A government panel presented a plan Tuesday that would enable life insurers to reduce yields promised to policyholders as a way to help weak insurers restructure.

The Financial System Council also listed in its interim report concerns by some members about the necessity and workability of the plan.

The council will solicit public input on the controversial step before making its final decision and is calling for comments to be submitted to its Web site by Aug. 31.

The council’s report, submitted to Financial Services Minister Hakuo Yanagisawa, would form the basis of a bill to revise the Insurance Business Law. Under existing legislation, insurers may change the terms of insurance contracts, including the yield guarantee, only when they become insolvent. Promised yields, as opposed to guaranteed yields, effectively serve to boost the amount of premiums policyholders pay for a contract.

“If a life insurance company does everything in its power to gain the understanding of policyholders to lower yields, this option should not be denied,” the report concludes. “But such a plan is only possible after gaining the understanding of the public.”

The life insurance industry is suffering from what is known as negative spread, or the gap between rates of return promised to policyholders and the actual returns gained on investments. This has prompted the debate on creating a mechanism by which insurers would be able to lower promised yields to prevent more bankruptcies.

Yields promised at the height of the asset-inflated bubble economy — some as high as 6.5 percent — continue to exceed the returns on insurers’ investments, eating away at profits. Five life insurers went under in the 12 months leading up to March 31.

In the Financial System Council’s interim report, members called on life insurers to gain the solid support of policyholders for any cut in promised yields, such as at policyholder meetings.

The panel suggested that insurers be forced to disclose their full accounts and to specify projected earnings, and that if actual earnings exceed projections, policyholders be compensated through dividends.

“Everything hinges on whether insurance companies are able to offer policyholders something new in their management and win their trust,” council head Toshihiko Fukui told a news conference. “That trust will be hard to earn given the business models that have been in place to date.”

The council said the courts should be involved to ensure fair procedures, and a system be created in which the Financial Services Agency would be able to gauge the necessity of lowering yields before giving final approval.

The report outlines some serious concerns regarding the plan’s workability, saying that a life insurer announcing it was lowering yields would trigger a rush of policy cancellations, driving the insurer to bankruptcy anyway.

When announcing their earnings results for the 2000 business year earlier this month, executives at the top life insurance companies said at individual news conferences they do not need to lower yields promised to customers.

But with no end in sight to the current low interest-rate environment, negative spread is no laughing matter. Even for industry leader Nippon Life Insurance Co., negative spread for 2000 totaled 320 billion yen, that is, 51.7 percent of basic profits, or profits earned from its core business.

Life insurers have indicated they have high expectations for the proposal. If insurers can gain public trust to lower yields, it could potentially free them to create new products at lower cost, they argue.

Limiting banks’ holdings

The panel also recommended that beginning in 2004, the limit on the value of banks’ stockholdings be set below their capital base to ensure the stability of the nation’s financial system.

The report proposes that the government review the evaluation of risk weightings on assets held by banks in line with an international rule currently being discussed by the Basel Committee on Banking Supervision in Switzerland.

The panel has been discussing the issue since the government and the ruling coalition proposed in their emergency economic package of April 6 limiting banks’ shareholdings to below their capital.

The report says, “As for banks whose stockholdings are conspicuous, imposing a limit on their shareholdings below their capital is acceptable to promptly reduce the total value of their stockholdings.”

The limit should be introduced in 2004 but the introduction could be delayed by a year or two for some banks if it could have a negative impact on them, it says.

The banks will have to sell stockholdings worth about 13 trillion yen to 14 trillion yen by the time the limit is introduced, a Financial Services Agency official said.

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