The Wall Street Journal


July 18, 2003 11:01 a.m. EDT








Japan Passes Law Allowing
Life Insurers to Cut Payouts


TOKYO -- Japanese legislators passed a law Friday allowing the country's troubled life insurers to break their contracts with clients and lower the amount they are obliged to pay out on policies, in a stark reminder of just how fragile Japan's financial system remains.

The law, which takes effect next month, is limited to insurers facing insolvency, something few companies would want to admit. Financial-rating agency Standard & Poor's issued a report immediately saying it would treat any reduction of yields, which are supposed to be guaranteed, as a default.

Still, the fact that the law sailed through Parliament shows that the financial condition of some insurers may have deteriorated to the point that a cut may be needed as a last resort. While the plight of Japan's teetering banking system has received more attention, the country's insurance industry -- the world's second largest with policies valued at a combined $10.5 trillion -- faces equally severe difficulties, analysts say.

The industry's fate has enormous implications for Japan's overall economic health, because life insurers are among the biggest holders of stocks and government bonds, and play an important role in the webs of cross-shareholdings that bind corporate Japan together.

Insurers have seen their massive stock holdings clobbered by the decade-long equity-market slide. Near-zero interest rates have also pinched insurers, who still must pay out policies whose average guaranteed yield is above 3%. Last year, the shortfall between what insurers paid out to policyholders and what they actually earned on investments was 1.07 trillion, or $9 billion. These "negative yields" have helped lead seven major Japanese life insurers to fail during the past six years.

New competition is also coming from a growing number of foreign companies, such as American International Group Inc. and Prudential Financial Inc., which have taken over bankrupt Japanese insurers. The foreign firms' market share has risen to 13% last year from 3% six years ago, according to Standard & Poor's.

Passage appears to be yet another blow to Japan's individual savers, who have been squeezed by vanishing interest rates on bank deposits and a steady collapse in stock-holdings, all as personal incomes have dropped. The guaranteed returns on their insurance policies were a final refuge from deflation.

Analysts have worried a cut in yields would likely spark an exodus of consumers from life-insurance policies altogether. Younger potential clients are already spooked, leaving insurers with an aging population of policy holders. The industry has also been shaken by a "flight to quality," as policyholders switch to bigger and healthier companies.

The head of one of Japan's biggest insurers sought to reassure policyholders by saying that a recent stock rally had taken off pressure -- for now. "If current market conditions continue, no company will cut guaranteed yields," Dai-Ichi Insurance Co. President Tomijiro Morita said.

Write to Martin Fackler at martin.fackler@wsj.com1


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Updated July 18, 2003 11:01 a.m.


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