Host Rob Chaplin is joined by colleague Annabel Smethurst to guide “The Standard Formula” listeners through the prudential solvency regime in Japan, the fourth-largest insurance market in the world. They explore why Japan is attractive to reinsurers, its regulatory evolution and the increased openness to foreign participation due to regulatory changes.
Episode Summary
In the third episode of Skadden's yearlong podcast series on global prudential solvency requirements, host Robert Chaplin and colleague Annabel Smethurst discuss Japan's insurance and regulatory landscape. As the world's fourth-largest insurance market, Japan has become increasingly attractive to foreign insurers due to its mature market, aging population and ongoing regulatory reforms. Rob and Annabel explore Japan's regulatory framework, its evolution from the “financial Big Bang” of the 1990s and the flourishing reinsurance sector that has emerged as the country aligns with international standards such as Solvency II and the Insurance Capital Standard (ICS).
Key Points
- Japan's Insurance Market: Japan holds 5% of the global insurance market, with premiums of $363 billion in 2024, making it the fourth-largest insurance market in the world after the U.S., China and the U.K. The country has seen increasing competition with the rise of foreign insurers and new entrants in the reinsurance market.
- Regulatory Framework: Japan's regulator, the Financial Services Agency (FSA), has more closely aligned the country’s standards with global frameworks such as Solvency II and the IAIS ICS. Foreign insurers must establish a local subsidiary or branch and obtain an FSA license to operate in Japan, with reinsurance being a notable exception.
- Reinsurance Boom: The past 18 months have featured a high volume of reinsurance transactions, particularly between Japanese life insurers and offshore reinsurers (often Bermuda-based). These transactions are driven by an aging population, as well as the capital- and asset-intensive nature of savings-oriented products.
- Economic Value-Based Solvency: Japan is implementing new economic value-based solvency regulations from the fiscal year ending March 2026 that are generally aligned with the ICS but with adjustments tailored to Japanese insurers, which could further transform the regulatory landscape.
Voiceover (00:01):
From Skadden, the Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.
Rob Chaplin (00:19):
Welcome back to the Standard Formula Podcast. Today we’ll be discussing Prudential Insurance Regulation in Japan, which is a hot topic on our radars and forms an important backdrop to the reinsurance boom we’ve been seeing in Japan. This episode is the third in our year-long podcast series on global Prudential Solvency requirements, which will form the basis of our forthcoming publication, the Encyclopedia of Prudential Solvency.
Rob Chaplin (00:46):
Joining me today to unpack Japanese prudential insurance regulation is my colleague Annabel Smethurst. It’s great to have you here to speak about this important topic. I should say that we’re enormously grateful to our good colleagues at Skadden Tokyo for their review of the script for this podcast.
Annabel Smethurst (01:04):
Thanks, Rob. Japan is the fourth-largest insurance market in the world holding a 5% global market share and insurance premiums of 363 billion US dollars in 2024. It follows only the US, China, and the UK in its hold of the world’s insurance market. Traditionally dominated by life insurance, over recent years, Japan’s insurance space has seen increasing competition with the rise of foreign insurers and new market entrants in the reinsurance market. The life insurance market in Japan is relatively consolidated. There’s only a total of 41 domestic entities on the regulators list of which 12 are foreign-owned. Top players amongst these domestic life insurers have a significant role as investors in Japanese and global markets with over 2 trillion US dollars in assets. These domestic insurers have been continually expanding overseas, making acquisitions in the US and London insurance market, as well as investing in Southeast Asia and the BRIC countries.
Annabel Smethurst (02:13):
Japan’s declining population and the resulting need for these life insurers to diversify their traditional offering has increased this acquisitive trend. By comparison, the FSA’s list as of the 23rd of December 2024 lists 57 licensed non-life insurance companies operating in Japan, comprising both domestic and foreign branch entities. The Japanese insurance market is attractive for foreign insurers for several reasons. For one, it’s one of the largest and most mature insurance markets globally with a broad customer base and a culture of high levels of household savings providing opportunities for growth and investment.
