Chapter 3 An Overview of Japanese Non-life Insurance Market
Japanese Insurance market has ranked second only to the United States for the past decades all over the world. Japanese insurance industry can be classified into life-insurance and non-life insurance. The total insurance premium written in 2013 was 531,506 million USD, accounting for 11.45% of the share of world market. As shown in table 1, the premium volumes of life insurance and non-life insurance were 422,733 and 108,773 separately in millions of USD next only to the
United States.
Table 1. Total premium volume in millions of USD in 2013 Ranking Country Life
Resource: Swiss Re, Sigma, No. 3, 2014
Besides, we can also learn more about the importance of Japanese insurance market from other indicators that are insurance density and insurance penetration. As shown in table 2, the insurance density in Japan was 4,207 in USD and ranked second in Asia in 2012, which means that every resident in Japan averagely paid $4,207 USD as their insurance premium.
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Table 2. Insurance density: premiums per capita in USD in 2013 Ranking Country Total business Life business Non-life business
1 Switzerland 7,701 4,211 3,490
Resource: Swiss Re, Sigma, No. 3, 2014
Table 3. Insurance penetration: premiums as a % of GDP in 2013 Ranking Country Total business Life business Non-life business
1 Taiwan 17.6 14.5 3.1
Resource: Swiss Re, Sigma, No. 3, 2014
As shown in table 3, the insurance penetration in Japan was 11.1%, meaning that the total insurance premium accounts for 11.1% of gross domestic product in 2013. Both of the indicators reflect that Japanese insurance industry has already been highly-developed and the residents have strong sense of the importance of insurance. Hence, insurance takes a significant role in Japanese
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economy. From the two indicators, we learn that Japanese insurance industry has already been highly-developed and the residents have strong sense of the importance of insurance in their daily life, which reflects that insurance takes a significant role in Japanese economy.
Japanese authority used to implement protective policies and enacted many restrictions on financial institutions, leading to a closed market. However, Japanese authority had to make some changes in financial market so as to respond to the trend of economic globalization. In 1996, Prime Minister Hashimoto instructed the ministries and governmental agencies concerned to tackle the issues on financial system reform to transform the Japanese financial market into an international financial market. This is the so-called Japanese Big Bang, which aims at three main principles: “Free”, “Fair” and “Global”. "Free" means creating a free market where market principles prevail through liberalization of such areas as entering into business, financial product planning, and pricing. "Fair" means transforming the financial market into a fair and reliable market through clearly defined rules with increased transparency. "Global" is targeted toward reforming the market to fit the global era through upgrading the systems of law, accounting and supervision system in compliance with global standards.
In April 1996, Japanese Insurance Business Law had been amended. The regulations on the calculation of rate in non-life insurance industry had been reformulated and the cross-operation between life insurance company and property-liability insurance company had been permitted.
The authority also introduced the insurance broker system, enhanced the flexibility of rate and the disclosure of finance. The procedures mentioned above facilitated the positive competition and
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the development of insurance business, which had a significant impact on Japanese insurance industry.
Nonetheless, the policy of rate liberalization in 1998 triggered vicious price competition in insurance market, resulting in some companies bankrupting and some mergers and acquisitions after then. As shown in figure 1, the growth rate of premium slumped, keeping negative for several years because of the price cutting competition. Moreover, in order to earn more market share, insurers tended to write policies applied by those with higher risk, resulting in the ascent of loss ratio since 1998 (see figure 2). Consequently, we can also observe that two years later the number of non-life insurance company started declining in figure 1 due to the impact of rate liberalization.
In 2000, the cross-operation between insurance industry and other financial industry had been permitted, and banks were allowed to sale insurance product in 2001. This created a new marketing channel for insurance industry, causing the growth rate of premium soared rapidly to 7.2% (see figure 1) and the reduction of underwriting expense, therefore we can observe the expense ratio started reducing from 2002 in figure 2. However, owing to the financial tsunami in 2008, the growth rate of premium slumped to -4.28% and kept negative for several years(see figure 1).
Not until 2011 did the growth rate of net premium turn out to be positive in figure 1 due to the occurrence of Tohoku earthquake and tsunami in Japan, which spurs the need of insurance and yet causes the loss ratio hovering rapidly around 80% because of the huge loss (see figure 2).
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As for mergers and acquisitions, Mitsui M&F and Sumitomo M&F were merged into Mitsui Sumitomo Insurance in October 2001. In April 2002, Tokio F&M, ranking first in Japanese non-life insurance industry, merged a relatively small company Nichido F&M into Tokio Marine Nichido and stayed the most profitable and highest market share in Japanese non-life insurance market. In July 2002, Yasuda F&M, Nissan F&M and Taisei F&M ,all belonging to Mizuho Financial Group, were merged into Sompo Japan and ranked second only to Tokio Marine Nichido.
In April 2010, Mitsui Sumitomo Insurance merged Aioi and Nissay Dowa into MS&AD, becoming the largest non-life insurance group in Japan and ranking seventh all over the world. At the same year, Sompo Japan and Nippon Koa were also merged into NKSJ. Since then, the three largest non-life insurance groups started to take shape, and they are Tokio Marine Nichido, MS&AD and Sompo Japan.
As of 2013, there are totally 52 general insurance companies operating in Japan containing 30 domestic general insurance companies (2 exclusively operating reinsurance business insurers) and 22 foreign non-life insurance (4 operating Protection and indemnity business insurers and 5 operating reinsurance business insurers included).
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1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
# of Company Growth Rate of Premium
Figure 1. Number of non-life companies and growth rate of total premium from 1986 to 2012
Note: operating reinsurance business excluded Resource: Statistic Japan
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Figure 2. Loss ratio and expense ratio from 1986 to 2012
Resource: Statistic Japan 30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Loss ratio Expense ratio Combined ratio
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