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Life Insurance Association Japan - Japanese Insurance

Life Insurance Association Japan

Some call him the "Bad Boy of Sumo" for his youth and unreserved fighting, but none can deny that Asashoryu Akinori is the 68th Grand Champion of sumo. Born in 1980, he started wrestling at the age of 15. In 1999, he entered Meitoku Gijuku High School to study sumo wrestling and became a disciple of Takasago-beya (then-Wakamatsu-beya). In January 2001, the youth entered the top division of sumo for the first time and in 2002, he became the fastest wrestler to reach the rank of ozeki (the second highest rank in sumo) since the current system was introduced in 1958.

Asashoryu Akinori is one of the greatest contemporary grand champions of the quintessentially Japanese sport of sumo wrestling. Known simply as Asashoryu, he is joined by another formidable master of this sport known as Hakuho. Indeed, the two of them are credited with bringing about a revival of this ancient sport. The surprising fact is that neither of these men is Japanese; both men are Mongolians. The irony is that while foreign sumo wrestlers seem keen to accept the discipline and lifestyle of this demanding sport, young Japanese are hesitant to enter the ring and the older Japanese wrestlers are finding it increasingly difficult to compete with the younger, stronger Mongolians. Thus what appears to be a uniquely Japanese endeavor is now dominated by two foreigners.

Sumo's Mongolian champions are not alone in providing a somewhat counter-intuitive perspective of events in Japan. Deceptive appearances also muddle much of the thinking about the Japanese life insurance industry, which appears stagnant and lacking in space for growth. In reality, there are significant forces driving the Japanese market.

It cannot be denied that the Japanese life industry was hit badly by the economic downturn that gathered force in the 1990s. Indeed, many companies have come close to collapse following the sharp interest rate rises; overall market growth has stagnated ever since.

This leaves a present-day picture of a Japanese life insurance market that, at first sight, looks like a huge, unchanging monolith, very much dominated by incumbent players and leaving little room for anyone else. But, as is often the case with perceptions of Japan, this picture is incomplete because the Japanese insurance market does have zones of growth and even foreign companies are managing to capitalize on them. A glimpse of these opportunities for smaller players can be seen in the fact that from 2000 to 2006, smaller players gained 36 percent market share at the expense of the four large, local incumbents and the postal system. These include foreign insurers such as The Hartford and ING who focused on variable (investment linked) annuities.

Japan is the largest market in Asia by far. Its 2007 gross premium was around US$325 billion, which was equivalent to four times that of South Korea, the second-largest market, and five times that of China, the third largest market. However, the Japanese market as a whole has been stagnant for years; during 2002-07 there was a compound decline of 2 percent, while other markets in Asia grew by an annual aggregate rate of 15.7 percent.

To understand Japanese insurance, one must first have an understanding of the different parties that make up the Japanese industries. The traditional players still dominate, including the postal system, mutual cooperatives, and large private incumbents. In particular, Japan Post Insurance Co. (Kampo Seimei Hoken), which raked in US$80 billion in premium or 23 percent aggregate market share in 2007, plays a large role in the industry.

It used to be that Japanese consumers bought mostly savings-type insurance, such as endowments, through postal outlets. Japan Post Insurance's average per policy face value is smaller than its private peers but with the sheer number of policies, the postal system used to dominate the market.

However, with shifting consumer behavior in Japan, Japan Post Insurance's premium income has steadily declined. In 1999, sales through Japan Post Insurance accounted for 33 percent of all life premiums. A second category of life insurers in Japan are insurance cooperatives named kyosai kumiai (mutual societies). The Cooperative Insurance in Japan 2007 Factbook describes a kyosai as:

A cooperative is a nonprofit-making organization established by a group of people with the desire to improve their living... In Japan, agricultural cooperatives (JA), fishery cooperatives (JF), consumer cooperatives, and cooperatives of small- and medium-sized enterprises, and so forth, are monitored by the relevant authorities... As such, the types of cooperative insurance, upper limit of the amount insured, utilization by nonmembers, accounting (various reserves, surplus regulations, asset operation procedures, etc.), and inspections by competent authorities are regulated in law.

