INSURANCE BUSINESS LAW (effective 1 April 1996)
The following is an English summary of some of the main points of the new Insurance Business Law which became effective on 1 April 1996. The previous law of 1940 was revised as part of the comprehensive reform of the Japanese insurance system.
The revisions was based on three principles,i.e.
- promoting competition and enhancing efficiency through deregulation and liberalization
- preserving soundness of business, and
- ensuring fairness and equity in business operations.
The following are provided for in the new Insurance Business Law:
- mutual entry between the life and the non-life insurance businesses,
- introduction ofa notification system for certain products and premium rates,
- introduction of an insurance brokerage system,
- introduction of solvency margin standards, and
- establishment of a Policyholders' Protection Fund.
The following summary is made by Mizuho Securities Co., Ltd. based on information provided by the Marine and Fire Insurance Association of Japan, Inc. and the Life Insurance Association of Japan and does not attempt to provide a complete translation. Reference to the relevant articles of the Japanese original are provided in brackets.
- Objectives (Article 1)
- Definition (Article 2)
- License (Article 3)
- Application Procedures for a License
- Examination Criteria for a License (Article 5)
- Amount of Capital or Foundation Fund (Article 6)
- Stock or Mutual Company carrying on Insurance Business (Articles 9 to 96)
- Insurance Business (Articles 97 to 100)
- Subsidiaries (Articles 106 & 107)
- Accounting (Articles 109 to 122)
- Supervision (Articles 123 to 134)
- Portfolio Transfer, Dissolution, Liquidation, etc. (Articles 135 to 184)
- Foreign Insurers (Articles 185 to 240)
- Special Measures to Protect Policyholders (Articles 241 to 270)
- Insurance Distribution (Articles 275 to 300)
- Miscellaneous (Articles 309 to 314)
- Supplemental Provisions (Supplemental Articles)
I. Objectives (Article 1)
The objective of this Law, with due consideration of the public responsibilities of the insurance business, is to protect policyholders'interests by ensuring the sound management of insurance companies and the fairness of insurance soliciting activities, thereby contributing to the stability of people's lives and the sound development of the national economy.
II. Definition (Article 2)
In order to make insurance-related terminology more precise, such words as insurance business, insurance company, foreign insurer, life insurance solicitor, non-life insurance agent, and insurance broker are defined individually.
III. License (Article 3)
- No person shall carry on insurance business without obtaining a license from the Minister of Finance.
- There shall be two types of licenses available - one for life insurance business and another for non-life insurance business.
- No person shall hold both licenses for both life and non-life insurance concurrently.
- The license for life insurance business is granted for underwriting the following classes of insurance:
- Insurance providing a certain fixed amount of benefits concerning the survival or death of individuals;
- Insurance relating to personal accident, sickness, and nursing care fields;
- Under the classes of insurance stated in 5-1 below, reinsurance related and limited to the above 4-1 and 4-2
- The license for non-life insurance business is granted for underwriting the following classes of insurance:
- Insurance covering loss or damage caused by a specified type of accident, which includes surety bonds.
- Insurance relating to personal accident, sickness, and nursing care fields.
- Under the classes of insurance stated in 4-1 above, insurance related and limited to death occurring during the course of overseas travel and death directly caused by sickness during the course of overseas travel.
Note. Reinsurance, conducted by non-life insurance companies, is deemed to be part of their insurance business.
IV. Application Procedures for a License
Any person wishing to obtain a license must submit to the Minister of Finance an application together with the so-called "Fundamental Documents". The Fundamental Documents consist of (i) the articles of association, (ii) a statement showing the method of operations, (iii) general policy conditions, and (iv) a statement showing the basis of working out premiums and underwriting reserves.
V. Examination Criteria for a License (Article 5)
The Minister of Finance shall examine whether the applicants for a license meet the following criteria:
- The applicant possesses sufficient assets to carry on insurance business soundly and effectively, and the prospects of revenues and expenditures concerning the applicant's insurance business are satisfactory.
- The applicant, in the light of its human resources such as its officers and other employees and other circumstances, possesses sufficient knowledge and experience to conduct insurance business appropriately, fairly, and effectively, and holds adequate social credibility.
- The contents statement showing the method of operations, the general policy conditions, and the statement showing the bases of working out premiums and underwriting reserves satisfy certain specified criteria.
