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Insurance business in Japan is regulated under the Insurance Business Act (IBA), whereby the Financial Services Agency (FSA) takes the main role as the insurance regulator.

Under the IBA, the Japanese Prime Minister has the authority to supervise the entities and people conducting insurance business and related business in Japan. However, the PM delegates most of this authority to the Commissioner of the FSA, excluding certain important powers such as granting or cancelling insurance business licences.

In turn, the commissioner delegates part authority to the directors of the Local Finance Bureau (LFB) of the Ministry of Finance.

Non-admitted insurers

Under the IBA, people or entities permitted to act as agents or intermediaries for the conclusion of an insurance contract in Japan are limited to life insurance solicitors, non-life insurance solicitors, small-amount and short-term insurance solicitors and insurance brokers.

Insurance and reinsurance activities are only permitted to be undertaken by insurance companies, Japanese branches of foreign insurers and small-amount and short-term insurance providers that have obtained licences in Japan.

Foreign insurers not licensed in Japan under the IBA, and without branch offices in Japan cannot conclude domestic risk insurance contracts – that is, insurance for people resident or domiciled in Japan or with property located, or vessels and aircraft registered, in Japan. However, certain insurance contracts are excepted: reinsurance; insurance covering international freight; overseas travel insurance; and insurance for which prior permission from the FSA has been received by the policy applicant.

Intermediaries

Under the IBA, agents or intermediaries for the conclusion of an insurance contract are limited to life insurance solicitors, non-life insurance solicitors, small-amount and short-term insurance solicitors and insurance brokers.

Authorisation

Japanese companies. A person who conducts insurance business must obtain either a life insurance business licence or a non-life insurance business licence from the PM.

The applicant must submit a licence application to the PM through the FSA. It requires information such as articles of incorporation, statement of business procedures, general policy conditions, statement of calculation procedures for insurance premiums and policy reserves, a business plan, documents explaining the status of recent assets, profits and losses, and documents relating to the applicant’s subsidiaries. To protect the public interest, the PM can impose conditions on licences or revise their conditions.

Foreign insurers. For a foreign insurer to conduct insurance business in Japan, its Japanese branch must obtain from the PM either a life insurance business licence or a non-life insurance business licence.

The procedures for foreign insurers to obtain a licence are similar to those for Japanese insurance companies.

Other regulations

Activities and subsidiaries. The IBA allows insurance companies and licensed branches to carry out only the following types of business:

• Underwriting insurance and management of assets (core business);
• Incidental business, such as: representing the business or performing services on behalf of other insurance companies and other entities carrying out financial business; guarantees of obligations; handling private placements of securities; derivative transactions; and business permissible under the IBA and other laws (e.g. certain securities trading business and trust business concerning secured bonds).

Insurance companies cannot hold subsidiaries or affiliates, other than those set out in the IBA, including:

• Companies that engage in financial business (e.g., insurance companies, banks, securities companies and trust companies);
• Companies that engage in business that is dependent on the business of their parent insurance companies and their subsidiaries;
• Companies that engage in business that is incidental or related to financial business;
• Companies that explore new business fields;
• Companies that carry out new business activities that are recognised as contributing to the improvement of management to a considerable extent;
• Companies that carry out business activities that are recognised as contributing to regional revitalisation; and
• Holding companies whose subsidiaries are limited to companies listed in the above points.

Ownership. A shareholder of a Japanese insurance company or insurance holding company that holds more than 5% of the total voting rights must file a notification with the LFB or (in certain cases) the FSA, and file a report each time there is a change to the notification. If a person or entity is to acquire directly or indirectly (through other entities) at least 20% of the total voting rights of a Japanese insurance company (or 15% in certain cases) (major shareholder threshold), they must obtain prior approval from the FSA. The IBA provides a certain review standard for the approval to ensure sound and appropriate management of the insurance company’s business.

With respect to insurance holding companies (a holding company set out in the Antimonopoly Act, having an insurance company as its subsidiary), obtaining the prior approval from the PM is required if a company that intends to become a holding company with an insurance company as its subsidiary or a person who intends to establish such a holding company.

Capital and solvency. Japanese insurance companies must hold JPY1 billion (USD6.5 million) or more in either:

• Stated capital (in the case of a stock company); or
• Total amount of kikin (the funds held by a mutual insurance company, equivalent to the capital held by stock companies), including a reserve for redemption of kikin in the case of a mutual company.

The IBA provides for a solvency margin ratio as a standard to assess the soundness of an insurance company’s business. The solvency margin ratio is calculated by dividing the total amount of stated capital, kikin, reserves and other amounts by the amount available to cope with possible risks, exceeding the standard predictions that may occur because of insurance accidents. Under the current regime, insurance companies are required to maintain a solvency margin ratio of at least 200%.

Contract essentials. While the IBA does not define what constitutes an insurance contract, an insurance contract under the Insurance Act is defined as an insurance contract, a mutual aid contract or any other contract in whatever name, under which both of the following apply:

• One party undertakes to pay financial benefits (limited to the payment of money in life insurance contracts and fixed benefit accident and health insurance contracts) to the other party, subject to a certain event occurring.
• The other party undertakes to pay insurance premiums (including mutual aid premiums), the calculation of which is based on the possibility of a certain event occurring.

Solicitation

The solicitation of (re)insurance should be conducted according to the rules provided under the IBA and the Comprehensive Guidelines for Supervision for Insurance Companies, including:

• People carrying out insurance solicitation should provide information and an explanation of important items necessary for the customers to determine whether to conclude an insurance policy.
• No false statement should be made with respect to important items.
• Policyholders and the insured should not be encouraged to make a false statement or be prevented or discouraged from disclosing a material fact to insurers.
• No discounts or rebates on insurance premiums or any other special benefits should be offered to policyholders or insured parties.

The Life Insurance Association of Japan provides clarification of “special benefits” in its voluntary guidelines. Special benefits include not only prepaid payment instruments under the Payment Services Act, such as e-money and coupons for goods, but also points that can be exchanged for money or e-money even if they do not fall under prepaid payment instruments. It states that other types of benefits should be also assessed on the basis of the range of usage of the services, the equality among the policyholders, and whether the economic value and contents of the services exceed social norms.

Future amendment

On 26 June 2020, the Advisory Council on the Economic Value-Based Solvency Framework, appointed by the FSA, issued a report that recommended the introduction of economic value-based solvency regulations in 2025 to enhance policyholder protection, as well as insurance companies’ risk management and discipline.

The FSA assumes that after publishing and implementing the relevant regulations and notices in 2025, it will require insurance companies to calculate and report their economic value-based ratios from the fiscal year ending 31 March 2026.