Annabel Smethurst (02:57):
Secondly, Japan’s aging population creates demand for a range of offerings, particularly in the life and longer-term healthcare space, providing a venue for insurers to cater to evolving and unique customer needs. Lastly, and importantly, Japan’s insurance market is becoming increasingly attractive to overseas insurers due to ongoing regulatory reforms aimed at improving financial stability and aligning Japan with international standards.
Annabel Smethurst (03:28):
In the past, Japan’s insurance sector was governed by formal solvency regulations. These have in recent years been revised by Japan’s financial services regulator, the Financial Services Agency, or FSA, which is an external organ of the Japanese government cabinet office. The FSA has aligned Japanese standards more closely with global frameworks such as Solvency-T and IAIS and ICS. This shift is intended to enhance the efficiency of the insurance market by introducing more sophisticated risk-based requirements, reflecting insurers actual risk profiles instead of relying solely on static capital buffers. Japan began liberalizing its insurance industry with the government’s financial Big Bang in the 1990s, whereas part of an attempt to remedy economic stagnation in the early ‘90s, the government introduced wide-ranging plans to re-regulate the financial services market modeled on a similar framework globally. Insurance regulations saw a shift from its previous more rigid framework in favor of greater openness and flexibility.
Annabel Smethurst (04:44):
1998 saw a relaxation of fixed insurance rates, for example, allowing insurers to compete more on price and service. The introduction of the Insurance Business Act in 1995 exemplified the spirit of liberalization and led to the increased presence of foreign life insurers, sparking a period of mass consolidation and restructuring of the non-life market. The Act saw industry regulators take a more principles-led approach with a greater emphasis on the protection of policyholders. The revised Act also permitted non-life insurers to enter into the previously cordoned off life insurance market through subsidiary structures promoting greater competition in the area. The Insurance Act of Japan 2008, which came into force in 2010, modernized insurance contract law in Japan, both in form and substance, which had survived for nearly a hundred years without substantial modification.
Annabel Smethurst (05:51):
Between 1997 and 2000, direct foreign investment in Japan’s financial insurance sectors was 11 times what it had been between 1989 and 1996. Foreign insurers have since been able to increase their market share. Foreign insurers now account for eight of the top 20 life insurers in Japan. In the non-life space, 22 of 55 listed general insurers in Japan are branch offices of foreign insurance companies and seven of the remaining 33 domestic insurers are deemed foreign-owned, meaning they have an overseas held stake of 50% or more.
Annabel Smethurst (06:36):
Deregulation and the end of tariffs in the late 1990s also ignited changes in reinsurance purchasing in Japan. Despite the size of the non-life market and exposure to natural disasters, a major feature of the Japanese reinsurance market since the post-war period had been for the bulk of reinsurance to be retained with the market through a variety of pooling arrangements and exchanges. For example, the government insured 60% of compulsory motor insurance in the late 1990s with the remaining 40% ceded to the compulsory automobile liability insurance pool, a public-private partnership involving government contributions. It was only since the liberalization of the nineties and a sweep of natural disasters such as the Typhoon Mireille in 1991 with insured losses of $3.8 billion that these pooling structures started disbanding and Japanese insurers began to arrange their own reinsurance facilities. These movements in reinsurance are only just about picking up with further regulatory reforms on the horizon. Stemming from this, Japan is becoming a real hub for reinsurance activity.
Annabel Smethurst (07:57):
Rob, could you shed a little color on the movement in that area?
Rob Chaplin (08:01):
Certainly, Annabel, while Japanese regulation allows for foreign insurers to become licensed to operate in Japan, the practicalities of which we’ll set out later in this episode, we’ve also seen a flourishing of reinsurance transactions in Japan structured through reinsurance to offshore reinsurers. Japan’s primary insurance and reinsurance sectors have experienced dynamic growth in recent years. The Japanese market is both mature and highly competitive, both of which are critical elements necessary for the growth of reinsurance. As with the US, recent primary insurance market growth in Japan has been driven by sales of savings-oriented products for mortality and annuity segments. These movements have been driven by an aging population. Also, limitations on public healthcare benefits mean that products offering morbidity coverage are in high demand. The capital and asset-intensive nature of these products drives the need for new partnerships to assist primary writers with sophisticated underwriting for complex products, balance sheet relief for their capital intensity and related asset management partnerships.
