These companies sold policies in the 80s with a predetermined interest rate of about 4%, but had a return on investment of less than 1% at the time of bankruptcy. The imbalance between investment returns and interest rates on debt is the culprit behind them.
Author: Cao Tian Editor: xiaopi
In 1997, Nissan mutual life insurance went bankrupt, the first Japanese insurance company to go bankrupt after World War II. Years of stability in Japan's insurance industry have finally been shattered, and the myth that insurance companies will not go bankrupt has been shattered.
At the time, Jesper Koll, an economist at JPMorgan Chase Japan, noted that one-third of Japanese insurance companies were expected to disappear within five years in the next five years.
In the years that followed, Japanese insurance companies went bankrupt.
In 1999, Toho Life Insurance Company, which ranked 10th in total assets of 5 trillion yen, fell into financial crisis and was taken over by GE Capital, and the two companies established a joint venture insurance company. Despite this, it was not able to salvage its eventual bankruptcy. Toho's auditors refused to sign the financial statements, revealing a financial shortfall of 20 million yen, which later exceeded 30 million yen.
On October 9, 2000, Chiyoda mutual life insurance, ranked 12th in Japan with total assets of $32.3 billion, filed for bankruptcy protection, leaving a financial shortfall of nearly $27 billion.
Just two weeks after Chiyoda Life went bankrupt, another national insurance company, Kyoei mutual life insurance, collapsed. Founded in 1935, Hip Rong Insurance has 13,000 employees and total assets of $42.4 billion. With a debt of 4.5 trillion yen, it became the largest insurance company to fail after the war.
Between 1997 and 2001, eight insurance companies went bankrupt and three stopped issuing new products, which is not a low percentage considering that there were only 40 insurance companies in Japan at the time.
After the war, the insurance industry soared
The problems faced by Chiyoda, Kyoei, Nissan are a microcosm of the predicament of most Japanese life insurance, which sold policies in the 80s with predetermined interest rates of around 4% but had a return on investment of less than 1% at the time of bankruptcy. The imbalance between investment returns and interest rates on debt is the culprit behind them.
The main sources of profit for insurance companies, especially life insurance companies, are three differences: interest rate spread, fee difference and death difference. The latter two indicators will not change much in the short term and are easy to calculate, while interest rate spreads are more volatile due to the external environment, especially interest rate policy.
Interest rate spread refers to the difference between the pricing interest rate of the insurance product and the actual investment return of the insurance company.
With high predetermined interest rates on the one hand and declining investment returns on the other, the main culprit of the wave of bankruptcies of Japanese insurance companies at the end of the last century was the widening spread losses.
The life insurance industry in Japan began in 1881 with the establishment of Meiji Life Insurance Company. After World War II, Japan's life insurance industry expanded massively, thanks to the rapid recovery of the domestic economy, high savings rates, and high population growth.
In the fifties and sixties, death protection life insurance developed rapidly in Japan. After the 80s, as the popularity of death protection life insurance approached saturation, and life insurance companies launched insurance products with high predetermined interest rates in order to seize market share, including endowment insurance and personal annuities with savings properties, which became the most popular products in the Japanese insurance industry in the 80s.
With its rapid progress, Japan has become the second largest insurance superpower after the United States. By 1994, Japan's life insurance industry reached its peak, ranking first in the world in terms of total premium income, life insurance business volume, insurance density and insurance depth, with a total insurance premium income of US$606 billion, surpassing the United States for the first time, and a per capita premium of US$4,849, leaving behind Switzerland, which had long maintained the world's first.
Imbalance of the scales
Located on the northwest side of Tokyo Station, Otemachi is one of Tokyo's most famous business districts, home to the headquarters of many Fortune 500 companies. If you visit here in the 80s, you will see a wide variety of insurance signs.
The popularity of insurance products with high interest rates has led to the rapid expansion of the wealth of insurance companies. In 1987, Nissan Life's total assets were 696.4 billion yen, and in 1989, its total assets reached 1,627 billion yen, an increase of 2.3 times in three years, of which high-interest rate personal pension products accounted for 49% of total assets.
As the saying goes, if the moon is full, it will be lost, and it will fall high. Behind the boom, the crisis in the insurance industry has begun to be revealed.
First, industry competition has led to higher predetermined interest rates. At that time, the predetermined interest rate for individual annuity products was around 5%. However, in order to gain a favorable position in the competition, insurance companies blindly pursue scale expansion and continue to increase their weight, and some individual annuity policies have predetermined interest rates as high as 8%.
Second, the bubble economy has led to an increase in high-risk assets. In order to pursue high returns, insurance companies have increased investment in real estate, equity and loans. In 1990, 19 percent of life insurance investment assets were stocks, 6 percent were real estate, and 38 percent were loans, adding up to more than half. The increase in the proportion of high-risk assets has weakened the ability of life insurance companies to resist market risks, laying the groundwork for the crisis that began in 1990.
Third, there is a serious duration mismatch between assets and liabilities. Theoretically, if an insurance company issues a 20-year policy, the portfolio should buy 20-year Treasury bonds directly, so that no matter how the market rises or falls in the process, it will not affect the payment at maturity. But in fact, at that time, the asset-liability mismatch in the Japanese life insurance industry was extremely serious, and of course, there were many factors that restricted the strict matching of assets and liabilities. For example, the supply of long-term bonds is insufficient, and short-term performance evaluation is strict.
