rider to a base life insurance policy.

                            In the non-life insurance area, seven restrictions on sales by Japanese
                            subsidiaries were put in place by the 1996 agreement, primarily to protect
                            the existing sales networks of foreign insurers for personal accident
                            insurance. Among U.S. non-life companies expressing an opinion, all


                            11
                             USTR officials have noted that the Japanese government has increased its staff responsible
                            for processing insurance applications since our survey.
                            12
                              While sales of stand-alone products in these areas were prohibited in the 1996 agreement,
                            medical and cancer benefits can be sold as riders to a base policy, provided that the rider-to-
                            base policy ratio is within prescribed limits. An insurance “rider” is a policy modification or
                            addition to a larger insurance policy. In this case, the underlying insurance being sold is a
                            life insurance policy.




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                          B-283294




                          reported that Japan had met most commitments in this area, though three
                          companies reported that the Japanese government had not complied with
                          one commitment—restricting sales of personal accident insurance
                          endorsed by interindustry associations.



USTR Is the Principal     The U.S. government has given the insurance agreements high-level
                          attention and monitors them on an ongoing basis. USTR is the principal
Monitoring Agency;        U.S. government agency responsible for monitoring and enforcing the
Believes Japan Has        insurance agreements. The U.S. embassy in Tokyo also plays a major role,
                          with the Departments of Commerce and State providing additional
Made Progress, but        assistance. The Departments of the Treasury and Justice play much less
Has Not Met Certain       active roles. USTR officials reported that they hold interagency meetings at
Key Agreement             least once every 2 months, and more often as issues arise, to discuss the
                          status of the insurance agreements. USTR and the U.S. embassy in Tokyo
Commitments               rely mainly on industry groups and individual companies for information
                          on the status of the agreements' implementation. USTR attempts, but is not
                          always able, to thoroughly verify the accuracy or completeness of industry
                          data on implementation. In monitoring the agreements, USTR has
                          determined that Japan has made progress in deregulating its insurance
                          industry but has identified key commitments that remain unmet.


USTR Plays Lead Role in   USTR's Japan Office, the office with primary responsibility for monitoring
Monitoring and            and enforcing the insurance agreements, currently has a total staff of four
                          permanent employees and one temporary employee from the State
Enforcement
                          Department, twice the amount of people that it had 4 years ago. However,
                          the lead USTR official for Japan insurance issues announced his departure
                          in September 1999. This office is responsible for monitoring approximately
                          20 trade agreements negotiated under the current and previous
                          administrations that cover diverse issues such as telecommunications and
                          autos and auto parts. USTR's Offices of the General Counsel and Services,
                          Investment, and Intellectual Property also provide assistance with the
                          insurance agreements when necessary.

                          USTR has estimated that its efforts, combined with those of the U.S.
                          embassy in Japan, constitute about 80 percent of total U.S. government
                          efforts to monitor and enforce the Japanese insurance agreements.
                          According to USTR, these two agencies confer on the agreements almost
                          daily. USTR also estimated that the Commerce Department contributes
                          about an additional 10 percent of U.S. government monitoring and
                          enforcement efforts and reported that the Treasury Department's role is


                          Page 13                                    GAO/NSIAD-99-209 International Trade
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                              limited.13 According to our survey, U.S. insurance companies in Japan have
                              communicated most frequently with staff from the U.S. embassy in Tokyo
                              and USTR regarding the agreements.

                              According to our survey, six U.S. insurers, which account for over
                              80 percent of all U.S. premiums generated in Japan, believed that USTR
                              does not have sufficient resources (personnel, funding, and so on) to
                              monitor and enforce the insurance agreements. USTR officials reported
                              that two Japan Office employees have worked part-time on insurance and
                              that more people are needed to work on insurance and other U.S.-Japan
                              trade issues. Moreover, a 1998 USTR document noted that the U.S. Trade
                              Representative spent more time on Japan insurance during much of 1998
                              than on any other single issue.


U.S. Agencies Meet at Least   USTR has reported that coordination among U.S. government agencies to
Bimonthly to Discuss          monitor the insurance agreements takes place about every 2 months and
                              becomes more frequent prior to consultations with Japan. Meetings are
Insurance Agreements
                              called as needed rather than being regularly scheduled in advance, a
                              circumstance that USTR officials view as typical for the agency. According
                              to a USTR official, there are no minutes or records of decisions for these
                              meetings. Typically, the Deputy Assistant U.S. Trade Representative for
                              Japan notifies about a dozen other U.S. government officials of meetings on
                              insurance.14 An exception to the usual working-level nature of the process
                              occurred in the spring and summer of 1998. Spurred by congressional
                              interest, the process was elevated to a more senior level, and more
                              agencies participated during two interagency reviews of the activities of
                              one U.S. insurance company and its Japanese partner. One of these reviews
                              reached the Cabinet level.

                              USTR officials have stated that it is difficult to get all agency
                              representatives to consistently attend meetings because these agencies'
                              offices have to focus on too many other issues to spend much time on the


                              13
                               The U.S. and Foreign Commercial Service, the overseas operations of the Department of
                              Commerce, is not involved with monitoring and enforcing the insurance agreements in
                              Tokyo.
                              14
                               These officials usually include an economic officer at the U.S. embassy in Tokyo; two other
                              USTR officials; two Commerce Department officials; two State Department officials in
                              Washington, D.C.; and one official each from the Treasury Department, the Justice
                              Department, the International Trade Commission, and the National Economic Council.




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                            U.S.-Japan insurance issue. One USTR official noted that, as a result of
                            budget pressures and declining staff levels, agencies choose to focus on
                            issues where they have the lead. In addition, a lack of personnel with
                            technical insurance industry knowledge and frequent personnel turnover in
                            certain agencies limit the understanding of issues among the interagency
                            participants. (Insurance is not regulated at the federal level in the United
                            States.) Decisions typically depend on consensus among those
                            participating, rather than on formal clearance with each official on the
                            meeting notification list.


U.S. Government             For monitoring and enforcing the agreements, USTR and the U.S. embassy
Monitoring and              in Tokyo rely primarily on information provided by U.S. insurance
                            companies and industry groups, as well as on information collected by
Enforcement Efforts Rely
                            officials at the U.S. embassy in Tokyo from Japanese sources.15 For
Heavily on Private Sector   example, USTR relied heavily on information provided by the U.S.
Information                 insurance industry in Japan to make its July 1, 1998, decision that the
                            Japanese government had not met key primary sector deregulation criteria
                            stipulated in the 1996 agreement. (See app. III for further information on
                            USTR's key monitoring and enforcement decisions.) USTR officials report
                            that while neither USTR nor the U.S. government in general possess the
                            resources or technical capabilities to independently investigate or verify
                            this type of information, the agency does make an effort to do so by
                            consulting with experts and industry analysts.

                            USTR officials and an economic officer at the U.S. embassy in Tokyo report
                            that one large U.S. insurance provider is a key source of information on the
                            Japanese insurance market. This company provides the U.S. government
                            with information on the insurance industry and identifies and provides
                            details on problems with the agreements' implementation. The embassy
                            official speaks with representatives from this provider several times a
                            week. According to USTR, without this company's assistance, much of
                            what the U.S. government has accomplished in encouraging deregulation of
                            the Japanese insurance market would not have been possible. USTR and
                            embassy officials also gather information from several other U.S. insurance
                            companies; the embassy official speaks with representatives from these



                            15
                             USTR also receives information from the Japanese government during bilateral
                            consultations. This information includes data on product approvals and insurance
                            premiums for foreign and Japanese insurance providers.




                            Page 15                                           GAO/NSIAD-99-209 International Trade
                              B-283294




                              companies about once a week or once every few weeks in order to obtain
                              as complete a perspective as possible on various issues.

                              In addition to using information from individual companies, USTR relies on
                              several industry groups to identify and explain insurance issues. These
                              groups include the American Chamber of Commerce in Japan (ACCJ),16 the
                              American Council of Life Insurance (ACLI), the Coalition of Service
                              Industries, the International Insurance Council, and the Foreign Non-Life
                              Insurance Association (which is located in Japan). Company participation
                              in these groups varies, and no one group has a membership that includes all
                              U.S. participants in the Japanese insurance market. Some U.S. insurance
                              companies have noted that even the associations to which they belong do
                              not always capture their views on insurance issues. However, USTR
                              officials maintain that they solicit competing viewpoints in cases where
                              companies are in disagreement. Further, insurance experts at the state
                              level from the National Association of Insurance Commissioners have
                              joined USTR in meetings with Japan on insurance issues. For example, the
                              association hosted working-level consultations between the U.S. and
                              Japanese governments in April 1999. The support of these technical experts
                              helped create a dialogue between U.S. and Japanese regulators on new
                              ways to ease the product approval process.


U.S. Government               As part of its monitoring efforts, the U.S. government has reported that
Recognizes Progress in        Japan has made some progress in deregulating the primary insurance
                              sector. According to a recent U.S. embassy document on Japan's insurance
Insurance Deregulation, but
                              reforms, there is evidence that deregulation has been taking hold, with new
Has Identified Unmet          entrants into the life and non-life primary sectors, stronger linkages
Japanese Commitments          between foreign and Japanese firms, and examples of product and price
                              competition. However, in July 1998 (and again in April 1999) USTR
                              reviewed the state of implementation and determined that Japan has not
                              implemented certain deregulation actions called for in the 1996 agreement.
                              Specifically, USTR stated that the Japanese government has not fully
                              implemented its obligations regarding the reform of rating organizations
                              that have historically established prices for major non-life insurance
                              products, and regarding the timely processing of new product and rate
                              applications. As a result, USTR does not support initiation of the 2.5-year
                              countdown toward opening the third sector. In addition, USTR said that


                              16
                                The ACCJ insurance subcommittee of the financial services committee is the source of
                              insurance information for USTR.




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                          Japan violated third sector protections by licensing a cancer insurance
                          product to a large Japanese insurance company. (For more information on
                          how the U.S. government reached these conclusions, see app. III.)

                          The Japanese government has stated that it has fully implemented both
                          agreements, including all deregulation actions. Therefore, on July 1, 1998,
                          Japan began its countdown of the 2.5-year period before opening the third
                          sector to increased competition. Further, Japan reports that the approval of
                          the cancer insurance product under dispute is not an agreement violation
                          but conforms to limitations negotiated by Japan and the United States.



U.S. Insurance Industry   More U.S. insurance companies expressed favorable views of U.S.
                          government actions to monitor the insurance agreements than reported
Views U.S.                favorable views of enforcement efforts. As shown in figure 1, 7 of the 13
Government                U.S. insurance companies operating in Japan, accounting for about 50
                          percent of U.S. premiums, reported that, overall, the U.S. government had
Monitoring Efforts        been effective or very effective in monitoring the agreements. Four
More Favorably Than       companies, representing 13 percent of U.S. premiums in Japan, believed
Enforcement Actions       that the U.S. government had been effective in enforcing the agreements.
                          Four companies reported that U.S. government monitoring efforts had
                          been as effective as ineffective. Five companies provided this neutral
                          response regarding enforcement efforts.




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Figure 1: U.S. Company Views on U.S. Government Monitoring and Enforcement
Efforts
6   Number of companies



5



4



3



2



1



0

        Very               Effective    As effective    Ineffective      Very       No basis
      effective                        as ineffective                 ineffective   to judge

              Monitoring

             Enforcement


Note: Data in the graph does not include brokers.
Source: GAO analysis of company survey results.


Most companies expressed satisfaction with U.S. government efforts
concerning the insurance agreements, particularly in situations involving
U.S. government interaction with U.S. industry. For example, nine
companies reported that the U.S. government had sought input from
industry on the status of agreement implementation to a great or very great
extent. Further, seven companies stated that the U.S. government had given
thorough consideration to implementation issues identified by industry to a
great or very great extent. Ten companies reported that the U.S.
government had represented the U.S. insurance industry in Japan generally
or very adequately. Companies providing these responses represented
around 40-50 percent of U.S. premiums in Japan.

However, U.S. insurance companies that account for a large percentage of
U.S. premiums in Japan expressed a lower level of satisfaction with other



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                  aspects of U.S. government monitoring and enforcement efforts,
                  specifically in terms of timeliness, accuracy of information, and
                  consistency of government policy. Six companies, which accounted for
                  over 80 percent of U.S. premiums in Japan, reported that the U.S.
                  government had not acted upon agreement implementation concerns in a
                  timely manner. Further, seven companies, which also accounted for over
                  80 percent of U.S. premiums in Japan, reported that the information
                  provided to them by the U.S. government on implementation had not been
                  clear and accurate. Finally, five companies, accounting for almost 90
                  percent of U.S. premiums in Japan, reported that U.S. government policy
                  actions regarding the agreements had not been consistent over time. The
                  largest U.S. insurance company in Japan expressed a strong level of
                  dissatisfaction with a U.S. government decision that Japan's failure to
                  prevent certain activities of a competing firm was not violating a third
                  sector restriction in the 1996 agreement.



Agency Comments   We obtained oral comments on a draft of this report from officials from
                  USTR, including the General Counsel and staff from the Japan Office.
                  USTR declined the opportunity to provide an overall assessment of the
                  report. USTR and an official at the U.S. embassy in Tokyo provided several
                  technical comments, which we incorporated into the report as appropriate.


                  As arranged with your office, unless you publicly announce its contents
                  earlier, we plan no further distribution of this report until 30 days after the
                  date of this letter. At that time, we will send copies of this report to
                  interested congressional committees and to Ambassador Charlene
                  Barshefsky, the U.S. Trade Representative; the Honorable William M. Daley,
                  Secretary of Commerce; the Honorable Madeleine K. Albright, Secretary of
                  State; the Honorable Lawrence H. Summers, Secretary of the Treasury; the
                  Honorable Janet Reno, Attorney General; 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.




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If you or your staff have any questions about this report, please contact me
at (202) 512-4128. Other GAO contacts and staff acknowledgments are
listed in appendix VI.

Sincerely yours,




Benjamin F. Nelson, Director
International Relations and Trade Issues




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Page 21   GAO/NSIAD-99-209 International Trade
Appendix I

Questionnaire on the Status of
Implementation of the U.S.-Japan Insurance
Agreements                                                                                                Appendx
                                                                                                                Ii




               We distributed a questionnaire to 13 insurance companies (5 life and 8
               non-life companies) and three insurance brokers operating in Japan that
               are either wholly or majority U.S. owned.1 We obtained a 100-percent
               response rate to the questionnaire. The questionnaire contains four
               sections: (1) implementation/impact of the 1994 U.S.-Japan insurance
               agreement, (2) implementation/impact of the 1996 U.S.-Japan insurance
               agreement, (3) the combined implementation/impact of the 1994 and 1996
               agreements, and (4) monitoring and enforcement of the agreements. We
               also administered a supplemental questionnaire that was only distributed
               to the 13 companies. The supplemental questionnaire asked for detailed
               information concerning applications companies had submitted.2

               Some of the questions in the questionnaire only applied to non-life
               companies, while others only applied to life companies, and these
               questions are noted in the attached questionnaire. Also, brokers were
               asked fewer questions than the companies because some of the
               commitments in the agreements did not pertain to them. For each question
               in the following questionnaire and supplemental questionnaire, we have
               displayed the company responses. The broker responses are displayed in
               parenthesis next to company responses.