Rob Chaplin (09:15):
Reinsurance is an effective tool to address all these objectives. The last 18 or more months have yielded a high volume of announced transactions, indicating the start of a reinsurance boom. These transactions are structured both on an in-force or block and flow basis and are designed to achieve various objectives for the Japanese cedents.
Rob Chaplin (09:41):
Annabel, could you sketch out some general characteristics of these transactions, please?
Annabel Smethurst (09:45):
Of course, Rob. Most of these transactions are characterized by a session from an onshore Japanese life and annuity insurer to an offshore reinsurer. Generally, a Bermuda classy long-term insurer. The fact that most of these transactions involve a session to Bermuda signals the FSA’s comfort with the BMA, which has also received equivalents under EU and UK Solvency II, and with the NAIC as a qualified jurisdiction.
Annabel Smethurst (10:18):
As a general trend, we’ve seen that partnerships are between the largest players in the Japanese life annuity markets and usually large reinsurers. Several in-force transactions with seeded reserves in the multi-billions may also signal a desire for capital relief. Most significant transactions have also been placed with reinsurers affiliated with large asset managers, signaling that Japanese insurers are looking for supports with investment management. Many such transactions have been on a flow basis, potentially signaling a desire for support with respect to assets origination at the time of contract inception.
Annabel Smethurst (11:05):
Rob, now that we know a little bit about this history and current trends in the Japanese insurance landscape, can you tell us about the regulator and an overview of the regulation in Japan’s prudential regime?
Rob Chaplin (11:19):
Yes, with pleasure. Japan’s insurance and reinsurance industry, it’s regulated by the Insurance Business Act of 1995 with supplemental rules in the enforcement order of the Insurance Business Act 1995 and the ordinance for the enforcement of the Insurance Business Act 1996. The regulatory authority is the Financial Services Agency or FSA, which is an integrated financial regulator reporting to the minister of state for financial services. Established by statute, the FSA is responsible for ensuring the stability of Japan’s financial system and the protection of depositors, insurance policyholders, and securities investors, a well-functioning financial system for its planning and policymaking activities and the inspection and supervision of private sector financial institutions, and the surveillance of securities transactions.
Rob Chaplin (12:18):
The FSA is empowered under statute to lead planning and policymaking of financial systems and plays a general supervisory role in the writing of insurance contracts and the activities of insurance companies. Based on the Insurance Business Act, the FSA has the power to issue administrative dispositions to insurance companies, including orders for business improvement, orders for the suspension of business and or orders for the cancellation of licences. In practice, raw discretion is given to the regulatory authorities. Insurers not only have to observe all laws and regulations, but must also follow the guidelines set by the regulatory authorities, the comprehensive guidelines for the supervision of insurers.
Annabel Smethurst (13:07):
Thanks, Rob. How does Solvency II relate to Japan?
Rob Chaplin (13:11):
Japan has been deemed Solvency-II-equivalent and was one of the first countries covered by the first wave of the equivalence assessment. It was granted temporary equivalence for reinsurance, which expired as of the 31st December 2020, a joint statement by the FSA. The European Commission and IOPA was issued on 21st December 2020 to address the expiry of this temporary equivalence and the future implementation of Japan’s economic value-based solvency regime.
Rob Chaplin (13:45):
In addition, Japan has been granted provisional equivalence for group solvency until 1st January 2026. In practice, this means that UK and EU insurance groups can conduct their prudential reporting for a subsidiary in Japan under local rules instead of Solvency II provided that they’re authorized to use deduction and aggregation as their method of consolidating group accounts alongside reinsurance equivalence. As we’ll go on to discuss later in the episode, the FSA has also since established an advisory council on economic value-based solvency and is looking to implement an economic value-based solvency regulatory framework over the next year. That is set to be closely aligned with Solvency II and the ICS.
