The insurance market in Japan has gradually been deregulated, but is still characterized by extensive cross-shareholdings between the banking and insurance sector. According to the International Monetary Fund's (IMF) 2003 Financial System Stability Assessment (FSSA), Japan has one of the largest insurance markets in the world, despite the relatively small number of licensed companies. The IMF's 2003 FSSA, which assesses Japan's observance of the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in October 2000, states that the establishment of the Financial Services Agency (FSA) in 2000 was key in strengthening and integrating financial sector supervision, although further improvements in a number of areas were desirable. While the FSA has moved toward a more risk-focused approach for the supervision of insurance companies, the lack of a board creates scope for the FSA to be subject to political and industry pressures. Furthermore, it is unclear whether the authorities are capable of enforcing their requirements fully, especially with regard to the valuation of assets and the quality of capital. In February 2008, according to a 2008 International Financial Law Review article by the law firm Nagashima, Ohno & Tsunematsu, a legislative subcommittee on insurance laws under the Ministry of Justice published a draft, with the aim of revising the current insurance rules. The revision would constitute the first amendment to insurance law in 100 years. Despite the information provided above, given the IAIS's revision of the ICPs and Methodology in October 2003, there is insufficient information publicly available regarding Japan's compliance with these more stringent principles.

General Overview

Until the creation of the Financial Supervisory Agency, established under the Financial Reconstruction Commission (FRC), banking and insurance supervision was carried out by the Banking Bureau of the Ministry of Finance (MoF). Similarly, securities firms were supervised by the Securities Bureau. The functions of the Banking Bureau and the Securities Bureau were transferred to the Financial Supervisory Agency in June 1998, and the Agency was subsequently renamed to the Financial Services Agency (FSA) in 2000. The FRC merged into the FSA in January 2001. The FSA has the authority to supervise all insurance companies, and is a member of the International Association of Insurance Supervisors (IAIS).

In 2003, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) in Japan, including an assessment of Japan's observance of the Insurance Core Principles (ICPs) issued by the IAIS in October 2000. The IMF report finds that substantial improvements have been made in the supervisory process since the FSA was set up as the regulatory body in Japan. The insurance market has gradually been deregulated, and the FSA has moved toward a more risk-focused approach for the supervision of insurance companies. However, it is unclear whether the authorities are capable of enforcing their requirements fully, especially with regard to the valuation of assets and the quality of capital. The IMF's 2003 FSSA notes that the MoF has effective management control over the FSA, which further lacks a board with outside members. This institutional structure creates scope for the FSA to be subject to political pressures. Given the IAIS's revision of the ICPs and Methodology in October 2003, there is insufficient information publicly available regarding Japan's compliance with these more stringent principles.

At the time of the 2003 FSSA, the Japan Post, which offers deposits, a payment system, and life insurance products, benefited from an explicit government guarantee. The government financial institutions (GFIs), which offer long-term loans with low fixed interest rates, also benefited from subsidies. Furthermore, the Japan Post and most GFIs were subject to limited prudential supervision. The long-term involvement of the public sector in financial intermediation has impeded the development of the financial system. The IMF report recommended reducing the involvement of the government in financial intermediation, by restricting the activities of the GFIs, as well as postal savings and insurance schemes. As of October 1, 2007, according to the IMF's 2008 Selected Issues report, efforts of the government to privatize the Japan Post have resulted in the creation of a single holding company with four separate businesses, namely the Japan Post Service, Japan Post Network, Japan Post Bank (JPB) and Japan Post Insurance (JPI). Under this new structure, the JPB and JPI are subject to similar regulatory and supervisory requirements as other private institutions.

The legal framework for insurance supervision is mainly based on the Insurance Business Act No. 105 of 1995, the Law on Sales of Financial Product and the Consumer Contract Act of 2000, and the Commercial Code. As noted on the Life Insurance Association of Japan (LIAJ) website, the objective of the Insurance Business Act is to protect policyholders' interests through "the sound management of insurance companies and fairness of insurance soliciting activities." Furthermore, the Law on Sales of Financial Product, and the Consumer Contract Act were promulgated to protect the interests of consumers. The U.S. Department of Commerce (DoC) 2008 Country Commercial Guide states that the Financial Instruments and Exchange Act No. 25, which replaces the Securities and Exchange Law, may help promote investment in the financial, insurance, and real estate sectors by establishing "a more flexible regulatory system for financial markets" and applying "a uniform set of rules for similar financial instruments." The Financial Instruments and Exchange Act was last revised in September 2007. According to a May 2008 article in the International Financial Law Review (IFLR) by the law firm Nagashima, Ohno & Tsunematsu, a bill to amend the Act was submitted to the Diet on March 4, 2008, which will create a new market for professional investors; revise firewall regulations affecting banks, securities, and insurance firms; and expand the administrative monetary penalty system. On February 24, 2008, per a 2007 IFLR article by the same law firm, a legislative subcommittee on insurance laws under the Ministry of Justice (MoJ) published a draft, with the aim of revising the current insurance rules. The study highlights that the enactment in the Diet of a bill based on this draft would constitute the first amendment to insurance law in 100 years.