               1
                The companies are (1) American Family Life Assurance Company of Columbus (AFLAC);
               (2) American Life Insurance Company (owned by American International Group [AIG]); (3)
               Prudential Life Insurance Company, Ltd.; (4) INA Himawari Life Insurance Company, Ltd.
               (90 percent owned by CIGNA at the time of our survey, but now 61 percent owned by CIGNA
               and 39 percent owned by Yasuda Fire and Marine); (5) GE Edison Life (90 percent owned by
               GE Capital); (6) AIU Insurance Company (owned by AIG); (7) CIGNA Accident and Fire
               Insurance Company, Ltd. (now owned by ACE INA); (8) American Home Assurance
               Company (owned by AIG); (9) Lumbermens Mutual Casualty Company (Kemper); (10)
               Liberty Mutual Insurance Company (Liberty International); (11) Unum Japan Accident
               Insurance Company; (12) Federal Insurance Company (Chubb); and (13) Allstate Property
               and Casualty Insurance Japan Company, Ltd. The three brokers are J&H Marsh &
               McLennan, Japan; Ltd.; AON Risk Services, Japan, Ltd.; and Willis Corroon Japan, Ltd. Willis
               Corroon is a British-registered company, with majority U.S. shareholders.
               2
                The supplemental questionnaire was not provided to brokers because they do not submit
               insurance applications.




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Appendix II

Analysis of Company Questionnaires on the
Status of Implementation of the U.S.-Japan
Insurance Agreements                                                                        Appendx
                                                                                                  iI




               This appendix presents a discussion of the results of the company
               questionnaires (see app. I) on the 1994 and 1996 U.S.-Japan insurance
               agreements. The following discussion is structured differently from our
               discussion of this topic in the main body of the report. The discussion in
               the main body of the report is structured around issues, such as
               implementation, impact, and concerns related to the agreements. This
               discussion is structured to follow the order of the questionnaire. We first
               discuss company responses to questions on implementation and impact of
               the 1994 agreement, then follow with a discussion of company responses to
               the 1996 agreement. We end the discussion with company views on the
               future impact of the agreements as well as company experiences in sales
               and market share over the last few years.

               In our discussion of company responses to questions on the 1994
               agreement, where appropriate, we compare responses in our current
               survey to those responses to a 1996 survey we conducted on the 1994
               agreement. Eleven of the 13 companies and two of the three brokers
               included in our current survey also responded to our 1996 survey. While our
               current survey section on the 1994 agreement covers the same major issues
               we covered in our 1996 survey, we did not ask as many detailed questions
               about the agreement as we did in our prior survey nor did we ask about
               certain commitments that had clearly been implemented prior to the
               creation of our 1999 survey.

               Finally, our discussion of survey results is supplemented with information
               obtained during interviews with U.S. insurance companies in Japan.




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                            Appendix II
                            Analysis of Company Questionnaires on the
                            Status of Implementation of the U.S.-Japan
                            Insurance Agreements




1994 Agreement              In our 1999 survey, 8 of the 13 companies, representing about 90 percent of
                            the premiums generated by U.S. companies in Japan, and two of the three
Largely Implemented         brokers reported that the 1994 agreement had enhanced their ability to
and Provides Positive       compete in Japan.1 This represents a positive change from our 1996 survey,
                            when most companies reported that Japan had implemented the 1994
Impact, but Concerns        agreement to varying degrees, but the agreement had no effect on their
Exist Over                  ability to compete.2 However, companies reported concerns over Japan's
Implementation of Key       implementation of specific commitments under the agreement.
Commitments

Company Views on            The 1994 agreement included commitments by Japan to increase
Implementation and Impact   transparency, deregulation, competition, and access to insurance programs
                            of government corporations, while protecting foreign companies' shares in
of Selected Key
                            the third sector. Table 1 lists selected key commitments by the Japanese
Commitments Under the       government under the 1994 agreement. Company views on the extent to
1994 Agreement              which Japan has implemented these commitments and their impact follow
                            the table.




                            1
                             Company shares (percentage) of total U.S. premiums generated in Japan were calculated
                            using premium data for Japanese fiscal year 1997 (Apr. 1997-Mar. 1998). Two surveyed
                            companies, GE Edison and Allstate, did not have sales in 1997 and were assigned a zero
                            weight for computing the premium proportions. The three brokers we surveyed were also
                            excluded from the calculation of premium proportions.
                            2
                             In 1996, we surveyed 11 U.S. companies and four U.S. brokers operating in Japan. In 1999,
                            we surveyed these 11 companies and 2 additional U.S. companies. One of these two
                            companies, GE Edison, entered the life insurance market through the acquisition of a
                            Japanese life insurer in April 1998. The other U.S. company, Allstate, was established in 1998
                            to sell automobile insurance. This company once had a 50-percent ownership in two other
                            insurance companies in Japan but divested itself of these two companies in November 1997.
                            Also, since our prior survey, one of the U.S. brokers acquired another of the brokers, thus
                            leaving us with three brokers in our 1999 survey.




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                                         Appendix II
                                         Analysis of Company Questionnaires on the
                                         Status of Implementation of the U.S.-Japan
                                         Insurance Agreements




Table 1: Selected Key Commitments of the 1994 U.S.-Japan Insurance Agreement

                                                       1994 Agreement
Measures                         Selected key commitments by the Japanese government
Transparency and procedural      • Publish and make publicly available licensing, product, and rate approval standards
protections                      • Encourage Japanese advisory groups to allow foreign providers to attend their meetings and
                                   submit statements when these groups are asked to provide recommendations to Japanese
                                   government related to the provision of insurance
                                 • Encourage Japanese industry associations to accord foreign insurers rights, privileges, and
                                   opportunities equal to those accorded to domestic firms
                                 • Provide meaningful and fair opportunities for foreign firms to be informed of, comment on, and/or
                                   exchange views with Japanese officials regarding insurance laws, ordinances, and/or regulations
                                 • Safeguard information considered secret in connection with a company's application, accept
                                   multiple applications for license or product approval at the same time, not require companies to
                                   coordinate their applications with other insurance providers, and not condition/delay acceptance
                                   of applications based on whether the company has consulted with other insurance providers
Deregulation                     • Institute, in stages, expedited and simplified systems for the approval of applications for certain
                                   insurance products and rates
                                 • Allow insurance companies to apply flexible rates for certain non-life products
                                 • Allow applications to use data collected outside of Japan
                                 • Establish a brokerage system
Entry into the third sector by   • Do not allow “mutual entry”a until a substantial portion of life and non-life areas are deregulated,
subsidiaries                       and avoid radical change in the third sector until foreign insurance providers have the opportunity
                                   to compete on equal terms in major product categories in the life and non-life sectors
Government corporations          • Encourage public corporations to permit foreign insurers access to their insurance programs and
                                   to ensure that allocation of premium shares among insurance providers is done according to fair,
                                   transparent, nondiscriminatory, and competitive criteria
Competition                      • Strictly enforce antitrust laws in the insurance sector
                                 • Require the private sector to complete a study of “keiretsu” relationshipsb


                                         a
                                          “Mutual entry” was defined in the 1994 agreement as “the ability of life insurance companies to
                                         introduce existing, new or modified rates, products, or riders in the third sector currently allowed to
                                         non-life insurance companies, and the ability of non-life insurance companies to introduce existing,
                                         new or modified rates, products, or riders in the third sector currently allowed to life insurance
                                         companies.”
                                         b
                                          “Keiretsu” are groups of Japanese firms that maintain close ties through the cross-holding of shares
                                         and exchange of personnel. They are important in the Japanese insurance market. With close
                                         corporate links, many Japanese businesses and their employees buy insurance from firms within their
                                         keiretsu—limiting the ability of foreign insurance providers to distribute their products.
                                         Source: “Measures by the Government of the United States and the Government of Japan Regarding
                                         Insurance,” October 11, 1994.


Transparency and Procedural              Our analysis of questionnaire responses indicates that most of the
Protections                              commitments to improve transparency and procedural protections have
                                         been met. Most companies (10 of 13) reported that they had been given
                                         meaningful and fair opportunities to share their views with Japanese
                                         officials regarding insurance laws, ordinances, and/or regulations. One



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               Appendix II
               Analysis of Company Questionnaires on the
               Status of Implementation of the U.S.-Japan
               Insurance Agreements




               company official indicated that the Financial Supervisory Agency (FSA),
               which assumed regulatory authority over product approval from the
               Ministry of Finance (MOF), encouraged greater dialogue with companies
               and appeared to value and respect diverse opinions. Further, 10 companies
               reported that they had received equal treatment in insurance industry
               groups. Also, 10 companies reported that the Japanese government had not
               required their company to coordinate its applications with other insurance
               providers (which may be potential competitors) and had not conditioned or
               delayed acceptance of their applications based on whether they had
               consulted with other insurance providers.

               Several companies, however, expressed concern over the Japanese
               government's commitment to publish and/or make publicly available
               licensing, product, and rate approval standards. Almost half of the
               companies (6 of 13) reported that the Japanese government had done little
               or nothing to meet this commitment. This result is very similar to what
               companies reported to us during our 1996 survey. Officials from two
               companies told us that the MOF and FSA were reluctant to put anything in
               writing with respect to approval standards. An official from another
               company told us that it was difficult to develop products because the rules
               of the product approval process were unclear. With respect to Japan's
               commitment to encourage Japanese advisory groups to allow foreign
               companies to attend group meetings when these groups are asked to
               provide recommendations related to insurance, four U.S. companies
               reported that they had attended only a few of these meetings, while another
               two U.S. companies reported that they had not attended any meetings.
               Officials from two other companies told us that the most effective way to
               communicate with the Japanese government was through industry
               associations, such as the Life Insurance Association of Japan and the
               Foreign Non-Life Insurance Association of Japan, rather than individually.

               Overall, 7 of the 13 companies, representing about 90 percent of the
               premiums of U.S. companies in Japan, reported that the Japanese
               government's actions to improve transparency and procedural protections
               had no effect on their ability to compete in Japan. Three companies
               reported that these actions had a generally positive effect.

Deregulation   Our analysis of questionnaire responses indicates that the Japanese
               government has implemented many of the specific deregulatory
               commitments in the 1994 agreement. Four of six non-life companies
               reported that the Japanese government had, to a moderate or great extent,
               expanded the types of non-life products to which flexible rates could be



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Analysis of Company Questionnaires on the
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Insurance Agreements




applied.3 Eight companies submitted applications using data collected
outside of Japan and were allowed to use this data. This represents twice
the number of companies that reported using outside data in our 1996
survey. However, over half of the companies (7 of 13), representing about
45 percent of the premiums, reported that generally the government had
done little to expedite and simplify the application review process. This
result is very similar to what companies reported to us during our 1996
survey.

Concerning Japan's implementation of its commitment to establish a
brokerage system, two of the three brokers reported that the Japanese
government's decision to recognize and license brokers had enhanced their
ability to compete in Japan.4 However, all brokers told us that they
continued to face obstacles in Japan, including a lack of price and product
differentiation, restrictions on the types of products they can offer, and
restrictions on the structure of their business operations. In terms of the
impact of brokers on insurance companies, two companies reported that
the establishment of a brokerage system had a generally positive effect on
their ability to compete in Japan, while seven companies reported that this
system had no effect.5

Overall, 9 of the 13 companies, representing about 45 percent of premiums,
reported that the Japanese government's implementation of its 1994
deregulatory commitments had a positive effect on their ability to compete
in Japan. Eight companies reported that the Japanese government's
implementation of its deregulatory commitments had enhanced their
abilities to differentiate product rates and forms.6 Also, five companies
reported that the implementation of deregulation commitments had
increased companies' abilities to distribute insurance products. These
results represent a positive change over our prior survey, when most
companies reported that Japan's actions had done little to enhance their
abilities to differentiate product rates and forms and distribute insurance
products.

3
Two non-life companies reported that this commitment did not apply to them.
4
All three brokers had received their brokers' licenses.
5
 The remaining four companies reported that they had no basis to judge or that it was too
soon to determine the impact of the brokerage system.
6
 These results reflect the Japanese government's implementation of both the 1994 and 1996
deregulatory commitments.




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                                 Analysis of Company Questionnaires on the
                                 Status of Implementation of the U.S.-Japan
                                 Insurance Agreements




Entry Into the Third Sector by   Six companies, representing about 80 percent of U.S. premiums, reported
Subsidiaries                     that the Japanese government had not taken sufficient action to avoid
                                 “radical change” in the third sector (that is, had not prevented large
                                 Japanese companies from entering into the third sector). Two U.S. insurers
                                 believed that radical change had occurred because two Japanese
                                 companies, Yasuda and Tokyo-Anshin, were operating in the third sector in
                                 a manner the U.S. insurers believed violated both agreements. Two
                                 companies, representing about 45 percent of U.S. premiums, reported that
                                 Japan had not taken sufficient action to avoid radical change in the third
                                 sector and that this inaction had a generally negative effect on their ability
                                 to compete in Japan. One company stated that Japan had taken sufficient
                                 action to avoid radical change and that this action had a very negative
                                 impact on its ability to compete. Five companies, representing about
                                 40 percent of premiums, reported that Japan's efforts to avoid radical
                                 change had a generally positive effect.

Government Corporations          The insurance programs of government corporations are large and
                                 profitable, according to officials from two U.S. insurance companies.7
                                 However, most companies reported that the insurance programs of these
                                 corporations are not fully available to them. Seven companies reported that
                                 for the most part, these corporations had not allocated shares of premiums
                                 using fair, transparent, nondiscriminatory, and competitive criteria, as
                                 required by the 1994 agreement.8 This result is very similar to our last
                                 survey. In our current survey, one company official stated that the formula
                                 used by the Housing Loan Corporation (the only government corporation
                                 that has disclosed its formula for allocating shares to insurance companies)
                                 to allocate premiums gave less than 5 percent of the shares to foreign
                                 companies. Furthermore, according to this company official, this
                                 government corporation gave the entire foreign share to one large U.S.
                                 company, with the expectation that the company would share the
                                 premiums with other foreign companies through reinsurance agreements.


