The deregulation of Japan’s insurance sector last year has set domestic and foreign-affiliated companies squarely against each other in the cancer and medical insurance battlefield.
The competition has been focused on the securing of marketing channels for these so-called third-sector insurance products, the demand for which is expected to grow along with Japan’s graying society.
Deregulation has provided a ray of hope for some domestic life insurers that have been hit by a wave of policy cancellations amid a problematic business climate.
Third-sector insurance, which was opened up to major domestic insurers in January 2001, includes independent products for cancer, nursing care and medical treatment. First-sector insurance covers life insurance, while second-sector insurance focuses on casualty insurance.
With Japan’s insurance industry having traditionally been separated into life and nonlife insurance covering the first two core sectors, the market for medical insurance, which falls into a category between the two, has yet to grow.
Conventional life insurance focuses on benefits at the time of a policyholder’s death and only features medical coverage as an option. On the other hand, third-sector insurance explicitly covers medical expenses ranging from fees for operations to the rental of hospital beds.
Third-sector insurance has been dominated by foreign-based firms led by American Family Life Assurance Co., which started marketing its cancer insurance products in Japan in 1974.
In the wake of AFLAC’s maneuver here, Tokyo advised domestic insurers not to enter this field, with the exception of a few small life insurers.
This constituted Japan’s response to a U.S. demand that domestic insurers be excluded from third-sector products until regulations governing core insurance products were relaxed for foreign firms.
Tokyo and Washington agreed in 1996, however, to allow major domestic life insurers to market third-sector products in January 2001 and nonlife insurers six months later.
Fiscal 2001, which ended March 31, marked the first full business year in which most domestic insurers were allowed to offer cancer and other medical insurance products that can be signed up independently — not just as options.
The first year of competition centered on the issue of whether new players could establish marketing channels for their third-sector products that did not clash with those of AFLAC Japan, which effectively held a 90 percent share of Japan’s cancer insurance market before deregulation.
During the year through March 2001, the U.S.-based life insurer sold 736,000 third-sector products worth a total 89.6 billion yen. As of September, its cancer insurance policy holdings totaled 13.7 million — by far the nation’s biggest.
Essentially, insurers have two marketing channels — life insurers target individual customers, while nonlife insurers focus on group contracts involving corporate employees. AFLAC’s cancer insurance business is primarily based on the latter.
Before the advent of deregulation, AFLAC was “very much concerned” about colliding with the marketing drives of domestic nonlife insurers, said Takahisa Sekine, deputy chief of the company’s marketing division.
By the end of 2001, Japan’s leading nonlife insurer, Tokio Marine & Fire Insurance Co., had sold some 235,000 third-sector products, followed by Yasuda Marine & Fire Insurance Co., which sold some 226,000.
These figures include sales generated by their life insurance subsidiaries.
Nevertheless, Sekine is confident that AFLAC has secured the edge over its rivals. “So far, virtually none of our corporate customers has switched from our products to those of new entries,” he said.
Nippon Life Insurance Co., the nation’s largest life insurer, has successfully expanded its share in the new market.
Nippon Life began to offer cancer coverage immediately after the January 2001 deregulation, racking up 180,000 such policies during the first three months, according to company spokesman Shohei Ueda.
Between April 2001 and February 2002, the company sold about 770,000 third-sector insurance products, of which 210,000 were cancer policies and the rest medical insurance contracts, Ueda added.
Competition has also heated up in the life insurance sector. In March 2001, AFLAC tied up with Dai-ichi Mutual Life Insurance Co. to bolster its individual customer base by exploiting the retail foothold of the country’s second-largest life insurer.
As of December, AFLAC had sold 265,000 cancer policies via the Dai-ichi channel, Sekine said.
Intensifying competition in the third sector has not stemmed from insurance deregulation alone. Medical insurance products — designed to offer limited coverage with cheaper premiums — match today’s insurance needs, according to experts.
Masayuki Kihira, a Tokyo financial planner, argued that the ongoing domestic business slump has discouraged people from paying high premiums for conventional life insurance contracts.
“Under the current bad income situation, people want to pay lower insurance premiums to reduce as much spending as possible,” Kihira said.
“The so-called household restructuring is behind the rising demand for third-sector products.”
Although premiums depend on the age of policyholders and the extent of contracts, typical monthly premiums for conventional life insurance policies centered on death benefits cost between 20,000 yen and 30,000 yen for men in their early 30s.
By contrast, medical insurance policies, which do not include huge death insurance benefits, offer drastically lower premium rates. This is where foreign insurers seem to be one step ahead.
For example, U.S-based life insurer Alico Japan Co., which sold nearly 340,000 third-sector products in fiscal 2000, offers a medical insurance plan under which a 30-year-old man would pay a premium of 7,492 yen a month for the rest of his life.
This would guarantee the client 8,000 yen a day to help cover hospitalization charges plus additional benefits for operations and so forth.
A similar product offered by AFLAC goes even further. A 30-year-old man would pay 1,790 yen a month for daily hospital coverage worth 5,000 yen. Additional benefits are also included in this package.
“Our recent market survey shows some 40 percent of those queried prefer lower premiums for limited coverage to paying more for perfect security,” Sekine said.
Kihira pointed out, however, that foreign insurers can keep premiums low by having customers pay premiums indefinitely. Premiums for medical insurance offered by Japanese insurers usually end when a client reaches the age of 60.
“Although foreign insurers’ premium rates are attractive, one must carefully consider how much you pay for how long, and how much you get,” Kihira said.
Growing demand for third-sector insurance products also derives from Japan’s aging society and growing health fears among the populace.
“The ‘risk of staying alive longer’ is increasing in Japan,” Kihira said.
“Unlike decades ago, when our life span was not so long as today, our attention is shifting from making death provisions to insurance while we are alive.”
Behind the ongoing third-sector competition, however, lies the severe business conditions facing domestic insurance firms, according to Nobuyasu Uemura, an insurance-sector analyst at Rating and Investment Information, Inc., a Tokyo-based credit-rating firm.
“Insurers’ conventional business foothold has been flagging recently,” Uemura said. “For life insurers, the market is almost saturated for their mainstream products centered on death benefits. The same can be said about nonlife insurers’ core business of fire and automobile insurance.”
Amid the stock market slump in Tokyo, life insurers have seen their stock gains become smaller than the returns they promised policyholders. This has reduced profits and driven some firms to bankruptcy in recent years.
Consumer skepticism over the financial soundness of life insurers has also increased the number of policy cancellations.
Given the fragility of domestic insurers’ core business, it remains to be seen if third-sector insurance can become the driving force for a revival, Uemura said.
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