According to the IMF's 2003 assessment, Japan has one of the largest insurance markets in the world, despite the relatively small number of licensed companies. As at February 1, 2008, according to the General Insurance Association of Japan (GIAJ) 2006-2007 Fact Book, there are a total of 51 general insurance companies operating in Japan, of which 29 are licensed as domestic insurers, including 4 foreign capital domestic insurers, while 22 are registered as foreign insurers. In 2008, total assets amounted to 37,274.7 billion yen, a 1.8 percent increase from the previous year. The IMF report highlights that while there are no direct ownership linkages between insurance companies and banks, extensive cross-shareholding takes place between the banking and insurance sector in terms of capital and capital-like instruments. In particular, insurers hold shares, preferred shares and subordinated debt issued by banks. Similarly, banks hold foundation funds (i.e. form of capital for mutual companies), and subordinated debt issued by insurance companies.

The Principles

ICP 1 Conditions for effective insurance supervision

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Substantial improvements have been made in the supervisory process since the FSA was set up as the regulatory body in Japan, according to the IMF's 2003 FSSA. The insurance market has gradually been deregulated, and the FSA has moved toward a more risk-focused approach for the supervision of insurance companies by joining on-site inspection efforts with offsite monitoring. Per the same report, the IAJ has issued to its members standards of practice, which are endorsed by the FSA. Actuaries are expected to comply with the standards, and adhere to reporting requirements. The IMF report advises enhancing "further cooperation with auditors and actuaries in the supervisory process" (p. 53).

The legal framework for insurance supervision is mainly based on the Insurance Business Act, the Law on Sales of Financial Product, the Consumer Contract Act, and the Commercial Code. According to the U.S. DoC 2008 report, the Financial Instruments and Exchange Act, which replaces the Securities and Exchange Law, may help promote investment in the financial, insurance, and real estate sectors by establishing "a more flexible regulatory system for financial markets" and applying "a uniform set of rules for similar financial instruments." The Financial Instruments and Exchange Act was last revised in September 2007. According to a May 2008 IFLR article by the law firm Nagashima, Ohno & Tsunematsu, a bill to amend the Act was submitted to the Diet on March 4, 2008, which will create a new market for professional investors; revise firewall regulations affecting banks, securities, and insurance firms; and expand the administrative monetary penalty system. On February 24, 2008, per a 2007 IFLR article by the same law firm, a legislative subcommittee on insurance laws under the MoJ published a draft, with the aim of revising the current insurance rules. The study highlights that the enactment in the Diet of a bill based on this draft would constitute the first amendment to insurance law in 100 years. Despite the information provided above, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 2 Supervisory objectives

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As stated on the LIAJ website, the mandate of the FSA is "to secure stability of the domestic financial function and thus to protect depositors, insurance policyholders, and securities investors, ultimately to ensure smooth operation of the financial system by means of inspection and oversight of financial institutions such as banks, insurance companies, and securities companies." However, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 3 Supervisory authority

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Until the creation of the Financial Supervisory Agency, established under the FRC, banking and insurance supervision was carried out by the Banking Bureau of the MoF. Similarly, securities firms were supervised by the Securities Bureau. The functions of the Banking Bureau and the Securities Bureau were transferred to the Financial Supervisory Agency in June 1998, and the Agency was subsequently renamed to the FSA in 2000. The FRC merged into the FSA in January 2001. The FSA has the authority to supervise all insurance companies, and is a member of the IAIS.

The institutional structure in Japan creates scope for the FSA to be subject to political pressures, according to the IMF's 2003 FSSA. The MoF has effective management control over the FSA, which does not have a board or other decision making body. In addition, the FSA lacks sufficient staff with extensive industry experience. There is also a need for more expertise in the actuarial and reinsurance areas. Following the completion of the IMF assessment, the FSA hired several actuaries, as well as an expert in reinsurance. Responding to the IMF assessment, the FSA states that it has significantly increased its staff for on-site inspections and offsite monitoring in the insurance sector. The FSA intends to further strengthen its staff for on-site inspections and offsite monitoring. However, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 4 Supervisory process

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There is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 5 Supervisory cooperation and information sharing

