Implications on the Systemic Relevance in the Japanese Insurance Industry

A series of problems concerning AIG (the American International Group, based in the United States) that occurred during the global financial crisis in 2008 have proved to be relevant to financial systems in terms of the activities of insurers. During the last crisis, contagious paths in risks, such as liquidity, spread and impacted the financial system. These paths were generally created by structural problems that emanated from the sharp expansion of leveraged liabilities and market transactions. This paper originates from and is motivated by the question of whether similar structural problems, as experienced in other jurisdictions, could arise in the Japanese insurance sector. In the Japanese insurance sector we have in the past experienced the collective failure of seven life insurers over a period of around four years in the late 1990s, starting with the failure of Nissan Mutual Life Insurance Company in 1997. Unlike the case of AIG in the U.S., the insolvency of these insurers was resolved within the resolution scheme of Japan without the injection of public funds. However, over ten years after that, no specific reviews have been made based on the lessons of AIG and in light of the potential systemic relevance of past failures in Japan. Particularly absent are reviews with a focus on whether structural problems similar to those in the last crisis were potentially identified in the Japanese insurance sector, and to what extent such similarities affected the Japan fs financial system. In response to the last global financial crisis, conceptual approaches to measuring the systemic relevance of financial institutions are being established in international fora, highlighting not only banking sector but also non-banking sectors including insurance sector. This paper mainly places an emphasis on the abovementioned structural problems observed during the last crisis, and examines potential factors that may increase the systemic relevance of the life and non-life insurance sectors in Japan, with a particular focus on the past and current attributes of Japanese insurers as follows: (1) the sharp expansion of off-balance- sheet liabilities and liquidity issues due to a rise in the lapse rate (policyholder fs lapse) that was observed in the 1980s to the late 1990s and (2) concerns over the lack of substitutability that could unexpectedly arise from the enhanced social and public nature of insurance services in the Japanese non-life insurance sector.