In the 90s, the Bank of Japan began to implement a low interest rate policy. At first, insurance companies felt that low interest rates were only temporary. When other financial institutions lowered interest rates, they did not change the pricing of their policies. As a result, the insurance industry has absorbed a large amount of capital with high debt costs.
Unfortunately, interest rate repair expectations fell short. In 1989, Japan's economic bubble burst and entered a deflationary phase. The Bank of Japan continues to lower interest rates, and yields on financial investment instruments, including Japanese government bonds and corporate bonds, continue to fall. The yield on insurance assets has also fallen as Japan's statutory interest rate has gradually decreased, and interest rate spreads have widened.
With Japan's discount rate falling from 6% in 1990 to 0.5% in 1995, the average rate of return on the Japanese insurance industry in the 90s was only about 3%, and the decline in investment returns put great pressure on insurance companies to pay. But on the liability side, in the mid-80s, insurance companies issued a large number of five-year or even ten-year savings insurance products with predetermined interest rates ranging from 6% to 6.25%.
Although the spread loss already exists, insurance companies can "borrow new to repay the old" only if there is an inflow of new policies, but the economic recession and declining income will also affect the purchasing power of residents for insurance, resulting in a decrease in new inflows, and it is difficult to continue the chain of borrowing new to repay the old.
In order to compensate for the loss of interest rate spreads, many insurance companies have carried out overseas investment activities and purchased large quantities of foreign bonds. However, after the Plaza Accord, the sharp appreciation of the yen increased the exchange rate losses and the value of bonds shrank.
After the bursting of the bubble economy, stocks and real estate assets bore the brunt of the continuous and tragic decline.
The Nikkei 225 index fell sharply by 33.1% in just one and a half years after 1991, and then fell into a bearish road and repeatedly fluctuated.
Nissan Life lost 149.3 billion yen on securities and 46 billion yen on real estate investments, and the decline in stock prices also caused huge losses. When the Japanese stock market fell below 19,000 points in 1997 and continued to decline, Nissan's stock investment finally failed, and at the end of March, it closed its accounts with a loss of 132.8 billion yen.
In addition, Nissan also invests in foreign exchange derivatives and bonds issued by securities companies linked to stock indexes, because the above two investment methods have not appeared for a long time, and the Japanese insurance regulator has not specified the limits on the use of these new types of funds, and Nissan Life has invested a lot of money in this area, which has also caused huge losses.
From 1991 to 1997, Japan's residential land price index fell by 50%, leading to the bankruptcy of a large number of companies in real estate and related industries, and the bad debt ratio of Nissan Life Insurance increased, and the value of mortgage assets (real estate) also depreciated significantly.
Bottom-up
The collapse of Nissan Life has caused an industry-wide shock, and the government has been concerned about the management of life insurance companies due to a series of bankruptcies during the reform of Tokyo's financial system.
Ikuo Uno was instrumental in resolving the insurance crisis, having become chairman of Nippon Life Insurance, Japan's number one insurance company, in 1997 and president of the Japan Life Insurance Association in 2000. When it comes to dealing with problematic companies, he prioritizes policyholder protection and maintaining the credibility of the industry.
After the collapse of Nissan Life, the Japan Life Insurance Association established Aoba Life Insurance to take over Nissan's policies. But soon, the insurance holder protection fund was quickly depleted and could not be sustained unless there was assistance from the white knights.
Later, Ikuo Uno presided over the establishment of the Life Insurance Policyholders Protection Corporation of Japan ("Protection Company"), which provides financial assistance to companies in crisis, funded by the support of health companies. If the insurance company goes bankrupt, the protection company has the right to take over the policy temporarily.
No public funds were used to dispose of the bankrupt insurers, and with the support of the protection companies, the policies of the holders of the bankrupt companies were continuously protected, risk spillovers were avoided, and public confidence in the insurers was gradually restored.
On the regulatory side, in August 2003, the Insurance Business Act, which was amended again, allowed for a reduction in the predetermined interest rate of valid insurance contracts. However, out of a prudent attitude, only companies that are in difficulty can be downgraded only after obtaining consent.
Fortunately, only the eight companies that declared bankruptcy lowered their predetermined interest rates when they restructured, and none of the other companies chose to apply for a reduction.
For new policies, with the approval of financial regulators, Japanese life insurance companies began to cut their predetermined interest rates all the way down, from 6% in 1985 to 2.75% in 1996.
In addition, in order to improve solvency, life insurance companies have reduced the allocation of assets such as stocks and loans, increased the allocation of safe investment products such as treasury bonds, and increased the allocation of overseas assets to stabilize the return on investment. In 1995, the share of fixed income investment was less than 50%, and by 2015, the share of Japanese government bonds had increased from 11% to 42%.
Japanese insurance went bankrupt and overseas insurance companies benefited, among which Prudential Group benefited the most. Nissan Life was acquired by Prudential, and Toho, Chiyoda and Kyoei are now part of Prudential's subsidiary, the U.S.-based Gibraltar Group. 100th Life acquired by Manufactures of Canada...... These companies that are in crisis have become leverage for foreign investment to enter the Japanese market.
A crisis is a litmus test, and a well-run company weathered the storm and came out stronger. When Ikuo Uno was the chairman of Sino Life, he focused on strengthening the company's own capital so that even if there was an unexpected risk, compensation could be paid according to the original policy.
From 1997 to 2009, Sino Life's own capital increased from 150 billion yen to 1,050 billion yen, and in the ensuing storm of the global financial crisis, the cash-rich Nippon Life Insurance was unscathed and ranked first in the Japanese insurance industry for a long time.
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