VI. Amount of Capital or Foundation Fund (Article 6)
An insurance company shall be a stock company or a mutual company with a capital or foundation fund not less than 1 billion yen, as prescribed by the Cabinet Ordinance.
VII. Stock or Mutual Company carrying on Insurance Business (Articles 9 to 96)
- The provisions of the Commercial Code apply mutatis mutandis to stock or mutual insurance companies. Special exceptions, however, are stipulated concerning the earned surplus reserves, registration of the incorporation, etc. of a stock company.
- Each member shall have one vote at a general meeting of members.
- Minority members and representatives minorities in a mutual company shall be guaranteed certain rights. For example, members representing not less than 1/1,000 of the total members of 1,000 or more of the members who have held continuous membership for at least the preceding six months may submit proposals to a general meeting of members.
- A mutual company shall be able to issue corporate bonds subject to a resolution of its board of directors.
- A mutual company shall be able to convert into a stock company, and vice versa.
VIII. Insurance Business (Articles 97 to 100)
- An insurance company shall be able to underwrite risks according to the type of license it obtains.
- The current document showing the methods of utilizing assets shall be abolished, and the provisions thereof shall be instituted in this law.
- As an ancillary business, an insurance company shall be able to undertake government bonds, municipal bonds, etc., or handle their flotation.
- As a legally permissible "other business", an insurance company shall be able to deal in business relating to the specific securities and transactions provided in the Securities and Exchange Law (the so-called "Dealing of Public Bonds").
- An insurance company shall conduct no business other than the above-mentioned business and those kinds of business allowed under other laws.
IX. Subsidiaries (Articles 106 & 107)
- A life insurance company shall be able to acquire or possess more than 50% of the stock of its subsidiary non-life insurance company. A non-life insurance company shall be able to acquire or possess more than 50% of the stock of its subsidiary life insurance company.
- An insurance company shall not conduct selling or buying of assets or other transactions with its subsidiary insurance company or its customers under terms and conditions which are significantly different from those of ordinary transactions.
X. Accounting (Article 109 to 122)
- A fiscal year of insurance company shall begin on April 1 and end on March 31 of the following year.
- With certain exceptions, an insurance company shall, for each fiscal year, draw up an explanatory document describing the condition of its operations and assets, and provide the head office and branch offices with this document so that it shall be available for public perusal.
- The chief actuary appointed by an insurance company, at the time of closing of the account, shall confirm whether underwriting reserves for insurance contracts have been accumulated through sound actuarial methods and submit his/her opinion papers stating the result of his/her examination to the board of directors. After that, he/she shall submit a copy of the opinion papers to the Minister of Finance without delay.
XI.Supervision (Articles 123 to 134)
- In case an insurance company wishes to make an alteration in the particulars stated in (i) the statement showing the methods of operations, (ii) the general policy conditions, or (iii) the statement showing the bases of working out premiums and underwriting reserves, it shall obtain approval thereof from the Minister of Finance. However, in cases where, under the provisions of the MoF Regulation, no problem arises in protecting the interests of policyholders, the insurance company need only to give notice of the amendment to the Minister of Finance.
- As the means of maintaining the sound management of an insurance company, the so-called "Solvency Margin Standard" shall be introduced, and the Finance Minister may require an insurance company to submit a business improvement plan for the maintenance of its sound management when the Minister considers appropriate measures need to be taken.
XII.Portfolio Transfer, Dissolution, Liquidation, etc. (Articles 135 to 184)
- An insurance company shall be able to transfer its insurance portfolio comprehensively to another insurance company under the agreement with the company concerned.
- Provisions for dissolution, liquidation, etc. of an insurance company should be instituted.
XIII. Foreign Insurers (Articles 185 to 240)
- A foreign insurer shall not be allowed to carry on insurance business unless it establishes its branch office in Japan and obtains the license from the Minister of Finance. A foreign insurer shall also be required to conduct the insurance business only within the scope of its license and through its branch office. For the purpose of licensing foreign insurers, the same provisions as apply to domestic insurers shall be instituted.
- A foreign insurer having no branch office in Japan shall not conclude any insurance contracts (excluding those stipulated in the Cabinet Ordinance) on persons residing or property located in Japan, with the exception of insurance contracts for which the permission thereof from the Minister of Finance has been received.