Rob Chaplin (14:34):
Anna, now that we know about Japan’s regulator and regulation, can you provide some more detail as to the requirements of the Japan prudential regime, especially with foreign insurer participation in mind?
Annabel Smethurst (14:48):
Certainly, Rob. Firstly, insurance companies are strictly defined under statute and as is the case in many regimes are not permitted to conduct any business other than underwriting insurance and any incidental business to the core insurance business.
Annabel Smethurst (15:07):
Incidental business is limited to the description in the IBA and not widely interpreted. Insurance companies are also restricted with respect to ownership of subsidiaries in accordance with the IBA, which includes restricting the ownership of non-insurance businesses. Insurers are not allowed to own subsidiaries that perform businesses other than insurance business or business incidental to insurance, nor are they allowed to obtain stake in domestic non-insurance companies in excess of 10% of those companies total voting rights.
Annabel Smethurst (15:45):
However, with the approval of the regulatory authorities, insurance holding companies may have non-insurance companies as their subsidiaries that insurers themselves may not own and are not subject to these stringent restrictions, but subject to slightly relaxed restrictions on the scope of business. Life insurance and non-life insurance remain strictly divided in Japan with different types of licenses required for each.
Annabel Smethurst (16:17):
Licenses for life insurance and non-life insurance business cannot be acquired by the same company, so companies are prohibited from running both businesses concurrently. Composites are not permitted, however, both life insurers and non-life insurers are free to offer insurance in the so-called third sector insurance markets. For example, medical care insurance, accident insurance or overseas travel insurance.
Annabel Smethurst (16:49):
Statute also imposes a minimum capital requirement on insurance companies, a minimum of 1 billion Japanese Yen, which is approximately 6.7 million US dollars. The same general restrictions apply to foreign insurers. Foreign insurers are only allowed to conduct insurance business in Japan if they have opened either a local Japanese subsidiary in the form of a Japanese stock company under the Company Act of Japan or a branch in Japan where instead of capital requirements, the branch is required to deposit a minimum of 200 million Japanese Yen, which is approximately 1.3 million US dollars to the deposit office to protect policyholders. Once they have opened a subsidiary or branch in Japan, foreign insurers then have to obtain an applicable license from the FSA. This requirement allows the FSA to have administrative power over such foreign insurers.
Annabel Smethurst (17:56):
The general rule is that unless they are licensed, foreign insurers are prohibited from concluding any insurance contracts that insure any person with an address, residence, or property in Japan or a vessel or aircraft registered in the country.
Annabel Smethurst (18:13):
Rob, could you shed a little light on applying for a license?
Rob Chaplin (18:18):
Sure, Annabel. As discussed earlier, a license is not issued unless the FSA is convinced of the credibility of the applicant in terms of sufficient financial assets, human resources, and business projections. During the licensing procedure, the FSA examines the company’s documents including general policy conditions, the business method statement, the premium and reserve calculation method statement, business projections generally for 10 years, director’s resumes and information on major shareholders of the applicant.
Rob Chaplin (18:55):
In terms of timings, the FSA endeavors to make decisions whether to grant a license within 120 days after receipt of the licensing application. This is called the standard processing period. However, this rule only applies on a best endeavors basis and is interpreted to commence when the formal application documents are filed. In practice, the foreign insurer or its subsidiary will hold many discussions with the FSA about the application documents before the formal filing, and this discussion period will likely take at least a year. Note that strict penalties apply, engaging in insurance business without necessary license is subject to punishment by maximum three years imprisonment or a maximum 3 million Yen fine.
Rob Chaplin (19:45):
Are there exceptions? Yes, there are exceptions. Certain limited exceptions do exist for certain insurance contracts. Foreign insurers may enter into insurance contracts without obtaining the applicable license. Reinsurance contracts are included in this exemption. The licensing restriction does not apply to any insurance contract where the FSA has granted advanced permission to an applicant wishing to purchase insurance from an unlicensed foreign insurance company. Let’s look a little deeper into the first of the exceptions which relates to reinsurance transactions by foreign companies.
