a day ago
Scandals put Japanese nonlife insurers' business model at a crossroads
The nonlife insurance industry stands at a crossroads as it confronts the need to overhaul its long-standing business model.
For nearly three decades, since the revision of the insurance business law in 1996, the sector has undergone steady deregulation. A series of recent scandals, however, has brought to light deeply entrenched and problematic business practices within the industry.
As Japan moves toward an era of fairer competition, nonlife insurers now face pressure to reform their business structures and adapt to new market expectations.
Before the law was revised, insurance premiums for major products, such as fire and automobile insurance, were set uniformly for all companies under government regulation. The system was intended to prevent excessive competition and potential bankruptcies. As a result, nonlife insurers were unable to differentiate their services through pricing.
In this environment, companies instead focused on building stronger relationships with customers, sales agents and other business partners to remain competitive.
Even after legal reforms allowed greater flexibility in product design and premium setting, restrictive business practices persisted in various forms, continuing to distort healthy competition.
In June 2023, it was discovered that four major nonlife insurers had colluded to prearrange premiums when bidding for joint insurance contracts, in which a company secures coverage from multiple nonlife insurers.
The scandal exposed a widespread industry practice in which the number of shares held in a corporate client played a key role in securing and retaining insurance contracts. It also revealed that insurers frequently provided excessive services, such as purchasing products from their clients, in an effort to win or maintain business.
The following month, former Bigmotor, a major used automobile dealer and repair service provider, was found to have engaged in fraudulent insurance claims.
In exchange for being assigned auto insurance contracts with buyers of secondhand vehicles sold at Bigmotor, nonlife insurers provided the company with excessive favors. They included referring vehicles involved in accidents to Bigmotor for repairs, purchasing vehicles with their employees' own money and assisting at Bigmotor's sales events.
"Since insurance products lack patent protection and can easily be replicated, a unique and inefficient competitive structure has developed in the industry, making it difficult to eliminate the detrimental practices of competing in areas beyond core insurance offerings," said Satoru Komiya, chairman of Tokio Marine Holdings, during his term as president.
In the wake of recent scandals, Japan's Financial Services Agency has repeatedly imposed administrative penalties on major nonlife insurance companies. These measures are intended to push them away from a relationship-dependent business model, which has become fertile ground for misconduct.
In response to shifting market conditions, MS&AD Insurance Group Holdings is considering the dissolution of its dual-company structure for nonlife insurance operations. The holding company is discussing plans to merge its two key subsidiaries — Mitsui Sumitomo Insurance and Aioi Nissay Dowa Insurance — which have operated separately since the 2010 business integration that formed MS&AD.
Commenting on the proposed realignment, an industry observer noted that with competition intensifying, "the scale of business will become increasingly important in various respects."
Japan's insurance market is contracting, driven largely by the declining national population. Furthermore, increasingly severe natural disasters and more complex risk factors are placing additional pressure on insurers.
To remain competitive in this challenging environment, MS&AD President Shinichiro Funabiki stresses the importance of "strengthening capital so that a single company can take on large risks."
Major nonlife insurers are seeking to differentiate themselves in their core businesses. They are developing innovative products that leverage artificial intelligence and big data, capitalizing on their economies of scale to gain an edge in the market.
To strengthen the price competitiveness of their products, expand overseas operations and invest in new fields, companies will need significant capital, a reallocation of human resources and enhanced business efficiency.
Tokio Marine aims to "strengthen its ability to provide solutions in areas such as disaster preparedness and mitigation that other nonlife insurers cannot easily replicate," Komiya said.
More than a quarter century after the insurance industry was liberalized through legislative reforms, Japanese nonlife insurance companies are finally taking meaningful steps toward genuine competition.
