Preventing Misconduct at Nonlife Insurers: Structural Problems in Industry Must be Tackled

Editorial

18:23 JST, April 1, 2024

The Financial Services Agency (FSA) is said to be poised to tighten regulations on nonlife insurance companies, on suspicion that structural problems in the industry are behind a string of recent misconduct at some insurers.

The hope is that insurers will review their relationships with partners and their business practices to remove the roots of the misconduct.

After the issue of fraudulent insurance claims by major used car dealer Bigmotor Co. came to light, its partner Sompo Japan Insurance Inc. was criticized for continuing to do business with the insurer and facilitating the fraud, despite strongly suspecting the practice was improper.

Last year, it was revealed that four major nonlife insurance companies had prearranged the premium amounts in insurance policies mainly for private railway giants. There are suspicions that such conduct constitutes a cartel, in violation of the Antimonopoly Law.

Scrutiny on the industry is becoming increasingly severe, making it essential to thoroughly implement measures to prevent a recurrence of these cases. The FSA has established an expert panel dedicated to this purpose. The panel will study matters such as revising the Insurance Business Law and supervisory guidelines before compiling a report possibly as early as June.

The FSA has identified as problematic the relationship between nonlife insurance companies and their agencies. In many cases, auto repair shops and auto dealers, like Bigmotor, run such agencies.

Nonlife insurance companies should normally be in a position to supervise agencies, but some believe that the power relationship is reversed because large agencies such as Bigmotor have a strong say as a powerful gateway for obtaining insurance contracts.

Currently, there are about 160,000 nonlife insurance agencies nationwide, and monitoring of them must be strengthened.

Based on lessons from the Bigmotor case, the FSA needs to closely supervise agencies, especially large ones. One idea would be for a private third-party evaluating organization to certify the soundness of agencies.

Bigmotor intentionally damaged its clients’ vehicles and charged padded repair fees, raising concerns over the company operating both as an auto repair shop and a nonlife insurance agency. It is also essential to establish a system to prevent fraudulent insurance claims.

Meanwhile, coinsurance policies for companies, in which premiums were found to have been preadjusted in one case, are those that are jointly contracted by several nonlife insurers, not just one, when compensation for infrastructure and other damages tends to be enormous.

In this format, nonlife insurers normally offer premiums to companies separately, but in reality, participating insurers are basically limited to the four major companies, so they would select one insurer to be the organizer for each project and prearrange the premium amounts. A framework should be considered that allows for the participation of a wide range of insurers, such as foreign companies and midsize firms.

It has also become a custom for the purchase of business partners’ products by nonlife insurers to be given strong consideration when contracts are made. Additionally, there is a custom of insurers holding shares in their partners as part of a cross-shareholdings policy. It is necessary to steadily reform such bad practices that hinder healthy competition.

(From The Yomiuri Shimbun, April 1, 2024)