Rob Chaplin (20:24):
By analogy, the appropriate test looks similar to the characteristic performance test familiar in the UK and Europe in order to determine the regulatory perimeter. Under the Japanese regime, if a insurer operates business on an offshore basis that is conducting or underwriting claims, handling contract negotiations and other activities from outside and not utilizing its own employees or agents to conduct any such activities in Japan, then it’s not required to be licensed and therefore will not be subject to FSA supervision, any regulatory, including reporting obligations or any capital requirements regardless of the amount of business it conducts with Japanese cedents.
Rob Chaplin (21:10):
Japanese cedents in turn are subject to regulatory requirements to obtain credit for reinsurance on their financial statements and may request such information from foreign reinsurers in order to comply with their regulatory obligations. Reinsurance transactions between Japanese insurers as well as those with overseas insurers that are licensed in Japan are classed as generally exempt from the general requirement on licensed insurers to hold policy reserves for the policies they have insured. Japanese cedents will get credit for reinsurance in respect to policy reserving. However, there must be a high possibility of recovery under the reinsurance contracts. They also must do their due diligence to understand the reinsurance counterparty in as much detail as possible in order to evaluate the possibility of such recovery. This exemption may also be invoked by Japanese cedents in respect to foreign reinsurers, but only to the extent that the reinsurance would not impair the financial soundness of the cedents considering the foreign reinsurer’s business and financial condition.
Rob Chaplin (22:16):
There is no specific test based on specific monetary thresholds or limits regarding this exemption. However, the FSA guidelines suggest that this exemption may be invoked in respect to foreign reinsurers, for example, where the maximum reinsurance payment per single insured event is less than 1% of the the cedent’s total assets, or in cases where the sedent has not accumulated liability reserves corresponding to the part for which the reinsurance is affected and the foreign reinsurer assumed the reinsurance. In each case, there must be no concern that the foreign reinsurer would fail to make the reinsurance payments due to insolvency or other reasons. In practice, this means that Japanese cedents may ask a foreign reinsurer for information, materials and other evidence regarding the foreign reinsurer’s business and financial condition in order to avail this exemption to hold policy reserves.
Rob Chaplin (23:17):
We should note that in late January 2025, it was reported that the FSA has started to survey Japanese life insurers to examine potential risks tied to their rapidly growing practice of transferring policy liabilities to reinsurers, often backed by global private equity firms. According to a March 2025 report, the FSA is reportedly asking Japanese life insurers about the scale of their reinsurance practices and the types of contracts they have in place and are also interested in the concentration of risks with reinsurers operating in Bermuda.
Rob Chaplin (23:54):
Note that despite this attention, there have been no official announcements or regulatory actions by the FSA so far. Only reports that this information-gathering exercise is taking place. This may suggest, however, that the FSA would consider introducing new regulations or restrictions on reinsurance transactions in the near future.
Rob Chaplin (24:15):
Annabel, we’ve talked a bit about licensing requirements and capital requirements. Are there also fronting restrictions under the Japanese rules?
Annabel Smethurst (24:24):
Thanks, Rob. No. Fronting is not expressly prohibited or permitted in Japan, and there are no explicit expectations with regards to the cedent’s retention. Rob, we hinted earlier that the Japanese prudential landscape is evolving. Could you provide a little more color on this?
Rob Chaplin (24:43):
Yes, Annabel. Of prime importance, the new economic value-based solvency regulations that Japan is looking to introduce. The FSA is preparing to align these with the insurance capital standard or ICS issued by the International Association of Insurance Supervisors or IAIS in final form in December 2024 as discussed in our January podcast. Due to the introduction of these new regulations, many Japanese insurance companies, especially life insurance companies, are considering entering into new reinsurance agreements with reinsurers sometimes in respect of quota share reinsurance of future premiums called flow reinsurance and reinsurance blocks of existing business called block reinsurance, often in the form of asset-intensive reinsurance or funded reinsurance, which is gaining momentum in the Japanese life insurance market.
