JAPAN Trends and Developments Contributed by: Kazuo Yoshida and Tomonori Ogawa, Mori Hamada
Increase in Reinsurance Transactions in the Japanese Market and Regulatory Framework Background – introduction of economic value- based solvency regulations and development of insurance products that leverage reinsurers’ investment capabilities In recent years, the amount of reinsurance ceded by Japanese insurance companies has increased sharply. One reason for this is the introduction of new econom- ic value-based solvency regulations. Under the new regulations, the economic value-based solvency ratio (ESR) will be calculated, as an indicator of the finan- cial soundness of insurers, by assessing the assets and liabilities of insurers on an economic value basis. The Japan Financial Services Agency (JFSA) has been preparing to align the implementation of the regula- tions in 2025 with the scheduled introduction of the Insurance Capital Standard (ICS) agreed by the Inter- national Association of Insurance Supervisors (IAIS). The ESR can be profoundly affected by fluctuations in interest rates, especially when an insurer has exist- ing blocks of insurance contracts with high long-term interest rates. Many Japanese insurance companies, especially life insurance companies, are entering into reinsurance agreements, which are sometimes called “asset-intensive reinsurance,” with overseas reinsur- ers, to reduce interest rate risk and improve their ESR. In addition, the recent increase in life reinsurance transactions appears to include arrangements aimed at developing insurance products that leverage rein- surers’ investment capabilities. Recently, reinsurers affiliated with private equity funds have been active- ly increasing their transactions. This has led to the development and provision of insurance products with higher projected interest rates, utilising the investment capabilities of those reinsurance companies. In this context, the JFSA has become interested in the above-mentioned reinsurance transactions, mainly from the perspective of counterparty risk and concen- tration risk. The JFSA emphasises the importance for Japanese insurance companies establishing appro- priate internal management systems, independently analysing risks and returns, being evaluated by sec- ond- and third-line functions, including risk manage- ment departments, and ultimately ensuring that the rationality for the transactions is institutionally decided
in accordance with each life insurance company’s risk appetite. In addition, the JFSA raised expectations for Japanese insurance companies’ risk management systems, focusing on: • the collection of necessary information for deci- sion-making in relation to reinsurer selection; • the conclusion of reinsurance contracts aligned with the purposes and risks of reinsurance; • strengthening of monitoring of reinsurers’ financial soundness and liquidity risk; and • development of robust measures, such as estab- lishing responses in anticipation of the deteriora- tion of reinsurers’ credit status. Issues for offshore reinsurers in the Japanese market Licensing requirements and considerations for offshore reinsurers Under the Insurance Business Act of Japan (IBA), “insurance business” includes any business that receives insurance premiums in exchange for the agreement to compensate someone for damages caused by uncertain events. This definition is broad enough to capture reinsurance businesses. Generally, an insurance business must be licensed. The excep- tion to this licensing requirement is a reinsurance transaction carried out “offshore” (ie, outside Japan) as it is exempted from regulations on overseas direct insurance. If a reinsurer operates a “(re)insurance business” on an “offshore” basis (ie, it carries out all underwriting, claims handling, contract negotiations and other activities from outside Japan and does not utilise its own employees or agents to conduct any such activities in Japan), then it is not required to obtain an insurance business licence under the IBA and, thus, is not subject to the supervision of the JFSA, any regulatory (including reporting) obligations, or any capital requirements regardless of the amount of business it conducts with Japanese cedants. However, cedants must pay attention to regulatory requirements for them to obtain credit for reinsurance on their financial statements. Licensed cedants (insur- ers) in Japan must hold policy reserves for the policies they have insured. There is, however, an exemption for policies that have been reinsured. This exemption is available without limitation for reinsurance trans-
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