Keiko Horikoshi, 41, sought out a financial planner last month to make sense of her and her husband’s life insurance coverage.

The couple had been paying as much as 75,000 yen a month for 15 years for life insurance, endowment and medical coverage — funds eating away at seed money to cover education costs for her 9-year-old son.

She was stumped a minute into the meeting.

“(The financial planner) asked the obvious question: ‘How much coverage do you really need?’ ” the Yokohama resident stammered. “But I couldn’t answer. I mean, I had never really thought about that.”

While the prolonged economic slump is prompting policyholders like Horikoshi to take charge of their insurance policies, confounded politicians and financial regulators are poised to push forward a rescue of troubled life insurance companies at the expense of customers.

How real is the risk of a massive exodus of policyholders? Will this trigger a chain of bankruptcies in the life insurance sector? How about the potential damage to the financial system?

Financial Services Agency officials have submitted a plan to a group of Liberal Democratic Party politicians to reduce life insurers’ life-long obligations, promises that were made to customers in the boom days of the asset-inflated bubble economy.

Under the FSA’s plan, troubled insurers would be able to lower guaranteed yields of between 7 percent and 9 percent on insurance policies to 3 percent, and temporarily freeze policy cancellations.

This would be done by raising the premium on insurance policies, or by lowering promised payouts.

The plan would help insurers hit by record-low interest rates and slumping stocks, which are keeping them from earning enough on investments to keep up with promised payouts to policyholders. The projected difference is set to remain at 1.2 trillion yen for the 10 largest life insurers for fiscal 2002.

In Horikoshi’s case, if the guaranteed yield was slashed to 3 percent from the current 5.5 percent, it would mean a difference of 6 million yen on her life insurance policy, meaning a payout of 14 million yen instead of 20 million yen at the time of her death.

Policyholders are sure to react to the proposed plan by cutting away at all but the insurance they need most.

“Not only will policyholders be enraged by the breach of contract, but it’s redundant,” said Ichizo Ohara, one of the senior LDP members to whom FSA officials explained their plan. “Should a life insurer go bankrupt, we already have court procedures and a safety net to help the insurer meet its obligations to policyholders.”

An industry-funded safety net currently has 22 billion yen remaining, and then there’s the 400 billion yen backup line to be tapped from public coffers.

Private life insurance companies recently agreed to dole out an additional 100 billion yen to the Life Insurance Policyholders Protection Corp.

Still, Ohara, a self-proclaimed financial reformer, supports the FSA plan — if officials fail to find a better alternative in the next few weeks.

If approved by LDP subcommittee members, the proposed changes to the Insurance Business Law will be submitted to the Diet during its current session. Under existing law, life insurance companies cannot cut their guaranteed yields before going under.

Ohara’s backing is evidence of how fragile the economy is. Policymakers are giving way to short-term measures to help prop up companies — otherwise, they say, there may not be enough time left to allow future reforms.

Insurers and banks prop each other up by taking turns extending subordinated, or low-obligation, loans to each other. As of the end of last March, the 10 largest life insurers had subordinated debts to the five largest banking groups of 1.2 trillion yen. Meanwhile, the life insurers have made 4.6 trillion yen in subordinated loans to the banking groups.

If a life insurer collapses, that means kissing subordinated loans to the insurer goodbye.

Major banks are also counting on further financial support from life insurers.

“The collapse of life insurance companies would be a debilitating blow for banks, just as they are trying to raise funds to replenish their capital,” said Mitsuhiro Fukao, a professor of economics at Keio University.

If the solvency margin ratios of Japan’s 10 largest life insurers were recalculated using U.S. accounting standards, the ratios would all fall below 400 percent, with three companies below 200 percent, Fukao said. The 200 percent level is the threshold at which the FSA issues a warning to improve financial soundness.

This is according to fiscal 2001 figures, when the Topix stock average ended at 1060.10. Stocks have since slumped even further, now lingering around 850.

“According to my calculations, at the end of September, six insurers would have undergone bankruptcy proceedings, and one more may have had to undergo a trend test (if they were) in the U.S.,” Fukao said.

Meanwhile, life insurers maintain strong ties with political circles.

The top 10 contributed more than 50 million yen to the LDP’s main fundraising body, the People’s Political Association, in fiscal 2001, with Nippon Life Insurance Co. topping the list at 14.9 million yen.

The biggest obstacle to the rescue plan, however, is life insurers’ unwillingness to admit openly that they are willing to be rescued.

“With times as uncertain as they are now, it would be a mistake to even debate such a scheme,” said Shinichi Yokoyama, president of Sumitomo Life Insurance Co. “We do not need it; we don’t plan to use it.”

But politicians say the life insurers know they need every bit of help they can get.

Unrealized gains on stocks shrank 87 percent to 230 billion yen at the end of September from just six months before at the 10 largest life insurers, with six companies burdened with unrealized losses close to 1 trillion yen.

They say that if life insurers can find a way to lower guaranteed yields, while skirting negotiations, they would do it. Negotiations would lay life insurers open to charges that they were violating antitrust laws.

Japan’s private-sector life insurance industry is the second-largest in the world, with individuals holding a whopping 1.2 quadrillion yen worth of policies at the end of November.

Coupled with the Postal Life Insurance system under the Public Management, Home Affairs, Posts and Telecommunications Ministry, and life insurance programs under the mutual aid associations, per capita ownership of life insurance is twice that in the United States.

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