Japanese insurance companies
Although the trust banks manage over 60 percent of the ¥40 trillion in Japan's private pension assets, life insurers pick up most of the rest.
Japan's insurance industry differs from America's because the Japanese industry is much more protected and regulated. The Japanese insurance industry is separated into life insurance and casualty insurance. The same firm may not yet underwrite services in both sectors.
The insurance industry is very concentrated. Whereas America has over 2,200 life and 3,900 casualty insurers, Japan only has about 25 life and 25 domestic casualty insurers. This high degree of concentration makes it easier for collusion, and insurance cartels are even allowed under the Insurance Business Act.
For example once a year the life insurance cartel gets together, finds the dividend payout rate that everyone can afford and the premium rate everyone needs for profitability. Results of the cartel's meeting are then published in the press. Such a practice would probably bring out calls for anti-trust action in the United States, but in Japan it is a non-event.
This concentration also leads to large firms. Japan is home to the world's largest life insurer, Nippon Life, which has assets of over $240 billion. The world's second largest life insurer, America's Prudential, has assets of $200 billion.
Because mortality rates for large numbers of people are predictable, life insurers can collect and invest funds on a long-term basis. This long-term investment outlook is seen when looking at the asset mix of the life insurance companies.
Long-term loans, at 40 percent, are the largest chunk of life insurers' assets. In 1979 however, this figure was nearly 60 percent. Thus life insurers face the same problem that the city banks do. Their favorite loan customers - large corporations - are finding it cheaper to obtain debt directly through bonds.
Next 20 percent of life insurer's assets are invested in stocks. As a group, life insurers are the largest holders of stock in Japan, with commercial banks second. Life insurers hold about 15 percent of all of Japan's publicly held equity, while banks hold about 10 percent.
However partly because of quirky regulations, the life insurers are becoming increasingly unwilling to invest in stocks. Even with the recent crash in the Tokyo stock market, Japanese stocks have been good investments with lots of capital appreciation over the decades.
Nevertheless Japanese stocks still have miserly yields. This is a problem for life insurers because they can pay dividends only out of income streams, not out of capital gains.
Thus although life insurers are sitting on huge amounts of unrealized capital gains in stocks, they cannot turn these gains into dividend payments.
This accounts for some otherwise questionable investment behavior of Japanese life insurers. For example life insurers bought billions of dollars worth of unhedged, long-term US treasury bonds in the 1980s.
When the value of these bonds dropped due to the dollar's devaluation, the insurers lost a bundle. But they didn't care because the bonds, which had an interest rate much higher than that available in Japan, provided large coupon payments which the insurers used to pay off their policy holders.
Thus because of the low dividend yield on stocks, Japanese life insurers will increasingly invest only in the stock of those companies in the same keiretsu. By doing so, life insurers cement relationships where the insurer can provide loans and sell its products to firms of the same keiretsu.
These products are becoming harder to sell, however. For a long time life insurers could offer investments that paid dividends much higher than similar products offered by other institutions like banks. These insurance products were merely savings vehicles like annuities and not life insurance.
The problem is that deregulation is increasing competition. Regulators have forced life insurers to reduce their rates of return, and now banks can offer deregulated deposits with higher interest rates. This caused premium collections to fall. In 1993 alone, personal annuity insurance collections fell 14 percent.
Thus for reasons of diversification, the life insurers may be interested in acquiring some of their fellow casualty insurers. Although this was impossible in the past, it may be allowed soon.
Casualty insurers have reason to fear deregulation because the life insurers are much larger than the casualty insurers. Life insurers - with total assets of ¥150 trillion - have more than five times the assets of the casualty insurers.
Casualty insurers derive 65 percent of their revenues from auto insurance. Automobile insurance - again with the help of a cartel - is quite profitable in safe and cautious Japan. Because casualty insurers must be able to meet unpredictable disasters, they invest most of their assets in short-term instruments, and the assets of Japanese casualty insurers reflect this.
Foreign insurers hold no more than three percent of the Japanese insurance business. In life insurance, a joint venture between Seibu and All State is notable, while in casualty insurance, AIU and CIGNA are among the leaders.