In a bid to prevent frailty in the life insurance sector from potentially exploding into the political and banking scenes, the House of Councilors on Friday enacted legislation allowing troubled life insurers to lower their promised payouts to policyholders.
Life insurance companies swear they would never resort to the revised Insurance Business Law, expected to go into effect as early as Aug. 24 after the government prepares relevant ordinances. They have instructed their sales teams to tell customers that they are not even considering lowering promised payouts.
Do not believe these sales pitches, warns Nobuko Takahashi, a journalist specializing in consumer affairs.
Takahashi, who sat on an advisory panel to the prime minister that objected to the plan when it was first submitted two years ago, tells customers to ask their branch manager to put in writing the promise that there will be no change to promised payouts.
“The principle of the legislation is to make the policyholder take on loss, instead of protecting him, as bankruptcy laws would,” she said.
Under the new scheme, a life insurer can apply to the prime minister for approval to change the terms of their policies. Once approved, the insurer must freeze policy cancellations.
In the following three months, the life insurer would submit its request to a group of policyholder representatives, usually handpicked by the insurer. The insurer would then send notices to policyholders, seeking approval. The motion can be stopped if 10 percent of policyholders — a number likely to be in the hundreds of thousands — disapprove.
If the request is approved, policyholders would only then learn how their policies would be changed, how much their payouts would be reduced, and whether they would need to recalculate their retirement plans.
Legally, insurers are allowed to cut guaranteed yields to 3 percent, down from an average peak among major insurers of 6 percent. A guaranteed yield is the rate of investment return an insurer promises policyholders.
In a simulation by insurance actuary Acalax Co., which advises life insurers, policyholders now in their 40s who bought whole-life insurance against death 15 years ago are likely to be hurt the most if an insurance yield is lowered to 3 percent. On a policy that promised a 10 million yen payout upon death, the policyholder’s family would receive only 6.6 million yen, he said.
But Acalax President Yoshiki Sakamoto cautions against panicking and terminating contracts. It may not be possible to find competitive policies at age 40 in the current low-interest-rate environment, he said.
Sakamoto applauded the new move for spurring new awareness among customers and making them think long and hard before buying insurance. Japanese have so far thought too lightly about what is often their second-largest purchase during their lifetime next to buying a home, he said.
Journalist Takahashi fumes that over the long term, the move will lead to higher premiums for lower payouts, as disillusioned customers flee.
“The new legislation will hurt the elderly and the weak most, as well as others who cannot change insurance companies,” she predicted.
Some policyholders have already turned tail and run, said Dai-ichi Mutual Life Insurance Co. President Tomijiro Morita.
Talk of life insurers lowering guaranteed yields may have caused policy terminations to post year-on-year rises in the months of June and July, he said, adding that new business in the same months fell slightly.
“Please keep in mind that this debate is all about something that might happen in the future, not about any present danger,” he told reporters following his appointment Friday as chairman of the Life Insurance Association of Japan.
But companies have been effectively changing promised payouts by encouraging customers to switch from high-yield policies to low-yield ones, said Hiroyuki Shingoshi, a manager at Acalax.
“Sales personnel come to the door, promise higher payouts, but don’t explain that policyholders will have to pay more in premiums for the next 10 years,” he said.
Shingoshi has seen people complain that in this way their yields were slashed to less than 1 percent from 6.5 percent.
If you want to know whether your company will use the new legislation, look at the way sales people work, as well as the insurer’s financial standing, Shingoshi said.
“A company’s true colors come out through its people,” he said.
Many Japanese insurers promised high yields to attract customers during the bubble economy in the late 1980s. But plunging stock prices and record-low interest rates have made such promises hard to keep, weighing heavily on the life insurance industry.
The vulnerability of the sector to flight by policyholders and another rampage of stock falls scares policymakers.
Japanese hold on to 1.27 quadrillion yen worth of life insurance, while 260,000 people look to the industry for jobs. Insurers are one of the nation’s largest financial players, with 172.5 trillion yen of assets invested.
They are also some of the leading shareholders for the nation’s largest banks, which in turn provide long-term loans that insurers count toward their capital. They are staunch supporters of the Liberal Democratic Party, with 21 life insurers pitching in a total of 1.38 billion yen to the LDP in the decade through 2001, with some even contributing on the eve of their collapse.
Standard & Poor’s will review the status of subordinated debt that it included in insurance companies’ capital, after the Diet’s enactment Friday of a law allowing life insurers to cut guaranteed yields to prevent insolvency.
“If the subordinated debt, including subordinated bonds, no longer qualifies as capital, this may lead to a downgrade of some insurers,” S&P said in a news release issued shortly after the House of Councilors enacted the revised Insurance Business Law.