2003 JAPAN LAW: INSURANCE---Contractual Rights Shredded with Government Imprimatur
Keywords: Insurance Law, Contract Law, Insurance Business Law, Life Insurance, Mutual Insurance Companies, Disclosure
Copyright 2004. All rights reserved Attorney Roderick H. Seeman
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What can be said when a government works in cahoots with massive financial institutions, pillars of Japan’s financial establishment, to tear up the contractually guaranteed obligations of these giants? Argentinans would be done proud. Indeed, considering the hard line position adopted by Japan on Argentina’s debt defaults, one could hardly find fault with Japan giving itself a good look in the mirror.

Once again the interests of consumers in Japan have been sacrificed on the altar of big business. At the same time the sanctity of contract was also steamrollered for the same interests. In the most recent 2003 revision of the Insurance Business Law the insurance companies were given permission to cut their contractually guaranteed payouts and, at the same time, the government made it more difficult for consumers to cancel out of their policies. Earlier amendments to the law in 1995 permitted life insurers to enter the non-life insurance sector through subsidiaries and in reverse, for non-life insurers, to enter the life insurance sector and permitted insurance brokers not affiliated with insurance companies, all in the hope that increased competition would help the industry. To no avail.

Japanese consumers have 1.27 quadrillion yen in life insurance in 2003 with insurers having 172.5 trillion yen in investment assets. Many of those life insurance policies had guaranteed yields and many of those made promised yields in the giddy days of the 1980s Japanese stock market bubble that are squeezing the insurers today with stock markets down in 2003 to 20% of their 1989 peaks and near zero interest rates on interest bearing yen investments in the 1990s. In most systems this would result in the bankruptcy of the company unable to perform its contractual commitments. In bankruptcy, creditors, including insurance policy holders would be given their legal creditor protections. In the new 2003 legislation, the policyholders, the consumers, have had these legal protections removed as their interests will be sacrificed in order to prevent the bankruptcy of the insurers. This is said to be necessary to protect the financial system. It also strips consumers of their contractual rights.

Under the new legislation it will be made easier for life insurance companies to change from mutual insurance companies to regular type companies, in other words, to demutualize. Measures will be introduced to insulate management from legal liability in such cases in changing from a mutual company to a regular company with respect to capital raising issues. A government fund of 400 billion yen backing up the insurance industry will also be extended until the end of 2005. In January 2003, the Life Insurers Industry of Japan agreed to a recommendation by the Financial Services Agency that they add an extra 100 billion yen to the  Life Insurance Policyholders Protection Corp. of Japan, the safety net body for life insurance policy holders, which is  funded by mandatory contributions by all life insurance companies operating in Japan. The industry had already provided 560 billion yen to the fund, but by the end of 2002 only 22 billion yen remained due to various life insurance company failures. The American Council of Life Insurers, an American insurance industry group criticized this as inadequate and blamed the problem on the government’s failure in solvency regulation. Yet demands for disclosure of basic information on life insurers such as investment returns (assumed & actual) and policy holder death figures, which could easily help in comprehending the insurers true condition, as demanded by some political parties and consumers interests were rejected by senior government officials as revealing “corporate strategies.” So once again business interests are protected, opaque practices defended, and massive amounts of government funds endangered.

With respect to the stripping of policyholders of their contractual rights to guaranteed yields, similar legislation had been proposed in 2001. The life insurance industry opposed any measure permitting a company to seek such permission to cut guaranteed yields as likely to lead to a stampede of policyholders fleeing the company as such a move was likely to raise suspicions of financial weakness. The preferred mode of the industry is that all together to cut guaranteed  yields under government’s order. This provides the defense of “the government made us do it,” prevents industry competition and continues them to permit the opaqueness whereby suspicions of financial weakness can be denied. Although once the legislation was passed stripping the policyholders of their contractual rights to guaranteed yields all the life insurers denied to their policy holders they would ever implement such measures, no greater confirmation can be given to the verity that actions speak louder than words. Otherwise, why was such a strenuous effort made to assure such measures?

The implementation guidelines for approval by the government on such application for permission to cut guaranteed yields by the Financial Services Agency were issued just prior to the enforcement of the amended law in September 2003. Under the guidelines approval to cut these contractually guaranteed yields would be permitted if the situation was such that the insurer was “in danger of” seeing its liabilities exceed its assets at any time within ten years or more . Not that it was “certain to be in such a condition,” before consumers rights and contractual law is tossed into the trash heap,  but merely “in danger of” and not “now” or in the “near future,” but at any time in the next ten years or more. In view of the FACT that the Institute of Actuaries of Japan considers 10 years as ordinarily the maximum period for credible forecasts, decisions based on such incredible standards assure that interests of policy holders are the only thing NOT guaranteed.

Simultaneously with permitting the insurer to cut its guaranteed yield the new legislation introduces draconian measures to prevent the policy holders, the consumers, from canceling their policies if it happens. Once an insurer applies to the government for permission to cut the guaranteed yield, the policy holders lose their rights to cancel their policies. Once the government grants it approval, it can be only be prevented if, within a certain period, 10% of the policy holders, usually a number reaching into the hundreds of thousands, object---a procedure not likely to be made easy. Some window dressing for consumer protection appearance purposes at least. But if you are going to commit a rape, it is  better to make sure the door is locked. The government is so avid in its protection of policy holders that it has provided that if an executive or an employee were to take pity and permit a policy holder to then cancel their insurance policy that executive or employee can be imprisoned for up to 2 years or fined up to 3 million yen. The insurer would be fined 300 million yen.

In the ten years to 2001 the life insurers donated 1.38 billion yen to the ruling Liberal Democrat Party, some even just before they collapsed.

In this respect, at around the time of the enactment of the amended legislation, the Democratic Party of Japan filed a criminal complaint with Tokyo prosecutors, accusing a commissioner of the Financial Services Agency of pressuring Japan’s largest non-life insurer, Tokio Marine & Fire Insurance Co. to merge with the ailing life insurer Asahi Mutual Life Insurance, claiming a potential collapse of the credit system, such actions violate the Penal Code’s provisions against attempted compulsion. The government said it made an investigation and found no violations.

Not all life insurers are losing money apparently. The National Tax Agency hit Sumitomo Life Insurance with 900 million yen in back taxes and penalties for evading 2.4 billion yen in income by utilizing subsidiaries in the Bahamas.

Meiji Life Insurance and Yasuda Mutual Life Insurance, which are set to merge in January, 2004 announced in December, 2003 that they had failed to pay policy holders 1.8 billion yen in dividends. They blamed the failure on computer systems miscalculations on contractually specifically delineated obligations. One wonders how they will perform on applications to meet “potential dangers within ten years or more.”  One even wonders if they can add or subtract.