                                 7
                                  Government corporations are established by special law in Japan to serve as instruments
                                 for state activities when it is recognized that such a corporation could operate more
                                 efficiently than if managed directly by a government agency, or that its financial and
                                 personnel management could proceed more smoothly than if subject to the laws and
                                 regulations of a government organization.
                                 8
                                  Five public corporations were encouraged by the Japanese government to permit foreign
                                 insurers access to their insurance programs: the Government Housing Loan Corporation,
                                 the Pension Welfare Service Public Corporation, the Housing and Urban Development
                                 Corporation, the Okinawa Development Corporation, and the Employment Promotion
                                 Corporation.




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                            Analysis of Company Questionnaires on the
                            Status of Implementation of the U.S.-Japan
                            Insurance Agreements




Competition                 Many companies reported that Japan had not taken sufficient action to
                            promote competition in the insurance market. Five of the 13 companies,
                            representing about 70 percent of U.S. premiums, reported that the
                            Japanese government had not vigorously enforced the Anti-Monopoly Act
                            in the insurance sector.9 Eight companies and all three brokers reported
                            that keiretsu practices and case agents still adversely affected them to a
                            moderate or greater extent.10 Officials from two companies indicated that
                            Japanese companies would usually not buy insurance outside of their
                            keiretsu. However, officials from two companies and one broker believed
                            that keiretsu groups would weaken over time. Overall, 9 of the 13
                            companies, representing about 90 percent of the premiums, reported that
                            Japan's efforts to improve competition by taking antitrust actions had no
                            effect on their ability to compete in Japan. This result is very similar to
                            what companies reported to us in our 1996 survey.



1996 Agreement Also         In our 1999 survey, 9 of the 13 companies, representing around 50 percent
                            of U.S. premiums, and two of the three brokers reported that the 1996
Largely Implemented         agreement had a positive effect on their ability to compete in Japan.
and Provides Positive       Companies reported that while Japan had implemented many of the
                            commitments, some had not been fully met.
Impact, but Some Key
Commitments Not
Fully Met

Company Views on            The 1996 agreement listed several deregulation commitments for the
Implementation and Impact   primary sector. In addition, the agreement listed other commitments that
                            restrict entry into the third sector by subsidiaries of large Japanese
of Selected Key
                            companies. The agreement clarified when these restrictions could be lifted
Commitments Under the       by explicitly linking them to the implementation of five primary sector
1996 Agreement              deregulation commitments. The agreement states that these restrictions
                            will be lifted 2.5 years after the five primary sector commitments have been


                            9
                             In addition, the private sector keiretsu study mandated by the 1994 agreement was never
                            completed.
                            10
                              Case agents are in-house insurance companies for Japanese firms. Case agents handle the
                            insurance needs of the firm and are supposed to lower a firm's insurance cost. Case agents
                            can also handle individual employee insurance needs, including auto, travel, and personal
                            accident insurance.




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                                               Status of Implementation of the U.S.-Japan
                                               Insurance Agreements




                                               implemented. Under the 1996 agreement, the Japanese government also
                                               made a commitment to take steps to increase the number of staff who
                                               process insurance applications. Table 2 lists selected key commitments by
                                               the Japanese government under the 1996 agreement. Company views on
                                               the extent to which Japan has implemented these commitments and their
                                               impact follow the table.



Table 2: Selected Key Commitments of the 1996 U.S.-Japan Insurance Agreement

                                                             1996 Agreement
               Measures                Selected key commitments by the Japanese government
Deregulation in the primary sectorsa   • Approval of applications for differentiated automobile insurance (different rates, forms, and
                                         methods of distributing insurance products based on risk factors) within the standard 90-day
                                         period
                                       • Authorization for companies to offer commercial fire insurance at different rates by further
                                         lowering of the minimum insured amount per contract required for the application of the advisory
                                         rate systemb
                                       • Expansion of the notification system for 19 products and their marketing within 90 daysc
                                       • Implementation of the necessary legal changes to eliminate obligations for members of a rating
                                         organization to use rates calculated by the rating organization
                                       • Approval of applications for differentiated products or rates within the standard 90-day period
                                       • Approval of direct response system for automobile insuranced
Entry into the third sector by         • Non-life subsidiaries of life insurance providers permitted to sell personal accident insurance
subsidiaries                             subject to restrictions
                                       • Life insurance subsidiaries of non-life insurance companies not allowed to sell stand-alone
                                         cancer or medical insurance
                                       • For life insurance subsidiaries, limit the ratio of cancer or medical rider benefits to base life
                                         insurance policies to what was in existence before the implementation of the new Insurance
                                         Business Law on April 1, 1996
Other issues                           • Take steps to increase the number of staff who process insurance applications


                                               a
                                               The implementation of the first five deregulation commitments serves as the five criteria that must be
                                               met before the restrictions on entry into the third sector by large Japanese subsidiaries can be lifted.
                                               b
                                                The Japanese government committed to allow companies to offer flexible rates on their commercial
                                               fire policies if the amount insured was 7 billion yen—the threshold—or higher.
                                               c
                                                Under Japan's notification system, a company notifies to the government its intention to offer a
                                               specific product/rate in categories of risk that have been designated by Japan as eligible to use the
                                               system. The company then waits 90 days while the notification is reviewed by the government. If, after
                                               90 days, no disapproval is received, the company can then consider the product/rate approved and
                                               begin to offer it.
                                               d
                                                This allows for automobile insurance to be marketed directly. For example, automobile insurance may
                                               be marketed over the telephone. The U.S. government acknowledged that the Japanese government
                                               had met this commitment in September 1996.
                                               Source: “Supplementary Measures by the Government of the United States and the Government of
                                               Japan Regarding Insurance,” December 24, 1996.




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                              Analysis of Company Questionnaires on the
                              Status of Implementation of the U.S.-Japan
                              Insurance Agreements




Deregulation in the Primary   Our analysis of questionnaire responses indicates that for the most part
Sectors                       Japan has implemented its deregulatory commitments and these
                              commitments are having a positive effect. For example, the three non-life
                              companies who submitted applications to offer automobile insurance
                              through the direct response system (for example, marketing over the
                              telephone) reported that these applications have been approved. One of
                              these three companies reported that this method of offering insurance had
                              a very positive effect on its ability to compete in Japan, while the other two
                              companies reported no effect. An official from another company noted that
                              the approval of direct marketing of automobile insurance should help
                              toward gaining the approval of direct marketing for other insurance
                              products.11

                              Of the five primary sector deregulatory commitments that serve as criteria
                              for lifting restrictions on the entry into the third sector by subsidiaries of
                              large Japanese companies, four of these apply only to non-life companies.
                              All of the non-life companies expressing an opinion reported that Japan
                              had implemented three of these four commitments (that is, approval of
                              differentiated automobile insurance applications, further liberalization of
                              commercial fire insurance, and elimination of the obligation to use rating
                              organization rates). One non-life insurer reported that Japan's commitment
                              to expand the notification system had not been implemented, while all
                              other non-life insurers reported that this commitment had been met. These
                              eight non-life companies had mixed views on the extent to which these
                              deregulatory actions affected their ability to compete in Japan.

                              • One of the three non-life insurers that had obtained approval to offer
                                differentiated automobile insurance reported that this had a very
                                positive effect on its ability to compete in Japan.
                              • Two non-life companies viewed the liberalization of commercial fire
                                rates as generally positive, with one company official indicating that the
                                liberalization was producing discounts of up to 30 percent. However,
                                four of the six non-life companies that offered commercial fire
                                insurance reported that this liberalization had no effect on their
                                company's ability to compete in Japan. Officials from two companies
                                stated that the threshold—the minimum insured amount above which
                                flexible rates could be applied—was still too high. An official from one



                              11
                               According to U.S. government officials, other types of insurance products, such as
                              personal accident insurance, are already being sold via direct marketing.




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Status of Implementation of the U.S.-Japan
Insurance Agreements




  of these companies stated that the keiretsu ties controlled which insurer
  provided commercial fire insurance for large corporations.
• Four of the six non-life companies that offered products under the
  notification system viewed the system as having no effect on their
  ability to compete in Japan, while two companies viewed the system as
  having a positive effect.
• Three companies reported that Japan's reform of rating organizations
  had a generally positive effect on their ability to compete, while four
  reported that Japan's effort had no effect or a generally negative effect.
  One company reported that the elimination of the obligation to use
  rating organization rates gave it greater discretion over setting premium
  rates. Another official indicated that his company left the rating
  organization because it was no longer required to be a member.

The fifth commitment that serves as a criterion for lifting restrictions in the
third sector applies to all insurers. This commitment requires that
applications for differentiated products or rates be approved within the
standard 90-day processing period. Seven of the 13 companies,
representing about 60 percent of U.S. premiums, reported that Japan had
implemented this commitment. However, five companies, representing
about one-third of U.S. premiums, reported that Japan had not met this
commitment.12 About half the companies (6 of 13) reported Japan's
approval of applications for differentiated products or rates within the
standard 90-day processing period had a positive effect on their ability to
compete in Japan.

We asked companies to provide us with information on the number of
applications they had submitted since the 1996 agreement was signed.
Companies reported that 422 of the 466 applications they had submitted
since the 1996 agreement was signed had been approved and 44 were still
pending. No companies reported that any applications had been rejected.
Companies also reported that 21 of the 422 approved applications, or
5 percent, were approved more than 90 days after submission, as shown in
figure 2. This does not necessarily mean that the Japanese government was
not in compliance with the standard 90-day processing period. This is
because the FSA may suspend the 90-day period under some
circumstances. The 21 applications that took longer than 90 days to
approve were submitted by three companies. Fifteen of the 21 applications
were for applications to sell new-to-market products or to sell through a


12
     One U.S. insurer reported “Do not know” in this area.




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Analysis of Company Questionnaires on the
Status of Implementation of the U.S.-Japan
Insurance Agreements




new distribution channel, as shown in figure 3. The remaining 6 of 21
applications were for revising company-exclusive product forms or rates.
The applications that have been approved to sell standard products or to
revise standard products or rates were all approved within 90 days.



Figure 2: Results of Approved Applications Submitted by U.S. Companies in Japan
Since the 1996 Agreement Was Signed

                            21 (5%)
                                                      Approved in more than 90 days




                 401 (95%)                             Approved within 90 days




Source: GAO analysis of company survey results.




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Analysis of Company Questionnaires on the
Status of Implementation of the U.S.-Japan
Insurance Agreements




Figure 3: Results of Approved Applications by Type, Submitted by U.S. Companies
in Japan Since the 1996 Agreement Was Signed
350 Number of applications




300




250




200




150




100


             15
    50                     6




     0

             Newa       Exclusiveb    Standardc


                    Approved within 90 days

                    Approved in more than 90 days


Note: Numbers next to bars represent those applications approved in more than 90 days.
a
    Includes applications to sell a new-to-market product and to sell through a new distribution channel.
b
    Includes applications to revise a company-exclusive product form or rate.
c
 Includes applications to sell an industry standard product or revise an industry standard product form
or rate.
Source: GAO analysis of company survey results.


In summary, regarding the five commitments that serve as criteria for lifting
third sector restrictions, five companies, representing about one-third of
U.S. premiums, reported that Japan had not complied with the commitment
to approve applications for differentiated products within a 90-day period.




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                                 Analysis of Company Questionnaires on the
                                 Status of Implementation of the U.S.-Japan
                                 Insurance Agreements




                                 One of these companies also reported that Japan had not complied with its
                                 commitment to expand the notification system.

                                 In addition to asking companies to report on the effect of the individual
                                 deregulatory commitments, we also asked companies to report on the
                                 overall effect of deregulatory actions taken by Japan on their ability to
                                 compete. Seven of the 13 companies, representing about 45 percent of U.S.
                                 premiums, and two of the three brokers reported that the Japanese
                                 government's implementation of its deregulatory commitments under the
                                 1996 agreement had enhanced their ability to compete in Japan. Four of the
                                 companies and one broker reported that the Japanese government's
                                 implementation of its deregulatory commitments had no effect, while one
                                 company reported that the Japanese government's implementation of these
                                 commitments had a generally negative effect.

Entry Into the Third Sector by   In the non-life area of the third sector, restrictions on sales by Japanese
Subsidiaries                     subsidiaries were set forth in the agreements primarily to protect the
                                 existing sales networks of foreign insurers for personal accident insurance.
                                 For five of the eight non-life companies expressing an opinion, all reported
                                 that Japan had met most of the these commitments. However, not one
                                 company (of those expressing an opinion) reported that Japan had
                                 prohibited the sales of personal accident insurance to association
                                 members. Overall, three of the non-life companies, representing a majority
                                 of the non-life premiums, reported that Japan's implementation of
                                 restrictions on sales by Japanese subsidiaries had a generally positive
                                 effect.

                                 In the life area of the third sector, Japan committed to prevent Japanese
                                 subsidiaries from selling stand-alone medical and stand-alone cancer
                                 insurance, but allowed for the sale of these products as riders to an
                                 underlying base policy if the rider-to-base-policy ratio was within
                                 prescribed limits.13 Two U.S. life insurance companies reported that Japan
                                 had not prevented Japanese subsidiaries from selling stand-alone medical
                                 and stand-alone cancer insurance. One of these companies reported that
                                 the Japanese government had failed to prevent Yasuda, a large Japanese
                                 company, from selling stand-alone cancer insurance through its
                                 relationship with INA Himawari. The other company reported that another


                                 13
                                  An insurance rider is a policy modification or addition to a larger insurance policy. In this
                                 case, the underlying insurance being sold is a life insurance policy. Cancer, medical, and
                                 other benefits are sold as riders in addition to the standard life insurance policy.




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                                Analysis of Company Questionnaires on the
                                Status of Implementation of the U.S.-Japan
                                Insurance Agreements




                                Japanese insurer, Tokyo-Anshin, was effectively selling stand-alone cancer
                                insurance even though the company offers it as a rider to a base life
                                insurance policy. These two companies reported that the Japanese
                                government's inability to prevent Japanese companies from selling
                                stand-alone cancer insurance had a negative effect on their ability to
                                compete in Japan.

Other Issues: Increasing the    The Japanese government committed under the 1996 agreement to take
Number of Regulatory Staff to   steps to increase the number of staff who process insurance applications.
Process Applications            Ten of the 13 companies reported that Japan had decreased the level of
                                staff responsible for insurance product approval, while the remaining three
                                companies reported that Japan had maintained the same level of staffing.
                                An FSA official told us that the agency had nine individuals responsible for
                                processing insurance applications.14 Officials from seven companies told us
                                that this staffing level was too small to handle the volume of insurance
                                applications. Five company officials told us that they had difficulty in
                                arranging a meeting with the FSA, and two of these officials indicated that
                                once they had secured a meeting, they were given little time to discuss their
                                applications with agency officials. One company official believed his
                                company could only submit applications twice a year because of the FSA's
                                staffing level. Two company officials expressed concern over the ability of
                                the FSA to meet the standard 90-day period for product approval, given the
                                expected increases in the volume of applications.



