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To ward off bankruptcy amid the deteriorating investment climate, the Financial Services Agency will allow life insurance companies to reduce the investment returns they have promised to policyholders, sources said Monday.

Life insurers are struggling from negative spreads, in which the returns on their investments have been significantly below the interest rates they promised to policyholders.

The FSA’s decision apparently reflects its judgment that if the spread is left to widen further, some insurers could go bust.

Many policies with high guaranteed returns — about 5 percent — sold during the bubble era in the late 1980s would be subject to the cuts, which would probably leave the yields at around 3 percent, the sources said.

Because policyholders will probably cancel their contracts as soon as life insurers announce the cuts, the FSA is considering banning cancellations for a certain period, the sources said.

Most of the insurers are expected to oppose the FSA plan because it could trigger credit unrest.

The FSA will ask its advisory body to study the plan in early January before submitting draft amendments to the insurance business law to the Diet, the sources said.

The FSA wants the new measure to take effect in fiscal 2003, the sources said.

It is expected to explain the decision to Prime Minister Junichiro Koizumi soon and begin consultations with other government agencies and the ruling parties.

Chief Cabinet Secretary Yasuo Fukuda suggested Monday the FSA is considering the cut in the guaranteed yields.

“The FSA has not made any decision on the matter. But it is studying a broad range of issues as a regulatory body, which could include the matter,” Fukuda told a morning news conference.

If the guaranteed return is reduced, policyholders will suffer a cut in the insurance benefits they receive. Currently, such a reduction is allowed only if life insurers go under. Under the FSA plans, the reduction would be possible even before insurers collapse.

To make up the shortfall between the investment returns they earn and the guaranteed yields promised to policyholders, the largest 10 life insurers alone have together been booking more than 1 trillion yen in losses annually.

Policies currently available on the market offer low guaranteed yields — at around 1 percent — so they are outside the scope of the FSA plan.

Under the new plan, life insurers would be urged to submit business-improvement plans — including cuts in guaranteed yields — if their ability to meet future obligations in insurance payments are deemed shaky, the sources said.

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