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The IMF's 2003 FSSA notes that the FSA conducts regular meetings with auditors and actuaries, and collaborates frequently with the Institute of Actuaries of Japan (IAJ). It is recommended that the FSA cooperate further with foreign insurance supervisory authorities. With regards to information sharing, the FSA believes that it is sufficient to deal with related issues "on an ad hoc basis as the need arises" (p. 52), rather than through the conclusion of memoranda of understanding. Responding to the IMF assessment, the FSA states that it has cooperated closely with supervisors in other jurisdictions, and has exchanged information by the means of mutual visits by inspectors and other forms of communication. The FSA intends to further improve cooperation with foreign supervisors. Nonetheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 6 Licensing

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There is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 7 Suitability of persons

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There is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 8 Changes in control and portfolio transfers

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The IMF's 2003 FSSA recommends that the FSA finalize the implementation of its new rules on controls over ownership transfers. Responding to the IMF assessment, the FSA points out that "the new rules in respect of requirements to be met when a change in control of insurance companies occurs became effective in April 2002 and were to be completely implemented in April 2004 when the transitional period expires" (p. 53). However, there is insufficient information with regards to the implementation of these new rules.

ICP 9 Corporate governance

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The IMF's 2003 FSSA notes that the FSA has issued guidelines to outline commendable corporate governance practices in insurance companies. The guidelines constitute the interpretation of the law, but are not statutory instruments. The IMF report recommends incorporating these rules in the statute or in formal regulation. Responding to the IMF assessment, the FSA points out that the Insurance Business Act and the Commercial Code provide the basic requirements for the corporate governance of insurance companies. The FSA further states that "the administrative guidelines stipulate the practical application of the law, and the inspection manual describes check-points for on-site inspection, both including corporate governance and internal control requirements" (p. 53). The FSA will, however, take appropriate measures, including the adoption of new regulations, when deemed necessary. Nonetheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 10 Internal control

II

The IMF's 2003 FSSA points out that the FSA has issued guidelines to outline commendable internal control practices in insurance companies. The guidelines constitute the interpretation of the law, but are not statutory instruments. The IMF report recommends incorporating these rules in the statute or in formal regulation. Responding to the IMF assessment, the FSA states that "the administrative guidelines stipulate the practical application of the law, and the inspection manual describes check-points for on-site inspection, both including corporate governance and internal control requirements" (p. 53). The FSA will, however, take appropriate measures, including the adoption of new regulations, when deemed necessary. Nonetheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 11 Market analysis

II

The IMF's 2003 FSSA notes that there is extensive disclosure of financial information concerning insurance companies in Japan, ensuring widely available insurance data. Information is namely made available through the websites and publications of the LIAJ, the GIAJ, and the Non-Life Insurance Institute of Japan (Sonposoken). However, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 12 Reporting to supervisors and off-site monitoring

II

The IMF's 2003 FSSA reports that the IAJ has issued to its members standards of practice, which are endorsed by the FSA. Actuaries are expected to comply with the standards, and adhere to reporting requirements. According to a regulatory and standard-setting framework assessment published by the Japanese Institute of Certified Public Accountants in December 2004, while the auditing and accounting standards of insurance companies are identical to those of other industries, certain additional disclosure requirements and practices are required. In this respect, the FSA has the authority to monitor insurance accounting and auditing practices. In January 2005, according to the 2005 update available from the Deloitte & Touche IAS Plus website, the International Accounting Standards Board (IASB) and the Accounting Standards Board of Japan (ASBJ) launched a joint project to reduce differences between IFRSs and Japanese accounting standards. The ASBJ was established in July 2001 as a private sector organization, under the authority of the FSA. Per the April 2008 update, the IASB met with representatives of the ASBJ in Tokyo from 8-9 April 2008. This was their second meeting in Tokyo since the announcement of the initiative to accelerate convergence between Japanese GAAP and IFRSs in August 2007. Nevertheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 13 On-site inspection

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The IMF's 2003 FSSA reports that the FSA has moved toward a more risk-focused approach for the supervision of insurance companies by joining on-site inspection efforts with offsite monitoring. On-site inspections include "reviewing with company management the risk management system and in attempting to assess the effectiveness of these systems and the remedial action that the risk management process may require" (p. 51). Furthermore, on-site inspections are conducted by staff with extensive supervision experience. It is advised that the FSA be given "legal authority to delegate on-site inspection functions totally or partly to third parties such as independent actuaries, auditors, etc." (p. 31). Nonetheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 14 Preventive and corrective measures

II

The IMF's 2003 FSSA states that new procedures and skills will have to be developed by the supervisors "to ensure they can identify financial problems in companies in time to take corrective action" (p. 51). Nonetheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 15 Enforcement or sanctions

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There is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 16 Winding-up & exit from the market

II

There is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 17 Group-wide supervision