U.S. Companies' Views           In soliciting company views on the future effects of the agreements, we
                                chose a 2- and 5-year time period to obtain company views both before and
on the Future Effects           after Japan intends to lift the third sector restrictions in January 2001.
of the Agreements               Eleven of the 13 companies, representing about 50 percent of U.S.
                                premiums, and one of the three brokers reported that over the next 2 years,
                                the agreements would have a very or generally positive effect on their
                                ability to compete in Japan, as shown in figure 4. Two companies told us
                                that they reported positively because of Japan's commitment to restrict the
                                entry by large Japanese companies into the third sector over the next
                                2 years. However, over the next 5 years, a smaller number of companies
                                reported a positive outcome, as 7 of the 13 companies, representing about
                                25 percent of U.S. premiums, reported that the agreements would have a


                                14
                                 According to U.S. Trade Representative (USTR) officials, FSA has increased the number of
                                staff responsible for application processing since our survey was completed.




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Analysis of Company Questionnaires on the
Status of Implementation of the U.S.-Japan
Insurance Agreements




positive effect. Brokers were more positive over the next 5 years, as all
three reported that the agreements would have a positive effect over this
time period. Two companies told us that once the third sector was opened
to large Japanese companies, the third sector business of these U.S.
companies would suffer.



Figure 4: U.S. Companies' Views on Future Effects of Insurance Agreements
12 Number of companies




10




 8




 6




 4




 2




 0

     Very positive     Generally       No effect     Generally           Very          No basis
        effect       positive effect               negative effect   negative effect   to judge


              Next 2 years

              Next 5 years


Note: Does not include brokers.
Source: GAO analysis of company survey results.




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                      Analysis of Company Questionnaires on the
                      Status of Implementation of the U.S.-Japan
                      Insurance Agreements




U.S. Company Sales    Most of the U.S. insurance companies with sales in Japan in fiscal year 1997
                      or earlier reported that their sales and market shares in the primary and
and Market Shares     third sectors had increased since the 1994 agreement was signed.
Increase; Some        Specifically, eight companies realized increases in their primary sector
                      sales, and six realized increases in primary sector market share, as shown
Companies Attribute   in figure 5.15 Two of the eight companies that reported increases in primary
Agreements            sector sales attributed the increases to actions taken by Japan under the
                      agreements. In the third sector, eight companies realized increases in third
                      sector sales, and six realized increases in market share, as shown in
                      figure 6.16 Five of the eight companies that reported increases in third
                      sector sales attributed the increases to actions taken by Japan under the
                      agreements.




                      15
                           Three companies responded, “Not applicable.”
                      16
                           Four companies responded, “Not applicable.”




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Analysis of Company Questionnaires on the
Status of Implementation of the U.S.-Japan
Insurance Agreements




Figure 5: Primary Sector Sales and Market Share Since the 1994 Agreement Was
Signed
9   Number of companies


8


7


6


5


4


3


2


1


0

       Increased               Remained           Decreased       Not applicable
                                the same


              Annual direct premium sales

               Market Shares


Note: Does not include brokers.
Source: GAO analysis of company survey results.




Page 77                                                 GAO/NSIAD-99-209 International Trade
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Analysis of Company Questionnaires on the
Status of Implementation of the U.S.-Japan
Insurance Agreements




Figure 6: Third Sector Sales and Market Share Since the 1994 Agreement Was
Signed
9   Number of companies



8



7



6



5



4



3



2



1



0

          Increased                Remained        Decreased          Not applicable
                                    the same

                Annual direct premium sales

                 Market Share


Note: Does not include brokers.
Source: GAO analysis of company survey results.




Page 78                                           GAO/NSIAD-99-209 International Trade
Appendix III

U.S. Trade Representative’s Key Monitoring
and Enforcement Decisions                                                                                 Appendx
                                                                                                                Ii




               USTR is the lead U.S. trade agency, with primary responsibility for
               monitoring and enforcing the U.S.-Japan insurance agreements. This
               appendix reports on the process and information USTR used in reaching
               key decisions regarding Japan's implementation of the agreements, as well
               as current U.S. government and industry positions on outstanding issues.
               Two of these decisions were reached on July 1, 1998, and decisions to drop
               or raise certain issues in the third sector have since been made. In some
               instances, Japanese, foreign, and U.S. industry groups and U.S. companies
               have expressed opinions that run counter to USTR's current position on
               specific implementation issues.

               After consulting with industry sources, USTR released an assessment on
               July 1, 1998, of Japan's implementation of five key primary sector
               deregulation measures contained in the 1996 agreement.1 USTR stated that
               while Japan had met three of these measures, it had failed to fully
               implement the two remaining commitments. USTR had identified problems
               in two areas: (1) unjustified delays in approving applications for
               differentiated products and rates within the standard processing period of
               90 days and (2) inadequate reform of rating organizations. Therefore, USTR
               announced that it did not support initiating a 2.5-year countdown to open
               the third sector in 2001. In contrast, Japanese officials have stated that
               Japan has fully implemented the five deregulation measures, and on July 1,
               1998, Japan initiated the 2.5-year countdown.

               Also, on July 1, 1998, USTR notified Japan that by allowing a Japanese
               insurance company (Tokyo-Anshin) to sell a cancer insurance product,
               Japan had circumvented the 1994 and 1996 agreements' terms that
               effectively reserved the third sector market for foreign and small and
               medium-sized Japanese firms. Japan responded that the agreement permits
               this particular cancer insurance product to be sold since it conforms to
               limitations negotiated by Japan and the United States. USTR has also
               reviewed other possible third sector violations, in one case determining



               1
                These measures are (1) approving applications for differentiated types of automobile
               insurance within the standard 90-day processing period, (2) further liberalizing commercial
               fire insurance pricing, (3) expanding a “notification system,” (4) removing the requirement
               for members to use insurance rates calculated by rating organizations, and (5) approving
               applications for differentiated products or rates within the standard processing period of
               90 days. According to the 1996 agreement, these measures are to serve as criteria that, upon
               being met, initiate a 2.5-year countdown toward opening the third sector to increased
               competition.




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                         Appendix III
                         U.S. Trade Representative’s Key Monitoring
                         and Enforcement Decisions




                         that there was no violation, and in another, choosing to raise the issue with
                         Japan.

                         USTR has not revised its July 1998 assessment of Japan's compliance with
                         the insurance agreements. In an April 1999 meeting with Japanese officials,
                         USTR repeated its position that Japan has not complied with two
                         outstanding deregulatory requirements (90-day product approval and rating
                         organization reform). Additionally, USTR said that Japan continues to
                         allow the ongoing violation of the third sector provisions of the
                         agreements. USTR has not undertaken any formal legal actions concerning
                         the agreements, but the U.S. Trade Representative has noted that the
                         United States can take action against Japan through World Trade
                         Organization (WTO) dispute settlement procedures, if necessary, to secure
                         U.S. rights under the insurance agreements. These actions are possible now
                         that Japan has included many of its insurance commitments in the recently
                         implemented WTO financial services agreement.



USTR Solicited           To reach its July 1998 decision that Japan had not fully complied with all
                         the five deregulation criteria, USTR relied on information it solicited from
Information on Japan's   industry, both in the United States and in Japan, as well as information
Implementation of Five   gathered by the U.S. embassy in Tokyo. The embassy works closely with
                         some U.S. companies in its data collection. However, some firms are not in
Deregulation Criteria    contact with the U.S. embassy. In addition, USTR consulted with other
                         agencies. The decision was preceded by a series of bilateral consultations
                         between the governments to review Japan's implementation of the five
                         commitments. One large U.S. firm in Japan provided key information to
                         USTR about Japan's implementation of the primary sector deregulation
                         criteria and possible third sector violations.

                         In addition to soliciting the concerns of individual U.S. insurance
                         companies, USTR also received information from two industry groups: the
                         American Chamber of Commerce in Japan (ACCJ) and the American
                         Council of Life Insurance (ACLI). In May 1998, the ACCJ insurance
                         subcommittee informed USTR that it believed Japan was not in compliance
                         with the two primary sector deregulation criteria previously mentioned, a
                         position supported by eight members of the subcommittee and opposed by
                         one. (Four U.S. firms were not participants in the May 1998 ACCJ decision.)
                         In April 1998, ACLI provided an analysis of Japan's implementation, which
                         voiced positions similar to those of the ACCJ and expressed additional
                         concerns that Yasuda, a Japanese insurer, and INA, its U.S. partner, were
                         causing “radical change” in the third sector.



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                            USTR feels that such industry information is critical for purposes of
                            identifying private sector concerns. However, USTR recognizes that there
                            are certain limitations associated with relying on information from industry
                            associations. No one trade association represents all U.S. insurance
                            companies, and for those represented, association positions may not
                            capture all company views on agreement implementation. Groups such as
                            ACCJ do not encompass all company views, as some companies do not
                            belong or do not actively participate. Participating companies reported that
                            there are divisions among ACCJ insurance subcommittee members and
                            cited instances where ACCJ position papers have not reflected their
                            company's views.



USTR Determines             Of five primary sector deregulation criteria in the 1996 agreement, USTR
                            concluded on July 1, 1998, that Japan has implemented three of them.
Status of                   USTR found that Japan has not complied with the criterion to approve
Implementation of           differentiated products within 90 days and that fundamental reform of
                            rating organizations was incomplete. Our fieldwork conducted in Tokyo in
Deregulatory                March 1999 found that U.S. insurance companies had mixed views
Commitments on              regarding Japan's implementation of the five criteria.
July 1, 1998

USTR Noted Three of Five    Four of the five primary sector deregulation criteria apply only to products
1996 Primary Sector         of non-life insurers. USTR has stated that Japan has implemented three of
                            these four insurance deregulation criteria. These were requirements to
Deregulation Criteria Met
                            (1) approve applications within 90 days for “differentiated” auto insurance,
                            which allows the insurer the flexibility to develop, price, and market
                            automobile insurance based on risk factors, such as the age, gender, and
                            driving history of the driver and the use and type of vehicle; (2) further
                            liberalize commercial fire insurance by decreasing limits for using an
                            “advisory rate system,” which gives insurers the freedom to set rates
                            outside the rates established by the Property Casualty Insurance Rating
                            Organization;2 and (3) expand the application of Japan's “notification
                            system,” whereby an insurance company, after filing its product plan with
                            the regulatory authority, can begin to market an insurance product after
                            90 days, unless disapproved by the government, to a list of additional


                            2
                             Since July 1, 1998, companies have been free to calculate their own rates and not use those
                            computed by a rating organization.




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                      products and allow marketing of those products within 90 days.3 According
                      to U.S. government officials, USTR's assessment of compliance was based
                      on the insurance industry's views.4


USTR Decided 90-Day   The 1996 agreement requires that Japan approve applications for
Product Approval      differentiated life and non-life products or rates within a standard
                      processing period of 90 days. In 1998, one U.S. company raised concerns
Commitment Unmet
                      with USTR that Japan was not in compliance with this requirement. On
                      July 1, 1998, USTR determined that Japan had not fully implemented its
                      obligations in this area and noted that in a number of specific cases, Japan
                      had “unjustifiably exceeded the standard 90-day processing period.”
                      According to USTR, the criterion's reference to a “standard 90-day
                      processing period” recognizes that the period can be exceeded in specific
                      circumstances.

                      In reaching its July 1998 decision, USTR sought examples from industry on
                      numerous occasions of applications whose processing exceeded 90 days so
                      it could raise this issue with Japan. One U.S. firm provided USTR with time
                      lines for four applications whose processing time exceeded 90 days; USTR
                      told us that it had never examined the actual applications. Based on the
                      information provided by this provider, USTR believed that these
                      applications were unacceptably delayed by the Japanese government.

                      Following June 1998 consultations with USTR, Japan responded that, per
                      the terms of the 1996 agreement, no applications for differentiated
                      products (other than differentiated automobile insurance) had been
                      received 90 days prior to the July 1, 1998, deadline and thus the
                      commitment was considered met.5 USTR rejected this reasoning as a
                      misinterpretation of the agreement. In addition, Japan consistently


                      3
                       Under Japan's notification system, the government has a 90-day period to review the
                      notification. If, after 90 days, no disapproval is received, the company can then consider the
                      product or rate approved and begin to offer it.
                      4
                       U.S. non-life providers are almost unanimous in reporting that Japan has implemented
                      these three commitments. In response to our 1999 survey, all U.S. non-life firms expressing a
                      view said that the government of Japan has implemented the criteria on differentiated auto
                      insurance and liberalized commercial fire insurance; all but one small U.S. non-life firm
                      reported that Japan had met the criterion regarding the notification system.
                      5
                       During June 1998 consultations, Japan told USTR that two differentiated product
                      applications had been approved within 90 days.




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maintained that it processed applications within the standard period of
90 days. According to Japan, under its regulations, the standard 90-day
period could be suspended if the agency responsible for processing
applications requires a company to revise or supplement information on an
application and that the four USTR examples had experienced delays due
to such inadequacies.6 USTR officials acknowledged that the 90-day period
can be effectively extended for this purpose but found that they were
unable to respond to Japan's claims that the delays were justified, since
USTR did not have permission from the insurance provider to discuss
application details. USTR officials told us that they do not possess the
technical ability to evaluate the applications' content.

Before the April 1999 consultations with Japan, about four companies
reported to USTR that they had had recent good experiences with Japanese
product approval; among those companies were two that had previously
complained about the application process. USTR officials were not
convinced that these experiences represented a systemic improvement.

In April 1999, USTR again cited Japan for continued failure to fully
implement the 90-day processing period requirement, offering several new
examples from the company that had provided cases to USTR for the July
1998 decision of applications whose processing exceeded 90 days. As
before, USTR reviewed the time lines with the company but not the actual
applications. Japan responded that the approval of applications in excess
of 90 days is permitted under Japanese regulations. For these cases, Japan
maintained that the applications were delayed due to sloppiness and
errors. According to USTR officials, USTR was not given permission by the
company to reveal its identity to the Japanese, and thus USTR was unable
to engage in detailed discussions with Japan regarding suspension of the
90-day period and whether the suspensions were justified in these cases.7

Also related to the product approval process, several industry participants
that we interviewed in March 1999 reported that the transfer of product


6
 The Ministry of Finance processed insurance applications until June 1998 when the FSA
began operations and took over this responsibility.
7
 With respect to the 90-day application processing period—the only criterion of the five that
applies to both life and non-life insurers—one life and four non-life U.S. insurance
companies reported in our survey that Japan was not in compliance. Seven companies
reported that Japan was in compliance, and one company responded that it did not know
the state of implementation for this commitment.




