The chairman of the Life Insurance Association of Japan expressed approval Wednesday about amending a law to allow life insurance firms to cut the yields they guaranteed to policyholders.
Shinichi Yokoyama told the House of Representatives Financial Affairs Committee that he will not oppose the planned introduction of new regulations on insurance yields, “if they are designed to secure ways to protect policyholders.”
The Lower House committee is discussing a revision to the Insurance Business Law to allow struggling life insurers to cut the yields they promised to policyholders before going bankrupt. The guaranteed yield is the rate of investment return an insurer promises policyholders.
Many insurers promised high yields to attract customers during the bubble economy years in the late 1980s. But plunging stock prices and record-low interest rates have made such vows hard to keep.
Yokoyama, president of Sumitomo Life Insurance Co., said the life insurance industry has been weighed down by negative spreads, in which the returns on their investments are significantly below the rates of the yields they promised.
“We will address the problem of negative spreads as the most important issue for the industry,” Yokoyama said. “It’s crucial for us to continue managerial efforts so that we will not have to cut yields.”
Chuo University Professor Akiyoshi Horiuchi, who heads a subcommittee of the Financial System Council, voiced his support for the plan, saying it is “rational” for authorities to provide insurers with a choice.
However, he also expressed concern that the amendment might be used arbitrarily by life insurers.
The bill to revise the law has drawn criticism from some quarters within the life insurance industry, who are concerned that the move may lead to a number of policy cancellations.
The Financial Services Agency plans to work out guidelines for life insurance companies seeking to cut yields they are contractually obligated to pay policyholders, a senior FSA official said Wednesday.
“It will be difficult to set numerical criteria and so we intend to consider preparing guidelines,” Takashi Fujiwara, director general of the FSA’s Planning and Coordination Bureau, told the House of Representatives Financial Affairs Committee.
Unfavorable investment conditions, such as razor-thin interest rates and the stock market slump, have prevented life insurers from securing enough returns on investment to match fixed yields on existing policies.
While life insurers have been bludgeoned by these negative spreads, the Insurance Business Law allows them to lower their guaranteed yields only when they go under.
The government has drafted a bill aimed at amending the law to allow life insurance companies to cut guaranteed yields before they go bankrupt.
The bill in question has been criticized as being too vague on when cuts of this kind would be permitted.
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