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There is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 18 Risk assessment and management

II

The IMF's 2003 FSSA notes that the FSA has moved toward a more risk-focused approach for the supervision of insurance companies. In the context of its supervisory process, the FSA focuses on risk management and disclosure. The IMF report recommends imposing a limit on transactions with related parties, as well as a ceiling on the maximum exposure to any single risk. The FSA should further carefully monitor the strong concentration in domestic property of non-life insurance companies. With regards to the reform of the GFIs, particularly Japan Post, the IMF's 2007 Article IV Consultation Report highlights that the successor savings and insurance entities will be supervised by the FSA in the same manner as private financial institutions. The FSA will further ensure that the savings and insurance entities have "sound risk management systems in place to avoid possible disruptions" (p. 23). As part of its Basic Policy for Financial Inspections in Program Year 2007, the FSA states on its website that it will examine is the appropriateness of insurance companies' risk management practices with regards to diversified investment vehicles. Nevertheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 19 Insurance activity

II

The IMF's 2003 FSSA recommends improving "the procedure for the recognition of reinsurance in the calculation of technical provisions of primary insurers" (p. 53). Nonetheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 20 Liabilities

II

The IMF's 2003 FSSA notes that life insurance companies and their actuaries need to put in place "appropriate policy reserves for all policies taking into account current investment returns and other conditions" (p. 24). It is further recommended that insurers "revalue their policy liabilities to account for currently lower investment returns" (p. 24). Deficiency reserves against known losses on investment returns should also be established by insurance companies. However, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 21 Investments

II

As recommended in the IMF's 2003 FSSA, limits on investments with related parties should be imposed. The IMF's 2003 FSSA points out that "the FSA is reluctant to establish investment limits, believing that these would place excessive impediments on a company's ability to manage its investment portfolio effectively and efficiently" (p. 52). Responding to the IMF assessment, the FSA states that it establishes individual investment limits when deemed absolutely necessary "in order to avoid putting excessive impediments on investment activities and enable efficient investment" (p. 54). Nonetheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 22 Derivatives and similar commitments

II

According to the IMF's 2003 FSSA, insurers' participation in derivative markets should be limited. It is recommended that the FSA enforce "exposure limits for derivatives until their capacities for assessing the insurance companies' internal risk control and management systems are adequately developed" (p. 25). Nonetheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 23 Capital adequacy and solvency

II

The IMF's 2003 FSSA recommends strengthening solvency ratios using the FSA formula, as they do not give an accurate picture of financial health. The FSA should further review its formula "taking into account the risk-based capital formulae employed by the companies and make adjustments as necessary" (p. 25). Nonetheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 24 Intermediaries

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As part of its Basic Policy for Financial Inspections in Program Year 2007, the FSA states on its website that it will examine the management of insurance agents, including banks.

ICP 25 Consumer protection

II

As noted on the LIAJ website, the objective of the Insurance Business Act is to protect policyholders' interests through "the sound management of insurance companies and fairness of insurance soliciting activities." Furthermore, the Law on Sales of Financial Product and the Consumer Contract Act were promulgated to protect the interests of consumers. Nevertheless, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 26 Information, disclosure & transparency towards the market

II

The IMF's 2003 FSSA notes that there is extensive disclosure of financial information concerning insurance companies in Japan, ensuring widely available insurance data. Information is namely made available through the websites and publications of the LIAJ, the GIAJ, and the Sonposoken. However, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 27 Fraud

II

There is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

II

The IMF's 2003 FSSA highlights that there have been substantial positive developments in Japan's Anti-Money Laundering (AML) and Combating the Financing of Terrorism. (CFT) framework. The FSA is responsible for monitoring compliance by non-government-owned banks, insurance, and securities firms with AML/CFT requirements, as stated in the IMF's 2004 report on FATF Recommendations for AML/CFT. The 1999 Law Concerning Punishment of Organized Crime, Control of Crime Proceeds and Other Matters No. 136 requires financial institutions, including banks, securities, and insurance companies to provide suspicious transaction reports directly to the Japan Financial Intelligence Center (JAFIC). The 2003 Law on Customer Identification and Retention of Records of Transactions by Financial Institutions further establishes customer identification and record keeping requirements for financial institutions. According to the IMF's 2004 report on FATF Recommendations, the FSA and MoF have published guidelines for financial entities on general compliance issues, including customer due diligence. In this regards, it is recommended that the JAFIC, in cooperation with the supervisors, "provide the financial institutions with additional guidance on complying with the AML/CFT requirements to raise awareness of money laundering and financing of terrorism" (p. 9). Despite the information provided above, there is insufficient information publicly available addressing Japan's compliance with this principle as revised in 2003 by the IAIS.