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                             approval authority from MOF to the newly created FSA resulted in a
                             reduction in the number of insurance product examiners. This, in turn,
                             resulted in a more understaffed office, with overworked employees, who,
                             according to U.S. insurers, may be unable to process applications in a
                             timely fashion. The Foreign Non-Life Insurance Association reported that
                             while its members have not complained about Japan's failure to meet the
                             90-day commitment, they have faced difficulties in meeting with FSA
                             officials to submit applications. The FSA agreed that it has few insurance
                             staff but notes that this staff would increase from 9 to 11 in the new fiscal
                             year 1999 government budget.


USTR Decided Fundamental     One of the primary sector deregulation criteria in the 1996 insurance
Rating Organization Reform   agreement that applies only to non-life products required Japan to
                             implement “the necessary legal changes to eliminate obligations for
Incomplete
                             members of rating organizations to use rates calculated by rating
                             organizations.” There are two rating organizations in Japan that non-life
                             insurance companies may belong to—one for auto insurance, the other for
                             additional types of property/casualty insurance. Historically, rating
                             organizations collected claims and expense data from member firms and
                             computed premium rates that were approved by the government. Rating
                             organization members were required to use the approved rate, unless the
                             Minister of Finance approved a deviation based on the firm's circumstance.
                             The result was considerable uniformity in insurance policies and rates for
                             major non-life insurance products.

                             At the time of U.S.-Japan consultations in June 1998, the necessary legal
                             changes to meet the deregulation criterion were pending. While all
                             necessary legal reforms were made by July 1, and the U.S. government was
                             aware that rating organization members were no longer required to use
                             rating organization rates, USTR concluded in its July 1, 1998, statement that
                             “fundamental reform” of rating organizations was incomplete.




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USTR stated that certain aspects of rating organization reform, such as the
continued collection of expense data8 and the collection of data for
additional insurance products, promote anticompetitive activities among
companies and therefore the rating organization criterion has not been
met. The two specific issues raised by USTR are not mentioned in the
bilateral agreements. USTR most recently raised its concerns about Japan's
incomplete compliance in April 1999 meetings with Japanese officials.
Japanese officials responded that the 1996 agreement only required that the
use of rating organization rates not be mandatory, a commitment that has
been met.9

One of USTR's outstanding concerns about Japanese rating organizations
involves the scope of cost data that such organizations can collect from
member firms. Specifically, USTR opposes the continued collection of
expense data from member firms, believing it limits competition and
promotes price uniformity. As part of rating organization reform that took
effect in July 1998, the Japan Fair Trade Commission imposed restrictions
on what kind of expense data the rating organizations could collect from
member firms on a voluntary basis. This restriction was to ensure that the
full rate, which member firms had previously been required to use in
establishing company rates, could no longer be computed by these firms.
However, according to USTR, the collection of partial expense data on a
voluntary basis would still enable firms to set prices in a way that would
lead to cartel-like, or uniform, practices. Several U.S. insurance providers
that we interviewed in March 1999 agreed with USTR's overall position that
fundamental reform has not yet occurred.

However, both Japanese rating organizations, as well as the Japanese
government and the Foreign Non-Life Insurance Association, reported to
us that now, after the reforms, the rating organizations can only collect
partial expense data on a voluntary basis and, therefore, the data held by


8
 Before July 1, 1998, Japanese rating organization members were required to set their rates
taking into account total premium rates calculated by the rating organizations. The total
premium included the actual cost of claims (losses), expenses (operating expenses, claim
investment fees, and general administrative expenses), and profits. Since July 1, 1998, the
rating organizations collect partial expense data on a voluntary basis and no longer collect
“general administrative expense” data. Therefore, rating organizations are no longer
computing total premium rates.
9
 In response to our 1999 survey, all U.S. non-life insurance providers reported that Japan had
complied with the specific criterion on rating organization reform contained in the 1996
agreement.




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these organizations is incomplete and does not provide a basis to establish
an industry rate. One rating organization reported that since the July 1998
reforms, it now collects one-tenth of the data it formerly collected, while
the other organization said it is unsure of the accuracy or value of the
expense data, since the data is incomplete in scope. Further, since all
companies choose whether or not to participate in the system, the
completeness of the data cannot be assumed.10 The Foreign Non-Life
Insurance Association questioned the statistical validity of the data
because not all firms participate and less data is collected. One large U.S.
non-life company characterized the collected data as “useless.” Further,
Japanese officials have stated that rating organizations in the United States
collect and publish complete expense data from companies and do so for
more product lines. Finally, one U.S. firm told us that it welcomed the
potential for its competitors to price uniformly, since it could price beneath
the uniform price and gain market share. Also, the Foreign Non-Life
Insurance Association noted that small firms need data, including expense
data, to function, since their sales volume is not large enough to be a
statistically sound sample from which to forecast costs and derive rates.

Another issue raised by USTR about rating organization reform concerned
the scope of business the rating organizations covered. Specifically, USTR
opposes the expansion of rating organization authority to collect data for
additional products such as nursing care and medical insurance. USTR
views such expansion as being inconsistent with Japan's objective of
achieving fundamental reform.

ACCJ and the Foreign Non-Life Insurance Association had expressed
concern over this expansion prior to the July 1, 1998, announcement.
However, the Foreign Non-Life Insurance Association reversed its position
before July 1, 1998, and now supports this expansion of data collection.
One U.S. insurance company we interviewed said that it would like rating
organizations to expand the number of product lines for which they collect
data. According to one Japanese rating organization, the collection of data
serves to encourage new entrants and promote competition, a position
agreed to by the Insurance Services Office, a U.S. supplier of insurance




10
 Additionally, rating organizations are not allowed to identify which firms voluntarily
submit expense data.




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                             information. The Japanese rating organization further suggested that data
                             for more product lines are available in the United States.11


U.S. Insurance Industry      In response to our January 1999 survey and March 1999 fieldwork, U.S.
Expresses Mixed Views on     companies offered mixed views regarding implementation of the five
                             primary sector deregulation criteria.12 In interviews with our staff in Tokyo
USTR's Position on Primary
                             during March 1999, representatives of four insurance providers voiced their
Sector Deregulation          support for USTR's position on primary sector deregulation. One company
                             attributed recent Japanese progress in deregulating the insurance market
                             to USTR's aggressively pushing insurance issues. Representatives of five
                             other providers volunteered in interviews that Japan had complied with the
                             agreements' deregulation commitments. One company said that U.S.
                             criticism of Japan's insurance reform efforts can undermine the efforts of
                             Japanese officials pushing for broad financial sector deregulation.



USTR Also Identified         USTR has contended that Japan is violating the third sector protections of
                             the 1996 insurance agreement. On July 1, 1998, USTR stated its concerns
Third Sector Violation       with Japan's licensing of a cancer hospitalization insurance rider to Tokyo-
                             Anshin, the life subsidiary of a large Japanese non-life insurance company.
                             The 1996 agreement stated that life subsidiaries of non-life insurance
                             providers will not be allowed to sell stand-alone cancer insurance.
                             Japanese subsidiaries may sell cancer insurance as a rider to a life
                             insurance policy provided that cancer benefit payments are limited to a
                             specific percentage of life insurance benefit payments, as set forth in a
                             September 1996 memorandum between the two governments.13 USTR's

                             11
                               For example, the Insurance Services Office provides data and information on 14 product
                             lines, while currently Japanese rating organizations provide data on 4 categories of
                             insurance. The Insurance Services Office recently opened a Japan office to collect and
                             publish data on insurance products not covered by the two Japanese rating organizations.
                             12
                              Five companies, representing about one-third of U.S. premiums, reported in our January
                             1999 survey that Japan had not complied with one of the five commitments (90-day product
                             approval). One of these companies also reported that Japan had not complied with a second
                             commitment (notification system). The remaining eight companies cited no area of
                             noncompliance by Japan. Of these eight companies, three have changed their position since
                             May 1998 when the ACCJ recorded them as finding Japan not in compliance.
                             13
                               On September 30, 1996, the two governments agreed that life subsidiaries of non-life
                             insurance providers would face restrictions on the benefits they could offer. After January 1,
                             1997, the ratio of cancer hospitalization benefit payments to life insurance benefit payments
                             would be limited to a maximum 3 to 1,000 ratio.




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                        analysis concluded that, based on the Tokyo-Anshin insurance policy's
                        design and marketing, the rider was clearly intended to circumvent third
                        sector protections. According to USTR, the rider was essentially a
                        “stand-alone” product, equivalent to cancer policies prohibited for sale by
                        Japanese life subsidiaries under the 1996 agreement.

                        USTR first raised the issue beginning in January 1998 after two U.S.
                        companies raised concerns about the rider. The government of Japan
                        responded that the rider conformed exactly to the limitations established in
                        the September 1996 memorandum with USTR that defined permitted
                        cancer riders. According to Japan, because this cancer rider is only sold in
                        conjunction with a life insurance policy, it cannot be considered a “stand-
                        alone” product.

                        USTR took its July 1998 position on the basis of information provided by
                        one U.S. life insurance company and the ACCJ insurance subcommittee.
                        However, according to the two other U.S. life firms selling cancer insurance
                        interviewed by us in March 1999, the Tokyo-Anshin rider is in compliance
                        with the agreement and is not a third sector violation. Of these two
                        companies, the one that is an ACCJ member chose not to oppose the
                        position taken by the ACCJ insurance subcommittee expressing concern
                        on this issue but thinks USTR lacks a basis to pursue the issue with Japan.
                        USTR continues to raise this issue with Japan. While USTR has not
                        undertaken any formal legal action it has underscored its position that
                        Japan not approve similar riders for other Japanese insurers.



USTR Reviews Other      In 1997 and 1998, USTR reviewed the activities of one U.S. life insurance
                        company, INA, and its Japanese partner, Yasuda Fire and Marine. These
Possible Third Sector   activities had been identified by competing U.S. insurers as a violation of
Violations              the third sector provisions of the 1994 and 1996 agreements. USTR, in
                        consultation with other U.S. agencies, determined in August 1998 that the
                        activities were not a violation of the agreement. (See app. IV for further
                        details.)

                        USTR continues to review allegations of another third sector violation that
                        was brought to its attention by industry. Specifically, during 1998, one U.S.
                        insurance company lobbied the U.S. government to stop plans by a
                        Japanese company to discount personal accident insurance offered to
                        members of an association of small- and medium-sized businesses.
                        According to the U.S. firm and the ACCJ, the discount deviated from past
                        practice and constituted “radical change.” USTR asked the government of



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Japan not to allow the introduction of the discounting prior to
consultations with U.S. government officials. Japan did not agree to this
approach. The U.S. government conducted a review of the U.S. company's
concerns and found that only this company supported the ACCJ finding.
USTR continues to raise this issue with Japan but has not determined that
the sales represent a third sector violation.




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U.S. Government Actions Regarding One U.S.
Insurer                                                                                                    Appendx
                                                                                                                 i
                                                                                                                 IV




              The U.S. government negotiated the 1994 and 1996 insurance agreements
              with the knowledge that a U.S. insurer, CIGNA Corporation, was
              considering selling a majority interest in its life insurance subsidiary in
              Japan (INA) to a large Japanese insurer, Yasuda Fire and Marine. Following
              completion of negotiation of the 1996 U.S.-Japan insurance agreement but
              before the agreement was signed, USTR and the Japanese government
              created a separate document, referred to as a “minute,” that was intended
              to provide a limited exception to the agreement. According to USTR
              negotiators, this exception, which proved difficult to negotiate, was meant
              to allow CIGNA, per a business agreement reached in 1993, to sell a
              majority interest in INA (which has third sector business) to Yasuda and
              then allow the Japanese-owned INA to continue to have a limited level of
              third sector life sales. Sales of third sector life “niche” products, such as
              cancer and medical insurance, by subsidiaries of large Japanese insurance
              companies, were expressly prohibited in the 1996 agreement. According to
              USTR officials, the “minute” would also prevent other large Japanese non-
              life insurers from similarly entering the third sector. During subsequent
              discussions, the two governments never reached agreement concerning the
              precise meaning of the “minute” and how it could be implemented. Further,
              views differ between USTR and two U.S. insurance companies regarding
              the extent to which USTR provided details of this exception to industry at
              the time it was negotiated. The document's actual impact on the third
              sector sales of a Yasuda-owned INA has never been tested, since the
              majority sale has not taken place.1 Our observations on certain aspects of
              the “minute” are included at the end of this appendix.

              Concerns of large U.S. insurers regarding U.S. government actions related
              to this sale continued beyond creation of the “minute” and involved (1) U.S.
              government discussions with the Japanese government during the fall of
              1997 that, while not opposing Japan's approval of the sale, expressed
              concern over whether the ongoing third sector activities of Yasuda and INA
              met the terms of the agreements and the “minute”; (2) USTR discussions
              with Japanese officials regarding Japan's December 1997 decision to
              include the 1996 U.S.-Japan insurance agreement in the WTO financial
              services agreement and what this development meant for the proposed
              majority sale of INA and its subsequent third sector sales; and (3) two 1998
              U.S. government interagency reviews of the third sector activities of
              Yasuda and INA that determined that no agreement violations had


              1
               While the majority sale has not been completed, Yasuda did purchase an additional
              29 percent of INA in April 1999, bringing its total holdings in the company to 39 percent.




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                         occurred. The most active parties during these events have been the largest
                         U.S. insurance companies operating in Japan (AIG, AFLAC, and CIGNA)
                         and the Office of the U.S. Trade Representative. In response to your request
                         for details regarding the extent and nature of U.S. government actions
                         related to the proposed sale of INA to Yasuda and subsequent related
                         events, we are providing the following information.



U.S. Government          In 1993, Yasuda Fire and Marine, a large Japanese non-life insurance
                         company, purchased a 10-percent interest in INA Life Insurance Company,
Negotiated the 1994      a subsidiary of CIGNA Corporation, a U.S. company. This deal also
and 1996 Agreements      provided for the possibility of the future sale of an additional 50 percent of
                         INA to Yasuda. In 1996, Yasuda announced its intention to acquire a
With Knowledge of        majority interest in INA from CIGNA.2 (See fig. 7 for a time line of events
Possible Majority Sale   from 1993 to 1996 regarding the Yasuda-INA deal.) USTR was aware of this
of INA to Yasuda         possible majority sale of INA to Yasuda before the 1994 agreement was
                         negotiated. The language of the 1994 agreement that committed Japan to
                         avoiding “radical change” in the third sector by large Japanese insurers was
                         negotiated by U.S. officials because INA had sales in the third sector. This
                         language was agreed to by CIGNA and AIG, the company expressing
                         concern over the possible sale at the time. USTR officials believed that this
                         language would provide flexibility for CIGNA to pursue a profitable
                         business strategy while still protecting the U.S. presence in the third sector
                         from increased competition from large Japanese insurers. The U.S. and
                         Japanese negotiators never defined the term “radical change” in the 1994
                         agreement.