Due to their private nature, there is no comprehensive data on how much life insurance they sold, but a survey of 59 kyosai cooperatives suggested that together they collected over US$38 billion in life insurance premium in 2006.

Finally, private insurers make up the third and largest category of players in Japan, with premiums docking in at almost US$250 billion in 2007. Large traditional players dominate this group; Japan's biggest insurer, Nippon Life, made US$45 billion in premium in 2006 alone - more than the entire Taiwan market combined! The top five players - Nippon Life, Dai-ichi Mutual, Sumitomo, Meiji Yasuda, and Mitsui Life - are all well known names in Japan, with company histories going back over 100 years. In 2006, the forerunner, Nippon Life, earned 3.5 times more premium than the largest foreign insurer, ALICO Japan.

The industry still focuses on traditional insurance products such as term and whole life, but this is slowly declining. In 2000, traditional products accounted for 70 percent of new private insurance policies by sum assured; by 2005, the figure was down to 60 percent.

The stagnation of Japan's life insurance market is likely to persist for some time due to the following factors: 
i) a shrinking population: 
ii) economic stagnation; 
iii) the erosion of sales power because the housewife based sales force is not equipped to cater to customer's changing and more sophisticated needs; and 
iv) an already high insurance penetration and density, amounting to approximately 7.5 percent of gross domestic product (GDP) and US$2,500 per capita in 2007.

But the overall stagnation of the market is masking some of the forces driving growth in the market. Liberalization of market-restrictive laws continues to shape the market. For example, reforms in the medical system are giving rise to new product offerings. There are also signs that regulators are seeking more vigorous customer protection, which will lead to changes in sales practices. In the past, mis-selling or poor selling (lack of product information) were not uncommon in this market. The Financial Instruments and Exchange Law (FIEL) was implemented in September 2007, bringing greater protection to buyers of finandal products. The law stipulates that banks and brokerages must explain and disclose, in marketing materials, the risks inherent in certain investment products. Meanwhile, other regulatory changes may lead to more competition from other financial institutions.

As a result, there are a number of niche opportunities, which are small compared to the size of the total market, but are equivalent to the size of an entire market elsewhere in Asia. Take the market for individual annuities as an example - in 2006, premium income was US$66 billion, up from US$19 billion just five years earlier, and it is now larger than the size of Taiwan's entire market.

New opportunities are mainly to be found in the following areas:
  • The retirement market: Japan is the most rapidly aging society in Asia with needs that mirror those of Western markets. We are already seeing a reflection of this in the rapid growth of the annuity market and, if the Western experience is anything to go by, other retirement offerings will follow.
  • Health insurance: Japan did not have medical insurance prior to the 1970s as the government offered a universal healthcare system. However, as medical needs grew, the demand for insurance complementary to the public healthcare system also grew, and insurance firms started selling private medical insurance. With an aging population, the need for health insurance is expected to continue its growth trajectory in Japan.
  • Investment-related products: As in other Asian markets, an attitudinal change to personal finance management is underway in Japan, leading to a demand for investment products. Between 2002 and 2006, the Japanese moved 7 percent of their personal financial assets, or US$50 billion, away from cash or deposits. Looking at it in a different way, personal assets in higher yield (nondeposit) financial vehicles grew by US$1.5 trillion over that period, including both new injections of funds and capital appreciation. Japanese insurers had suffered a reputational hit in the 1990s on investment-linked insurance, but the product has returned in recent years, repackaged as variable annuities.
  • Banuusurance. In the wake of deregulation, distribution through banks swelled, having been well received by customers. It seems likely that Japan will share the experience of other Asian markets and see an even greater growth of this business, which is still relatively new in Japan. Indeed, full deregulation only occurred at the end of 2007, following a first wave in 2002 when banks were allowed to sell annuities.
  • Channel innovation: There are some interesting examples here. albeit not widespread. For instance, there are insurance outlets in retail stores (known as shopassurance), kiosks in high-traffic areas like train stations, mail order and TV shopping, and online sales.

Based on these trends, we see a distinctly mixed picture emerging in Japan characterized by the following themes: continued decline in the overall market, slow decline of incumbents, emerging sizeable opportunities in certain product submarkets, increasing scope for innovative sales models, and rewards for innovative players with perseverance. To find out more, you can check Life Insurance Association Japan.