Rob Chaplin (25:40):
This is because the type of liabilities found in Japan can be profoundly affected by fluctuations in interest rates, especially when an insurer has existing blocks of insurance contracts with high long-term interest rates, meaning reinsurance agreements are seen as a way to hedge against this risk. With this in mind, we are seeing a real blossoming of reinsurance deals in the Japanese market, which is ripe for overseas participation. In terms of timing for these new economic solvency regulations, the FSA is planning to implement them from the fiscal year ending March 2026. Insurance companies in Japan are expected to submit business reports pursuant to the new legislation from the fiscal year ending March 2026.
Annabel Smethurst (26:28):
Rob, do these new solvency regulations seem likely to depart in any way from the ICS or will they be fully aligned?
Rob Chaplin (26:37):
Yes, more or less. Japan’s new regulations are designed to be generally aligned with ICS, but with slight adjustments tailored to Japanese insurance companies. For example, the coefficient for calculating life insurance and non-life insurance risks will be calibrated to reflect the characteristics of Japanese insurance companies. Many of Japan’s insurers are small or medium-sized, whereas the coefficient in the calculation of ICS is based on data mainly collected from large international insurance groups. Now that we’ve talked about some considerations regarding the new regulations, why don’t we go over a few more links between Japan and the UK insurance world?
Annabel Smethurst (27:18):
Thanks, Rob. Japanese insurers do interact with the UK regulatory regime in a number of notable areas. Historically, Japanese insurers have used the Part VII process in the UK to transfer their insurance liabilities, which is affected by the courts in the UK to another, including where both the transferor and the transferee insurers are Japanese insurers in circumstances where Part VII can apply. While a statutory transfer mechanism for books of insurance does exist in Japan, this requires the authorisation of the Prime Minister, a special resolution of the shareholders of both the transferor and the transferee, and the notified consent of all affected policyholders. However, several Japanese insurers have historically opted to use the Part VII process in the UK to dispose of legacy businesses and action portfolio transfers.
Annabel Smethurst (28:18):
Moreover, several of the leading Japanese trading companies have historically set up insurance-broking subsidiaries in the UK in order to become involved in the insurance arrangements of the parent companies in the absence of an equivalent framework being available under Japanese law. We have also seen Japanese insurance companies making sustained outbound deal activity as they pursue business outside their home markets. The main driver for this M&A is promoting diversification where a shrinking population has weighed on domestic growth. At the same time, as we have discussed, foreign insurance companies and insurance brokers are increasingly making inroads into the Japanese markets.
Rob Chaplin (29:06):
Thank you, Annabel. That brings us to the end of today’s episode. It’s evident that the regulatory framework in Japan is designed to balance the protection of policyholders and regulatory equivalents with the need for insurers and Japan to remain competitive. Not only our Japanese insurance companies vibrant participants in the global market, we’re increasingly seeing overseas insurers and reinsurers make the most of insurance opportunities ripening in Japan.
Rob Chaplin (29:34):
In summary, we expect that the strength of the Japanese insurance industry and the FSA’s encouragement of innovation will lead to further regulatory evolution as new challenges arise. Japan is rapidly adapting its regime to be equivalent with international prudential mechanisms in order to preserve its position within the global insurance market. Both on the sedent side and reinsurance side has exemplified the new economic solvency regulations and the welcoming of overseas participation in the Japanese reinsurance space.
Rob Chaplin (30:09):
We look forward to welcoming you to the next episode of our podcast, which will cover the Cayman Islands. Thank you for listening today.
Voiceover (30:16):
Thank you for joining us on the Standard Formula. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don’t miss any future episodes. Additional information about Skadden can be found at skadden.com. The Standard Formula is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. Skadden is recognized for its deep experience in representing insurance and reinsurance companies and their advisors on a wide variety of transactional and regulatory matters. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.
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