                         2
                          Yasuda and CIGNA have had a formal business relationship since 1972. The companies
                         have helped each other in obtaining licenses, through reinsurance agreements, and through
                         training and product development. In January 1997, INA Life changed its name to INA
                         Himawari Life Insurance Company, Ltd.




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Figure 7: Time Line of Events Related to “Minute” and Yasuda-INA Deal, 1993-96

                                                             May                 August            December           December
 1993               1994                 1995                1996                1996              15, 1996           17, 1996




Yasuda            U.S. considers   Concerns emerge          CIGNA tells USTR     Yasuda             Negotiations on    CIGNA tells USTR
purchases         the possible     over implementation      about plans to       announces          new insurance      about concerns
10% interest in   majority INA     of 1994 agreement        sell majority        intent to          agreement          over agreement’s
INA Life, with    sale in          with regard to           interest in INA to   purchase a         concluded          impact on
an option to      negotiating      Japanese entry into      Yasuda;              majority                              proposed INA sale
purchase an       “no radical      the third sector         expresses            interest in INA                       to Yasuda
additional 50%    change”                                   concern that
                  language in                               current
                  1994 insurance                            negotiations
                  agreement                                 might affect the
                                                            sale
                                                  Source: USTR and U.S. embassy in Tokyo documents.


                                                  By late 1995, the U.S. insurance industry was expressing strong concerns
                                                  over implementation of Japan's Insurance Business Law. Revisions to this
                                                  law, the first major changes in 50 years, would for the first time allow life
                                                  insurance companies to enter the non-life insurance business through a
                                                  non-life subsidiary, and, similarly, for non-life insurance companies to enter
                                                  the life insurance business through a life subsidiary. Although the 1994
                                                  agreement restricted the entry of Japanese companies into the third sector,
                                                  U.S. officials were concerned that Japan would allow these subsidiaries to
                                                  move rapidly into the third sector. As a result of these concerns, bilateral
                                                  negotiations on insurance began and would continue for a year−until
                                                  December 1996.

                                                  In August 1996, Yasuda formally announced its intention to purchase a
                                                  majority interest in INA from CIGNA. According to Yasuda, this
                                                  strengthened relationship was intended to improve INA Life's distribution
                                                  network and serve as Yasuda's means for achieving entry into the life
                                                  insurance market (through the acquisition, rather than the establishment,
                                                  of a life insurance subsidiary). Press reports noted that this sale could
                                                  provide Yasuda entry into Japan's third sector life insurance market.

                                                  CIGNA came to USTR in May 1996 to discuss its intention to sell a majority
                                                  interest in INA to Yasuda and projected sales in the third sector for the
                                                  resulting company. CIGNA requested that this transaction and the business
                                                  of the Yasuda-owned company not be compromised during the ongoing



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                        negotiations or through any resulting new bilateral agreement. In an effort
                        to maintain a united industry position, USTR asked CIGNA not to press the
                        issue at that point and noted that the situation should be handled close to
                        the completion of the negotiations. According to a former USTR official,
                        CIGNA did not contact USTR again on this issue during the negotiations,
                        even though USTR was in frequent contact with the company regarding the
                        content of the agreement and had shared drafts of the agreement with
                        CIGNA (as well as other U.S. companies). This negotiator noted that USTR
                        assumed that CIGNA had worked out an arrangement with the Japanese
                        Ministry of Finance (MOF) on its own. Therefore, the U.S. government did
                        not include any text to address CIGNA's specific interests in the agreement.
                        This former USTR official noted that as negotiations were concluding,
                        USTR was focused on primary sector deregulation and other (third sector)
                        commitments in the draft agreement. A USTR official stated that the
                        Japanese government never raised the issue of the sale of INA to Yasuda
                        during the negotiations. CIGNA's failure to pursue the issue with USTR as
                        negotiations neared completion, as well as USTR's failure to address the
                        Yasuda/INA situation during the negotiations, were oversights by both
                        parties, in the view of former negotiators. Negotiations on a new insurance
                        agreement were concluded on December 15, 1996, though the agreement
                        was not signed until December 24, 1996.



Creation of Exception   USTR officials stated that it was completely unexpected when, on
                        December 17, 1996, 2 days after negotiations ended, CIGNA approached
to the 1996 Agreement   USTR to express serious concerns over the recently concluded insurance
for Yasuda/INA Proved   agreement and its impact on the planned majority sale of INA to Yasuda.
                        According to CIGNA, the company had previously “made USTR aware of its
Difficult               goals in the Japanese insurance market and has received USTR's assurance
                        that a CIGNA/Yasuda joint venture of INA Life which would continue to sell
                        INA Life's full product range would not violate the spirit or the letter of the
                        1994 Insurance Framework Agreement regardless of Yasuda's potential
                        majority interest.” In raising its concerns on December 17, 1996, CIGNA
                        noted that agreement language contained in a Japanese agreement outline
                        could be interpreted by Japan as prohibiting the CIGNA-Yasuda
                        transaction. Specifically, CIGNA was concerned about one provision of the
                        agreement that, according to the outline, stated that in order to avoid
                        “radical change,” life subsidiaries of non-life insurance providers will not
                        be allowed to sell stand-alone cancer and stand-alone medical insurance.
                        CIGNA noted that




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“[I]f the Japanese were to interpret INA Life as a ‘life subsidiary of a non-life insurance
company' when Yasuda acquired a majority interest, then it would prohibit INA Life from
selling medical or cancer insurance until the year 2001. This would have a severe adverse
impact on INA Life given its current product and marketing mix and its long-term strategic
direction.”

At that point, CIGNA proposed that technical language be inserted into the
1996 agreement that would exclude INA, even if majority Japanese owned,
from coming under the definition of a “life subsidiary of a non-life
insurance company.” CIGNA compared this approach to the exemption
requested and received by UNUM (another U.S. insurance company
operating in Japan) with respect to group long-term disability insurance
and income indemnity insurance in the 1996 agreement. USTR also
received letters from Members of Congress expressing support for the
exemption for INA from the life third sector restraints of the 1996
agreement.

USTR took action to address CIGNA's concerns, given that the majority
sale had been planned prior to the 1994 agreement and the agency needed
to maintain unified U.S. industry support for the as yet unsigned 1996
agreement.3 USTR officials were reluctant to go back to the Japanese
government, which was being criticized in the Japanese press as a victim of
U.S. pressure in agreeing to the terms of the 1996 agreement, and asking for
additional commitments. Further, one of these officials stated that USTR
did not want to reopen the agreement out of concern that the Japanese
government would then also want to reopen other issues, thus possibly
leading to the unraveling of the agreement. USTR negotiators believed that
a separate document was necessary. USTR immediately contacted the
Japanese Ministry of Foreign Affairs (MOFA) and initiated new
discussions.




3
 According to USTR and CIGNA officials, USTR officials did not request or review the 1993
contract between Yasuda and CIGNA that provided for the majority sale of INA.




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USTR negotiated with the Japanese government from December 18 to 21,
1996.4 USTR requested a “grandfather” clause to allow the sale of INA to go
through but also proposed restricting INA's activities in the third sector,
once the company was owned by Yasuda, to avoid “radical change.” USTR
was the only U.S. agency involved in these discussions. MOFA was the lead
Japanese agency and consulted Ministry of Finance officials as necessary.

Negotiations over the “minute” proved difficult. The Japanese government
was reluctant to make any accommodation for the United States beyond
those embodied in the then-pending 1996 agreement. Moreover, there was a
concern that a specific commitment regarding the CIGNA-Yasuda
transaction could be viewed as singling out one large Japanese insurer for
special, favorable treatment in the third sector.

Under these circumstances, the Japanese government sought to keep any
understanding reached regarding the transaction and subsequent third
sector activities by a Yasuda-controlled INA as informal as possible. For
their part, USTR negotiators reported that they would have preferred, and
attempted to obtain, a more formal document than the “minute,” but that
their paramount concern was the substance, not the form, of the
understanding. At the same time, USTR negotiators understood the
sensitivity of the matter for the Japanese government.

No explicit agreement was reached between the two sides during the
negotiations regarding precisely how, or to what extent, the Japanese
government would restrict INA's activities in the third sector following
consummation of the sale. In particular, the two sides did not agree on the
question of whether the Japanese government had legal authority through
the use of its licensing powers to restrict INA's post-transaction activities in
the third sector. However, USTR negotiators felt that the references in the
“minute” recommitting Japan to avoid “radical change” in the third sector
and to making necessary modifications to INA's post-transaction licenses,


4
 A final version of the “minute” was not completed until May 1997. When “minute”
negotiations were concluded and the 1996 bilateral insurance agreement was signed on
December 24, 1996, there was one unresolved factual issue in the “minute.” In the second
paragraph, there was a question as to when Yasuda's intention to purchase a majority
interest in INA had been publicly disclosed. USTR wanted as strong a case as possible for
creating a “limited exception” to the 1996 agreement for CIGNA/Yasuda, and so asked
CIGNA to determine whether the planned purchase had been publicly announced prior to
the 1994 agreement. In May 1997, CIGNA informed USTR that the possible majority sale had
not been publicly announced prior to conclusion of the 1994 agreement. The two
governments then finalized the “minute” by including language to that effect.




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                  meant that Japan had committed to keeping INA's third sector business
                  activities very limited. Further, based on past experience, USTR officials
                  felt that Japan could use both formal and informal means to limit INA's
                  third sector activities.

                  While no other U.S. government agencies were involved in negotiating the
                  document, a copy of the draft “minute” was faxed to the U.S. embassy in
                  Tokyo, and the National Economic Council (NEC) was reportedly aware of
                  its existence. Two Members of Congress who had requested that USTR
                  facilitate the transaction also received copies of the documented
                  exception, according to one of the negotiators. This former USTR official
                  does not know if key congressional committees ever received the
                  document, which, if they did not, he described as an oversight on the part
                  of USTR. The exact text of the document is reproduced in figure 8.


                  Figure 8: Text of the December 21, 1996, “Minute”

                  1. Both governments noted that Yasuda Fire and Marine purchased 10 percent of the INA
                  life insurance company on July 7, 1993, which was before the negotiation and conclusion
                  of the 1994 Measures and before the passage and implementation of the new Insurance
                  Business Law. The transaction was publicly announced on July 7, 1993.

                  2. The contract provided for Yasuda to acquire an additional 50 percent of INA after
                  April 1, 1996, the anticipated implementation date for the new Insurance Business Law,
                  subject to the necessary approvals by the relevant authorities. This aspect of the contract
                  was not publicly announced.

                  3. It is confirmed that the life insurance business license and product approvals held by
                  INA will be maintained with necessary modifications after Yasuda acquires majority
                  ownership of INA stock.

                  4. The Government of Japan reconfirmed its commitment to faithfully implement the 1994
                  Measures and the 1996 Supplementary Measures, inclusive of measures to avoid radical
                  change in the third sector as specified in those sets of measures.


                  Note: The document, on a blank sheet of paper, is unsigned, undated, and untitled.
                  Source: Office of the U.S. Trade Representative.




Disagreement on   Current and former USTR officials stated that the final document, the so-
                  called “minute,” was intended to ensure that (1) the 1996 U.S.-Japan
Meaning of the    insurance agreement would not prevent CIGNA from carrying out its
Exception for     preexisting business plan to sell a majority interest in INA to Yasuda,
                  (2) INA would continue to have only a very limited presence in the third
Yasuda/INA

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sector if the transaction went forward, and (3) other large Japanese non-
life insurers would be prevented from similarly entering the third sector.
There was no attempt during the “minute” negotiations to specify what
might constitute a limited presence or radical change. Further, USTR
officials have noted that there have never been discussions between the
U.S. and Japanese governments to define limited presence or radical
change regarding INA's post-sale, third sector activities.

U.S. and Japanese officials have disagreed over how the “minute” could be
implemented. Based on experience with the Japanese government and the
knowledge that Japan could use formal or informal means to affect
company behavior, USTR officials felt confident that Japan could exert a
level of control over INA's third sector activities by modifying INA's
licenses or other means, once it is majority owned by Yasuda. From the
time of the “minute” negotiations in December 1996 until July 1998,
Japanese officials emphasized that they had no legal authority to impose
restrictions on acquired subsidiaries lawfully operating in the third sector.
However, after July 1998, Japanese officials said that as a result of
legislative changes that went into effect at that time (discussed later), a
Yasuda-owned INA would not be allowed to operate in the third sector at
all. USTR does not accept this position and has stated that it expects Japan
to abide by the terms of the “minute.”

In addition, the enforceability of the “minute” is perceived differently by
the two governments.5 USTR officials stated that the “minute” is a fully
negotiated and enforceable document and characterized it as a mutual
understanding between governments. They have also noted that
implementation of the “minute” is integral to Japan's compliance with the
insurance agreements. In contrast, a MOFA official told us that the
“minute” is in “no way” part of the 1996 agreement. Instead, this official
characterized the document as a “non-paper memorandum for
negotiators.” One MOFA official told a U.S. embassy representative that the
“minute” does not have the same status as the bilateral agreement and that
Japan does not want to be held by it.



5
 In discussions with former USTR officials (who did not work on Japan insurance issues),
we were told that the creation of documents such as the “minute” is not unusual and is
within USTR's authority. These officials also stated that it is unusual to provide such a
document to one member of an industry and not to others (as discussed later), but they
could understand USTR's decision not to share the document widely since it dealt with a
company-specific situation.




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Views Differ Regarding   According to a former negotiator, USTR was in frequent contact with a
                         senior CIGNA official during negotiation of the “minute.” This official was
the Extent to Which      shown drafts of the document in order to verify factual information
USTR Disclosed the       included in the “minute.” (See fig. 9 for a time line of events from 1996 to
                         1997 regarding the Yasuda-INA deal.) A former USTR negotiator stated that
Exception to Key U.S.    CIGNA knew what USTR was trying to accomplish in negotiating the
Insurance Companies      “minute” (including allowing the sale but restricting Yasuda's post-
                         acquisition third sector activities in order to avoid “radical change”).
                         According to CIGNA's outside counsel, on December 24, 1996, the day the
                         insurance agreement was signed, CIGNA was informed by USTR that Japan
                         had agreed to language that stated that INA would be permitted to maintain
                         its licenses and product approvals after the purchase of majority ownership
                         by Yasuda. Further, the deal was viewed as unique by both governments
                         because it predated the 1994 insurance agreement. CIGNA outside counsel
                         was shown a draft version of the “minute” in January 1997.6 This version of
                         the “minute,” like the final version, mentioned “necessary license
                         modifications” but did not specifically address the level of third sector
                         activity permitted by the Yasuda-owned company. Nevertheless, according
                         to CIGNA's legal counsel, CIGNA was satisfied that this arrangement would
                         meet its needs. Moreover, CIGNA was not concerned about the level of
                         formality or the enforceability of the document.




