Administrative Action against Nonlife Insurers: 4 Major Firms Showed Serious Disrespect for Laws, Regulations

Editorial

16:19 JST, December 28, 2023

Four major nonlife insurance companies have received administrative punishments simultaneously. The firms’ disregard for clients and disrespect for laws and regulations is wholly unacceptable. Regaining the public’s trust will be a difficult challenge.

Based on the Insurance Business Law, the Financial Services Agency has issued business improvement orders to Tokio Marine & Nichido Fire Insurance Co., Sompo Japan Insurance Inc., Mitsui Sumitomo Insurance Co. and Aioi Nissay Dowa Insurance Co., in connection with prearranged premiums for corporate insurance policies.

Making agreements in advance to adjust insurance premiums among companies can be construed as a cartel in violation of the antimonopoly law. According to the FSA, these inappropriate contracts were drawn up among 576 businesses.

Speaking at a press conference, Finance Minister Shunichi Suzuki, who also serves as financial services minister, strongly criticized the firms involved, saying their acts were “highly malicious.” It is entirely natural for the punishment to be severe.

Compensation payouts for damages in insurance policies for companies tend to be extremely high, making it difficult for single nonlife firms to underwrite such possibilities. Therefore, insurance policies are often jointly handled by multiple firms in a form of coinsurance.

Occasionally, bidding is conducted in cases of coinsurance. But even in cases where contracts are coinsured, participating nonlife insurance companies are supposed to offer premiums individually to corporate clients.

The prearranged premiums were uncovered when major private railway company Tokyu Group flagged the practice. Other similar cases came to light one after another — including one involving East Japan Railway Co. (JR East) — prompting the FSA to launch an investigation into the actual situation.

It is highly likely that the four nonlife insurers set premiums high through prearrangements, forcing corporate clients to pay relatively high fees. Such behavior exhibits a basic contempt for clients.

Since the latter part of the 2010s, nonlife insurers have seen fire insurance profits fall due to an increase in serious natural disasters. Against this backdrop, contracts in question have been sharply increasing since 2017 due to sales staff being strongly pressured by management to increase profits, the FSA said. Such administrations bear a heavy responsibility.

According to an FSA survey, more than 30% of the inappropriate contracts were concluded with the four insurers being aware that such deals were illegal or improper. In more than 40% of the cases, department heads or section chiefs were said to be aware of improprieties. In spite of that, they could not halt such prior arrangements. This is clearly dysfunctional corporate governance.

Another astonishing factor is that 40% of the inappropriate cases were handed over orally or in written form.

The nonlife insurance industry has repeatedly been reorganized and consolidated into the current four major companies. The market share of these firms’ net premium revenues — tantamount to sales — exceeds 80%. This oligopolistic structure likely gave rise to cozy relations among the companies in question.

The four firms are set to submit business improvement plans to the government by the end of February. The key will be whether they will be able to produce effective measures to prevent recurrences.

The Japan Fair Trade Commission this month also conducted on-site inspections at the four major nonlife insurers under the antimonopoly law on suspicion that they constituted a cartel. It is hoped that the antimonopoly watchdog will clarify the entire picture of the situation and deal with the issue strictly.

(From The Yomiuri Shimbun, Dec. 28, 2023)