- A foreign insurer shall deposit the cash and/or securities which are stipulated in the Cabinet Ordinance as a necessary and proper amount to protect policyholders.
- A foreign insurer shall hold, in Japan, assets equivalent to the amount calculated on its liability reserves and outstanding loss reserves in Japan.
- In case an unlicensed foreign insurer wishes to establish a representative office in Japan for the purpose of collecting or providing information regarding insurance business, it shall report in advance to the Minister of Finance of the details of the planning activities.
Provisions to allow Lloyd's to obtain a license from the Minister of Finance and conduct insurance business in Japan shall be instituted.
XIV. Special Measures to Protect Policyholders (Articles 241 to 270)
- Transfer of Portfolio (Articles 241 to 258)
- When, in view of the conditions of business or assets of an insurance company, the Minister of Finance considers that it is difficult for the company to continue its business, he shall be able to order the company to discuss the transfer of its portfolio, or to take any other necessary measures. The Minister also shall be able to order an insurance custodian to take over the administration of the company's business and assets.
- The Minister of Finance shall be able to designate the transferee of the portfolio transfer and recommend discussions on the transfer of the portfolio. If no agreement is reached after such discussions, the Minister shall be able to conduct the necessary mediation after hearing both parties' opinions in advance.
- Policyholders' Protection Fund (Articles 259 to 265)
- The Minister of Finance shall be able to designate a corporate body under the Civil Law as a policyholders' protection fund if he considers that it will be able to conduct the business of financial assistance services properly and reliably.
- The policyholders' protection fund, under certain conditions, shall carry on giving financial aid to an insurance company which accepts the portfolio from an insolvent company and shall receive from the member companies their share of the liability.
XV. Insurance Distribution (Articles 275 to 300)
No person, other than officers or employees of a non-life insurance company, registered life insurance solicitors or non-life insurance agents, and registered insurance intermediaries (insurance brokers), shall engage in insurance soliciting.
- Life Insurance Solicitors and Non-Life Insurance Agents. (Articles 276 and 282)
- A life insurance solicitor or a non-life insurance agent shall be registered at the Minister of Finance.
- A life insurance company shall not commission a life insurance solicitor of any other life insurance company to solicit on their behalf.
- A life insurance solicitor shall not be engaged in soliciting under commission of any other life insurance company.
Above provisions 1-2 and 1-3 shall not apply, in case where the Cabinet Ordinance considers there is no problem in protecting the interests of policyholders.
- Insurance Company Concerned (Articles 283 to 285)
The insurance company concerned shall be liable for loss caused to persons effecting insurance by its life insurance solicitor or its non-life insurance agent in relation to his/her soliciting.
- Insurance Intermediaries (Insurance Brokers) (Articles 286 to 293)
- An insurance broker shall be registered with the Minister of Finance, and shall make a cash deposit stipulated in the Cabinet Ordinance for his/her operations.
- In cases where the Minister of Finance has approved the broker taking out a professionalliability insurance, the amount of the cash deposit mentioned above can be reduced, depending on the amount covered during the period of the policy.
- Regulations on Soliciting Activities (Article 299 and 300)
- An insurance broker shall intermediate in good faith for the sake of the policyholders.
- Life insurance solicitors, non-life insurance agents, and insurance brokers shall not conduct such specified acts as making misrepresentations to the policyholders, causing them to apply for a new insurance contract by way of unjust termination of an existing insurance contract, offering them discount or rebate of premium or any other special benefit, and making comparisons with other insurance contracts which might be misleading.
XVI. Miscellaneous (Articles 309 to 314)
An application for an insurance contract shall be able to cancel the application by giving written notice within eight days of the application, except in certain cases.
XVII.Supplemental Provisions (Supplemental Articles)
- This law shall be effective from the date stipulated in the Cabinet Ordinance within a period not exceeding a year counting from the date of its promulgation.
- The Law concerning the Control of Insurance Soliciting and the Law concerning Foreign Insurers shall be repealed and then unified in the new Insurance Business Law.
- In the case that an application for approval of insurance policies or premium rates relating to the personal accident, sickness, and nursing care fields has been made, the Minister of Finance shall examine whether it will cause adverse changes in the management and the sound business of specific insurance companies which deal mainly with these three fields.
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