                         6
                          CIGNA's outside counsel has stated that CIGNA was not given a copy of the “minute”
                         document until April 1998.




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Figure 9: Time Line of Events Related to “Minute” and Yasuda-INA Deal, 1996-97

                  On or near
 December         December 21,          January              September            Sept.-Oct.         October               Nov.-Dec.

 18-21, 1996      1996                  1997                 1997                 1997               1997                  1997




USTR negotiates   USTR informs AIG   INA changes       AIG and AFLAC         CIGNA’s counsel      AFLAC and AIG first      USTR continues

language on       and AFLAC that     name to “INA      express concerns      concerned that       shown the “minute”;      to meet with

Yasuda-INA deal   “accommodation”    Himawari”         to U.S. gov’t; U.S.   USTR may have        USTR meets with          Japanese
with Japanese;    was made for INA                     conveys               threatened the       Japanese officials,      officials on

“minute”          and Yasuda;                          concerns to           sale; USTR not       does not oppose the      Yasuda-INA

drafted;          “minute” not                         Japanese              opposed to the       sale but says            issue

agreement         mentioned; AIG                                             sale but concerned   Yasuda’s third sector

signed, 12/ 24    and AFLAC do not                                           about Yasuda’s       activities through INA
                  object                                                     third sector         should be limited

                                                                             activities; USTR

                                                                             receives
                                                                             congressional

                                                                             letters for and

                                                                             against the sale




                                                 Source: USTR and U.S. embassy in Tokyo documents.


                                                 Around December 21, 1996, USTR officials contacted AFLAC and AIG,
                                                 INA's primary U.S. competitors in the life third sector, regarding the
                                                 situation with CIGNA, INA, and Yasuda. U.S. government and industry
                                                 officials characterized these discussions very differently. According to
                                                 USTR notes taken during the discussion with AFLAC, a USTR negotiator
                                                 told a company official that USTR needed to ensure that “the deal can go
                                                 forward, and it is not a precedent for other deals.” USTR informed AIG that
                                                 a problem had arisen with Yasuda/INA and USTR had to find a way to deal
                                                 with it. USTR needed to make an adjustment as this issue threatened the
                                                 recently concluded agreement of supplementary measures. Former and
                                                 current USTR officials stated that they informed the two companies that an
                                                 “accommodation” was necessary for INA and Yasuda, though no mention of
                                                 the existence of a document was made. USTR officials did not explicitly
                                                 convey their intention to AIG or AFLAC that the “accommodation” would
                                                 allow for limited third sector sales by Yasuda once it acquired a majority
                                                 interest in INA. However, according to these officials, AFLAC and AIG
                                                 understood that the accommodation would allow for the majority sale and
                                                 limited third sector activities for the subsequent company. USTR officials
                                                 stated that neither company raised objections during their communications
                                                 with USTR (though AIG expressed some unhappiness).



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In contrast, AFLAC stated that “based on prior discussions with USTR and
the Japanese government, and on restrictions in the 1996 agreement,
AFLAC did not oppose CIGNA's sale of a controlling interest in INA to
Yasuda. But USTR did not discuss, nor did AFLAC agree to, a special carve-
out [the “minute's” limited exception] for INA's continued or expanded
operations in the third sector after a takeover by Yasuda.” An AIG official
also noted that AIG did not understand at that point that an
accommodation had been reached with Japan that would allow for some
level of third sector sales once INA was majority owned by Yasuda.

The “minute” document itself was not shown to companies other than
CIGNA until October 1997, when AIG and AFLAC were raising concerns
with USTR over Yasuda's and INA's increasing third sector activities
(discussed later). According to USTR officials, no company representatives
ever asked USTR about the existence of this document until that time.
These officials noted that, when AIG and AFLAC inquired at a meeting in
late October as to whether there was an agreement with Japan concerning
the sale of INA to Yasuda, they did not respond in the affirmative or
negative, but instead, after the meeting, conferred with a senior USTR
official. A few days later, USTR called both companies to the agency and, at
separate meetings, presented them both with copies of the “minute”
document.

AFLAC's and USTR's portrayals of how the existence of the “minute”
document was disclosed differ. According to an AFLAC official, USTR
repeatedly denied the existence of this written agreement before October
1997 when questioned by the company. However, according to a USTR
official, agency officials never denied the existence of the “minute.” In
addition, a U.S. embassy official also reported that he was asked about the
“minute” twice before it was publicly acknowledged by USTR. The
embassy did not provide any information to the companies and later asked
USTR for guidance on how to respond to such inquiries. According to this
official, he was told to refer companies to USTR on this issue.

Two former USTR officials who were involved in negotiating the “minute”
have since stated that, in their judgment, the document should have
immediately been fully disclosed to industry. While AIG and AFLAC did not
raise objections in December 1996 when USTR informed them of the
“accommodation” for the sale of INA to Yasuda, they reacted negatively
upon learning of the existence of the “minute.” An AFLAC official has noted
that the 1996 agreement states that no large Japanese insurer will sell
stand-alone cancer or stand-alone medical insurance prior to 2.5 years after



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                        primary sector deregulation; in his view, this prohibition should include
                        INA once it is majority owned by Yasuda, a large Japanese insurer. Further,
                        an AIG official has written that “regrettably, USTR saw fit in late 1996 to
                        allow an exception [to the 1996 agreement], which has the effect of
                        allowing a U.S. company to divest itself in Japan, thus reducing the overall
                        U.S. market penetration while jeopardizing the integrity of the entire
                        agreement.”



USTR Expressed          In late September 1997, as a result of urgent concerns on the part of AIG
                        and AFLAC, an official from the U.S. embassy in Tokyo met with Japanese
Concerns to Japan in    government officials from the Ministries of Finance and Foreign Affairs, at
1997 Over Yasuda's      USTR's instruction, to discuss a recent expansion of third sector activities
                        by INA and Yasuda. This U.S. embassy official emphasized that while the
Ongoing Third Sector    two governments had reached an understanding (the “minute”) to allow
Activities While        Yasuda to move forward with its plans to acquire a controlling interest in
Making Clear That the   INA, the understanding also contained a commitment to constrain the
                        growth of INA's third sector business so as to avoid “radical change.” The
Majority Sale of INA    U.S. embassy representative informed Japanese officials that INA's third
Should Be Allowed       sector licenses must be modified in order to achieve this commitment.

                        The U.S. government had concerns that Yasuda and INA were acting in a
                        manner inconsistent with the agreements' restrictions on avoiding “radical
                        change” by greatly expanding the marketing of INA products by Yasuda
                        sales agents before the majority acquisition. This U.S. embassy official
                        expressed concerns to Japanese officials that Yasuda had more than
                        doubled the number of agents selling INA products in a 1-year period and,
                        as a result, INA was rapidly increasing its third sector sales.7 This change
                        was characterized to Japan as “historically unprecedented” and “resulting
                        in a serious loss of business for U.S. firms in the third sector.” He
                        emphasized the U.S. belief that the bilateral insurance agreement
                        compelled MOF to limit the growth of INA's third sector business and
                        agents to historical trends and roll back the past year's dramatic increase in
                        INA's force of Yasuda agents.

                        7
                         A competing U.S. firm asserted that INA had increased its pool of Yasuda agents licensed to
                        sell INA products to over 10,000. Further, an internal U.S. government document noted that
                        INA's third sector premiums rose by 82 percent in fiscal year 1996. CIGNA has stated that
                        Yasuda agents have a long history of selling INA products and the agent increase was due to
                        a liberalization in Japanese law that allowed non-life agents to sell the products of multiple
                        insurance companies. CIGNA has also noted that AIG and AFLAC have used Yasuda agents
                        to distribute their products.




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Japanese officials responded that INA's activities had nothing to do with
the agreements. They stated that the agreements' provisions apply to
Japanese, not U.S., subsidiaries and INA is majority-owned by a U.S.
company. They noted that Yasuda owned only 10 percent of INA and any
market developments reflected the independent operations of INA. These
officials also emphasized that there was no basis under Japanese law to
restrict the license of a company operating properly under law and
regulation, and, further, an agent rollback would be impossible.

After U.S. embassy meetings with the Japanese government, CIGNA's
outside counsel expressed concern to USTR that the U.S. government's
recent communication with MOF had threatened the majority sale. CIGNA
believed, as a result of its discussions with MOF, that the U.S. government
would only support MOF approval of the sale if Yasuda and INA were to be
restricted from selling any third sector products and reduce the number of
Yasuda agents at INA to the number at the end of the previous fiscal year.
CIGNA requested that USTR rectify the situation by sending a letter to MOF
supporting the sale without conditions or modification of licenses.8

USTR met with CIGNA's outside counsel and explained that USTR did not
oppose the transaction but had concerns about Yasuda's third sector
activities. Again, USTR noted that, while it was still looking into the facts,
Yasuda's current activities might violate the terms of the insurance
agreement. USTR pointed out to CIGNA that while what might constitute
“radical change” was not precisely defined, the threshold was not very
high−particularly when activities by a large Japanese insurance company
might result in a direct loss of business for U.S. firms.

USTR eventually concluded that sending a letter to MOF would be
counterproductive based on concerns that the letter might be
misinterpreted. During this period, while USTR was communicating
frequently with CIGNA regarding the majority sale of INA to Yasuda and
subsequent third sector activities, USTR received congressional letters of
support for the transaction, as well as letters claiming that Yasuda was
violating the agreements and should not be allowed to sell third sector
products after the sale.

8
 A letter expressing this view was sent to Japan's Minister of Finance from one U.S. Senator,
which, from Japan's perspective, created an inconsistency in the U.S. government position
on this issue. According to one Japanese official, USTR was telling Japan to restrain INA
activities, while from elsewhere in the U.S. government, Japan was receiving
encouragement for the sale to go forward with no restrictions.




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                        In October of 1997, a senior USTR official traveled to Japan for 2 days of
                        meetings with Japanese officials and certain U.S. companies to discuss the
                        activities of INA and Yasuda. This official emphasized to Japanese officials
                        that (1) the transaction should be allowed to go forward, (2) INA's licenses
                        should be modified as necessary, (3) this is the only exception to the
                        agreement, and (4) Yasuda's actions both before and after the acquisition
                        should not be permitted to result in radical change in the third sector. He
                        noted that there was evidence suggesting that Yasuda was controlling INA
                        and might be causing radical change.

                        Japanese officials again responded that Yasuda's and INA's activities before
                        the acquisition cannot constitute an agreement violation since INA is a U.S.
                        company. Furthermore, these officials said that Japan could not impose
                        legally enforceable restrictions (such as license modifications) upon the
                        activities of INA just because it is acquired by Yasuda. However, Japanese
                        officials also suggested that, recognizing the agreement's spirit, Yasuda was
                        likely to act on its own initiative to keep INA's activities in the third sector
                        within a certain limit.

                        CIGNA correspondence with USTR shows that the company was unhappy
                        with USTR's visit to Japan, believing that a link had been made with
                        Japanese officials that the transaction should not be approved unless
                        Yasuda's current activities were restricted. CIGNA also expressed concern
                        that USTR was discussing its private business decisions with its
                        competitors.

                        The U.S. and Japanese governments had additional discussions in late 1997
                        regarding the majority sale and subsequent third sector activities of INA
                        once it was owned by Yasuda. No agreement was ever reached as to how or
                        whether the third sector sales of INA could be restricted.



Japan Included the      During the WTO financial services negotiations,9 the U.S. government
                        requested that Japan include the 1996 bilateral insurance agreement in its
1996 Agreement in Its   WTO commitments. The U.S. government held this position (1) in order to
1997 WTO Financial      seek third country support for full implementation of the agreement, (2) to
                        have access to WTO dispute settlement procedures, and (3) to respond to
Services Commitments    U.S. industry support for this initiative.

                        9
                         These WTO financial services negotiations were concluded in December 1997 and
                        addressed banking, securities, and insurance.




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                                                  In December 1997, the Japanese government agreed to include most of the
                                                  provisions in the 1996 agreement in the WTO financial services agreement,
                                                  including third sector provisions.10 (See fig. 10 for a time line of events from
                                                  1997 to the present regarding the Yasuda-INA deal.) Japan's legislation that
                                                  implements its WTO financial services commitments authorizes MOF to
                                                  prohibit entry into the third sector by acquired, as well as newly
                                                  established, subsidiaries. A MOFA official confirmed to us that Japan's
                                                  implementing legislation and its referral to established as well as acquired
                                                  subsidiaries implied that if Yasuda were to acquire INA, INA would be
                                                  considered a life insurance subsidiary of a non-life insurance company
                                                  subject to the third sector sales prohibition in the 1996 agreement.
                                                  Therefore, while Japanese officials had said, before implementation of
                                                  Japan's WTO financial services commitments, that they were unable to use
                                                  legal means to regulate third sector activities even following Yasuda's
                                                  purchase of the company, Japan has now implemented its WTO insurance
                                                  commitments and has expressed a view that INA's sales in the third sector,
                                                  post transaction, would be completely prohibited.



Figure 10: Time Line of Events Related to “Minute” and Yasuda-INA Deal, 1997-Present

    December                 February                        July I, 1998                Summer                   Present
    1997                     1998                                                        1998




Japan agrees to        Japan says inclusion of                                                                 AFLAC and AIG
                                                          Japan implements
                                                                                  Interagency reviews
include third sector   1996 agreement in WTO                                                                   disagree with
                                                          its WTO insurance       conclude that      INA’s
and most other         pact would authorize MOF                                                                interagency
                                                          commitments
                                                                                  and Yasuda’s third
provisions of 1996     to prohibit third sector                                                                conclusions but one
                                                                                  sector activities have
agreement in the       entry by subsidiaries like                                                              company notes that
                                                                                  not violated the
WTO financial          INA that may be acquired                                                                Yasuda/ INA’s third
                                                                                  agreements; USTR
services pact          in the future; Yasuda                                                                   sector activities have
                                                                                  finds no evidence that
                       announces delay of its                                                                  had little impact, have
                                                                                  CIGNA had transferred
                       majority purchase of INA                                                                slowed, and are no
                                                                                  ownership or control
                                                                                                               longer a threat
                                                                                  to Yasuda


                                                  Source: USTR and U.S. embassy in Tokyo documents.


                                                  10
                                                    According to a USTR financial services negotiator, some provisions of the 1996 agreement
                                                  that had already been implemented, such as expansion of the notification system, were not
                                                  included.




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                          In February 1998, MOF notified insurers to explain that Japan's
                          commitments under the WTO financial services agreement prohibit sales of
                          third sector products by acquired life subsidiaries of non-life insurance
                          providers. One day later, Yasuda announced that it would delay its majority
                          purchase of INA until agreement restrictions are lifted on sales of third
                          sector products by life subsidiaries of non-life insurance companies.11

                          In later communication with USTR, CIGNA did not preclude the possibility
                          that the sale still might go through before third sector restrictions are lifted.
                          Therefore, in June 1998, the month before Japan's WTO insurance
                          commitments were implemented on July 1, USTR engaged in discussions
                          with Japanese officials regarding the consistency of Japan's implementing
                          legislation with the intent of the “minute.” Specifically, USTR sought
                          reassurance that INA could continue third sector sales if acquired by
                          Yasuda. USTR officials claim that Japanese officials responded in a
                          noncommittal fashion and never provided an answer. USTR officials have
                          emphasized to Japan that it has an obligation to uphold the “minute,” which
                          allows for the majority sale of INA to Yasuda, and to limit third sector
                          activity for the new entity, regardless of Japan's WTO insurance
                          commitments.12



U.S. Government           In early 1998, USTR began a review of the ongoing activities of Yasuda and
                          INA to determine whether they were consistent with the third sector
Review of Yasuda's and    restrictions in the 1994 and 1996 agreements. Two companies, AFLAC and
INA's Ongoing             AIG, had contended that Yasuda, through its partnership with INA, had
                          entered the third sector and caused radical change to that sector in
Activities in the Third   contravention of the agreements. USTR provided CIGNA, AFLAC, and AIG
Sector Determined         with an opportunity to present their views in writing. AFLAC and AIG
That No Agreement         argued that Yasuda had effectively entered the third sector through receipt
                          of financial benefits it had obtained in connection with its business
Violations Have           relationship with INA. They also argued that because of its relationship
Occurred                  with Yasuda, INA was a de facto Japanese company and that its third sector
                          activities violated the agreements' restriction on these activities by


                          11
                           According to CIGNA, the timing of Yasuda's announcement to delay the purchase of INA
                          was coincidental.
                          12
                           USTR has always supported third sector restrictions for newly established and acquired
                          subsidiaries but has consistently viewed Yasuda/INA as a limited exception to these
                          restrictions.




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Japanese companies. Finally, the U.S. companies argued that changes to
INA's corporate structure and business operations constituted radical
change and should therefore not have been permitted.

During this review, the U.S. Trade Representative expressed a reluctance to
choose sides among U.S. companies and a hope that the companies could
cooperate to find a mutually agreeable business solution.13 However, such a
solution never materialized. Therefore, USTR examined each of the
allegations and, as summarized in a classified memorandum, concluded
that the activities of Yasuda and INA did not constitute a violation of the
agreements.14 After conducting an analysis of INA's operations, USTR's
fundamental position was that INA is a U.S. company and, therefore, its
activities do not fall within the terms of the 1994 and 1996 agreements. This
decision was agreed upon during interagency meetings that reached the
subcabinet (NEC Deputies) level15 and included officials from the
Departments of State, Commerce, the Treasury, and Justice; as well as the
NEC and USTR. On July 1, 1998, USTR communicated the consensus
decision to CIGNA, AIG, and AFLAC.

In response to a request by AFLAC and a few Members of Congress, an
additional interagency review was subsequently conducted in late July and
early August 1998. This final review reached the level of the Cabinet (NEC
Principals), whose review had participation from the Council of Economic
Advisers; the Office of Management and Budget; the National Security
Council; NEC; the Departments of Commerce, Justice, Labor, State, and the
Treasury; and USTR. During this second review, all three companies
presented their arguments orally to the interagency group. The original
conclusion−that information provided to date did not support a
determination that the activities of INA and Yasuda in the third sector had
violated the 1996 agreement−was reaffirmed. During the second
interagency review, which reached a consensus decision that there was no
violation of the “radical change” provisions of the 1996 agreement, the
Department of Commerce recommended that additional measures be taken

13
 USTR did note that very strong proof would be required to demonstrate that INA, a
company 90 percent owned by CIGNA, was actually controlled by Yasuda.
14
 Due to the classified nature of the USTR's analysis during this review, we are unable to
disclose more details about the basis for USTR's final determination.
15
  There are four possible levels of review in making decisions related to trade policy: the
Trade Policy Staff Committee, the Trade Policy Review Group, the NEC Deputies, and,
finally, the NEC Principals.




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U.S. Government Actions Regarding One U.S.
Insurer




to monitor the situation. A Commerce official proposed that an interagency
team conduct further work in Tokyo to verify the facts presented to the
U.S. government. According to USTR, this suggestion was not adopted
based on the general interagency view that no further information was
necessary to resolve the issue.

In discussing how USTR's views evolved from raising serious concerns
regarding a possible violation of the agreements with Japan in late 1997 to a
final determination that no violation of third sector provisions had
occurred, USTR officials noted that AIG and AFLAC expressed concerns
over Yasuda and INA activities in an extremely urgent manner in 1997. As
the companies emphasized that they were losing business as a result of
these activities, USTR felt compelled to address the issue with the
Japanese government immediately. However, over the next several months,
as USTR was able to conduct its own analysis of the situation, it ultimately
determined that no violation had occurred.

Both AFLAC and CIGNA raised concerns about the process used by USTR
to conduct the formal review of Yasuda's and INA's activities in the third
sector. AFLAC expressed frustration over USTR's requests for updated
information on the situation after the agency did not act on information
provided by AFLAC months earlier. CIGNA felt that it never received a
complete explanation from USTR as to what accusations had been made
against the company, but was compelled to respond to allegations made
against it nonetheless in an attempt to defend itself.

AIG and AFLAC disagreed with the interagency decision. However, officials
from one company have also noted that Yasuda's activities in the third
sector have slowed. Specifically, these officials have stated that the rapid
growth in the Yasuda agent force selling INA products has ended and their
company's existing client base is no longer being actively threatened. INA's
principal U.S. third sector competitor believes that the government of
Japan has been successful in restraining Yasuda's activities through the use
of “soft controls,” such as requiring a slowdown in the projected
registration of Yasuda agents with INA in the company's business plans.
This company has also noted that the impact of Yasuda's and INA's
activities on its business has been small to date. Neither AFLAC nor AIG is
currently pressing this issue with the U.S. government.




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                      Appendix IV
                      U.S. Government Actions Regarding One U.S.
                      Insurer




Our Observations on   We have observations in the following three areas regarding the “minute”:
                      (1) the difficulties USTR faced in creating the “minute,” (2) the
the “Minute”          consequences of USTR's lack of complete communication with industry
                      regarding the limited exception, and (3) the problems USTR encountered
                      due to the use of undefined terms in the text of the “minute.”

                      Because the issue of the majority sale of INA to Yasuda and the resulting
                      company's allowable third life sector activities were not addressed during
                      the course of the 1996 insurance agreement negotiations, USTR was put in
                      a difficult position. After the agreement negotiations were concluded,
                      USTR felt compelled to preserve CIGNA's support for the agreement by
                      accommodating the company's business plans that predated negotiation of
                      both insurance agreements but that would clearly violate the 1996
                      agreement's terms if not addressed by the two governments. This situation
                      was made more delicate due to the fact that competing U.S. companies had
                      opposing and strong views as to whether or how Yasuda/INA should be
                      allowed to sell third sector life products. In deciding to accommodate
                      CIGNA's sale of INA to Yasuda and subsequent third sector life sales by the
                      company, USTR took a position that appeared to benefit one U.S. firm at
                      the expense of others. USTR faced the difficult challenge of determining
                      the U.S. interest in a case where U.S. companies' interests were opposed.

                      Moreover, given the sensitive issues the “minute” raised in Japan, USTR
                      officials believed that broad dissemination of the document might lead to
                      its disavowal and possibly to the unraveling of the 1996 agreement itself.
                      USTR therefore sought to limit distribution of the “minute” and thus did not
                      provide copies to the two other U.S. insurance companies that had an
                      interest in developments related to Yasuda/INA. Further, in late December
                      1996, USTR did not explicitly describe to AIG and AFLAC the extent to
                      which a Yasuda-owned INA would be allowed access to the third sector life
                      insurance business. This “grandfather” document added to the 1996
                      agreement, combined with USTR's incomplete description of the exception
                      and the failure of USTR to provide the actual document to industry, created
                      frustration with USTR on the part of U.S. insurers that lasted for months.

                      Further, the “minute” used undefined terms that made its meaning and
                      implementation uncertain. While USTR officials maintained that a Yasuda-
                      owned INA would only be allowed restricted access to the third sector, it is
                      unclear what language or provision in the “minute” requires that the
                      company maintain only a limited presence. As a result of this undefined
                      language in the “minute,” the U.S. and Japanese governments had



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U.S. Government Actions Regarding One U.S.
Insurer




numerous consultations during 1997 regarding the meaning of the
document's terms. U.S. and Japanese government officials have expressed
very different understandings of the “minute,” with Japan's actions
suggesting an unwillingness, even an inability under Japanese law, to
implement the document as intended by USTR. After several months of
discussions, the two governments were never able to reach an agreement
as to how Yasuda might be restricted in the third life sector, demonstrating
the questionable value of the “minute” in creating a limited exception to the
1996 agreement to accommodate CIGNA.




Page 109                                     GAO/NSIAD-99-209 International Trade
Appendix V

Objectives, Scope, and Methodology                                                          Appendx
                                                                                                  i
                                                                                                  V




              The Chairman of the House Subcommittee on Trade, Committee on Ways
              and Means, asked us to examine (1) the views of U.S. insurance companies
              operating in Japan regarding the agreements' implementation and impact
              on their ability to compete in the Japanese market; (2) the roles and efforts
              of the Office of the U.S. Trade Representative and the Departments of
              Commerce, State, and the Treasury in monitoring and enforcing the
              agreements, and U.S. government views on whether Japan has met its
              commitments under the agreements; and (3) U.S. insurance industry views
              on U.S. government monitoring and enforcement efforts. We also collected
              information addressing U.S. government actions related to one U.S. insurer
              and its Japanese partner.

              To obtain the views of U.S. insurance companies regarding the agreements'
              implementation and impact on their ability to compete in Japan, we
              distributed a questionnaire to all 13 U.S. insurers and three brokers in
              Japan that are either wholly or majority U.S. owned. Surveys for life and
              non-life insurers differed somewhat depending on whether a particular
              commitment applied to them, and the survey included far fewer questions
              for brokers as several of the commitments in the agreements do not
              directly pertain to them. The survey was distributed in January 1999, and
              we obtained a 100-percent response rate to our questionnaire. We then
              traveled to Japan and met with representatives from all the insurers and
              brokers in March to obtain detailed explanations of and clarifications to
              their questionnaire responses. In some cases, responses were revised
              during discussions at our meetings. The questionnaire asked U.S. insurers
              and brokers for their views on the implementation and the impact of those
              provisions of the agreements for which the companies would have first-
              hand experience. All of the questions were referenced back to their related
              provisions in the agreements. For the questions related to the 1994
              agreement, we developed, where possible, similar or identical questions to
              those we used in a 1996 survey on the implementation and impact of the
              1994 agreement. This allowed us in some cases to compare how company
              responses had changed over time. Eleven of the 13 companies and two of
              the three brokers included in our current survey also responded to our 1996
              survey. In analyzing questionnaire results, we examined response
              frequencies. We also computed the percentage of U.S. insurance sales in




              Page 110                                   GAO/NSIAD-99-209 International Trade
Appendix V
Objectives, Scope, and Methodology




Japan represented by company responses.1 In requesting company
participation in our survey, we pledged that company responses would be
reported in aggregate form and that we would not identify specific
responses with the individual companies. In certain cases, the reporting of
responses in conjunction with the percentage of U.S. insurance premiums
in Japan associated with that response limits this confidentiality. In those
cases, the firms that could be identified, due to their large size, gave us
permission to report the market premium data. We also interviewed and
collected information from industry groups and insurance companies in the
United States.

To identify the roles and efforts of USTR and the Departments of
Commerce, State, and the Treasury in monitoring and enforcing the
insurance agreements, as well as U.S. government views on
implementation, we conducted interviews with officials from each agency,
including the U.S. embassy in Tokyo. We reviewed available information
from USTR and the U.S. embassy in Tokyo to establish the nature and
frequency of interagency interaction. We also assessed extensive
documentation from USTR and the U.S. embassy in Tokyo to review
USTR's determination regarding the status of agreement implementation
and discussed USTR's determination with U.S. companies and Japanese
government agencies and industry groups. Information on Japanese law in
this report does not reflect our independent legal analysis but is based on
interviews and secondary sources.

We also used the 1999 questionnaire to obtain the views of U.S. insurance
companies regarding U.S. government monitoring and enforcement of the
agreements. All 13 insurance companies and three brokers were asked
questions regarding overall U.S. government monitoring and enforcement
efforts, as well as questions related to their specific experiences with
various government agencies. As with implementation and impact
questionnaire responses, we conducted follow-up interviews in Japan with
U.S. participants in the Japanese market. We also held interviews with
industry groups and insurance companies in the United States. We
examined extensive documentation regarding monitoring and enforcement




1
 Company shares (percentage) of total U.S. premiums generated in Japan were calculated
using premium data for Japanese fiscal year 1997 (Apr. 1997-Mar. 1998). Two surveyed
companies did not have sales in 1997 and were assigned a zero weight for computing the
premium proportions.




Page 111                                         GAO/NSIAD-99-209 International Trade
Appendix V
Objectives, Scope, and Methodology




actions by USTR and the U.S. embassy in Tokyo that have proven
controversial with some U.S. insurers operating in Japan.

We performed our review from July 1998 to June 1999 in accordance with
generally accepted government auditing standards.




Page 112                                GAO/NSIAD-99-209 International Trade
Appendix VI

GAO Contacts and Staff Acknowledgments                                                       Appendx
                                                                                                   iI
                                                                                                   V




GAO Contacts      Elizabeth Sirois (202) 512-8989
                  Leslie Holen (415) 904-2277



Staff             In addition to those named above, Emil Friberg, José Peña, Kay Halpern,
                  Kim Frankena, Richard Burkard, Kathleen Joyce, and Rona H. Mendelsohn
Acknowledgments   made key contributions to this report.




                  Page 113                                GAO/NSIAD-99-209 International Trade
Related GAO Products


                   U.S.-Japan Trade: U.S. Company Views on the Implementation of the 1994
                   Insurance Agreement (GAO/NSIAD/GGD-97-64BR, Dec. 20, 1996).

                   U.S.-Japan Trade: The Japanese Insurance Market (GAO/NSIAD-99-108BR,
                   Mar. 15, 1999).




(711367)   Leter   Page 114                                GAO/NSIAD-99-209 International Trade
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