## 1jpnea2024002 ## Source details **Canonical URL:** [1jpnea2024002](https://www.imf.org/-/media/files/publications/cr/2024/english/1jpnea2024002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1jpnea2024002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1jpnea2024002.pdf.json) --- ### Scope, methodology, and engagement - Assessment conducted as part of the 2024 Financial Sector Assessment Program (FSAP). - Benchmarked against the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in November 2019, including ComFrame standards. - Based on laws, regulations, supervisory requirements, and practices in place in September and October 2023. - Assessment covered only FSA-regulated insurance sector; kyosai (cooperative insurance) supervised by other ministries was excluded from the assessment scope but is described in the report. - Assessors engaged with: Staff of the FSA; The MOF including one of its Local Finance Bureaus (LFBs); MAFF; insurance companies; industry and professional organizations. ### Institutional and market setting (FSA, kyosai, LFBs) - FSA role and responsibilities: - Integrated regulator for financial services including insurance except for insurance activities of cooperatives (kyosai). - Responsibilities: (i) ensuring the stability of the financial system in Japan, (ii) protecting depositors, insurance policyholders and securities investors, and (iii) ensuring smooth finance functions. - FSA employed 1,644 staff at mid-2023. - FSA budget: JPY 23.19 billion in FY 2023; total number of staff covered by this budget: 1649. - Bureaus and staff (June 2023): Strategy Development and Management Bureau 609 staff; Policy and Markets Bureau 190 staff; Supervisory Bureau 387 staff. - Resources allocated to insurance sector regulation and supervision: 88 in the Insurance Business Division and around 40 staff in other roles within the FSA; estimated 50 staff involved in insurance sector work at the Local Finance Bureaus. - Kyosai (cooperative insurance) metrics and coverage: - Kyosai members: 78 million members and 130 million policies at end-FY2021. - Kyosai gross written premiums (GWPs) in FY2021: JPY 8 trillion. - FSA-regulated sector GWPs in FY2021: JPY 41 trillion. - Kyosai assets: JPY 67 trillion, with Zenkyoren accounting for around 85 percent. - Kyosai entities are not covered by FSA policyholder protection arrangements and are supervised by relevant ministries. - Local Finance Bureaus (LFBs) delegation: - 11 LFBs located in prefectures; delegated powers include regulation and supervision of SASTIs, agents and brokers (registration and enforcement). - SASTI firms: 120 firms at end-March 2023 with total written premiums in the financial year 2022 of JPY 134.6 billion (less than 0.5 percent of the industry total). ### Overall observance of ICPs and supervisory findings - Overall assessment: good level of observance. - ICP ratings summary: - Observed: 6 ICPs. - Largely Observed: 12 ICPs. - Partly Observed: 6 ICPs. - Key supervisory strengths: - Licensing and approval: extensive licensing requirements; comprehensive approval requirements for changes in control and portfolio transfers; FSA engages closely with applicants though final licensing decisions are taken by a minister. - Cooperation and information sharing: broad powers to exchange and protect confidential information; supervisory colleges established for four IAIGs. - AML/CFT: extensive legislative, guideline and supervisory framework; dedicated AML/CFT Policy Office (40 total staff; estimated three engaged in insurance work). - Supervisory tools and sanctions: escalating set of preventative and corrective measures and an extensive list of possible sanctions applied in practice. - Macroprudential progress: FSA obtains adequate data, performs macroprudential analysis, implements IAIS Holistic Framework monitoring for major insurers. ### Significant gaps and supervisory challenges - Resource constraints and governance: - Resourcing constraints at the FSA underlie many shortcomings; meeting most recommendations will require more resources. - FSA expenditure determined and financed by government; dependence constrains ability to deliver new resources and exposes FSA to potential political interference. - Commissioner not appointed for a fixed term; FSA almost entirely government-funded. - Supervisory approach limitations: - Largely reactive approach; supervisory activities mainly industry-wide thematic work instead of regular risk assessment on individual insurers. - Regular risk assessment on individual insurers is not undertaken as part of a supervisory cycle (ICP 9 shortcomings). - On-site work limited and typically used only after problems have crystalized; no routine on-site inspections as part of a supervisory cycle. - Lack of individual supervisory plans and risk-category allocation for insurers. - Resolution framework issues: - Resolution plans are not required for insurers; FSA does not regard any insurer as systemically important. - Multiple legislative paths to resolution exist (IBA, CRA, SMRPFI, DIA), but in practice CRA/SMRPFI used in recent cases rather than IBA. - FSA may petition courts and state opinions but lacks decision-making authority in court-led reorganization processes. - Access to public funding in life insurer resolution is allowed under limited circumstances; potential for direct taxpayer subsidy exists. - Policyholder protection corporations funding pre-funded limits: LIPPC pre-funded limit JPY 400 billion; NIPPC pre-funded limit JPY 50 billion. - LIPPC post-funded borrowing up to JPY 460 billion with maximum member contributions JPY 33 billion per year. - Governance, fit and proper, and control functions: - Suitability (fit and proper) requirements need strengthening to apply to all board members, senior managers, and key control function staff. - Requirements for effective, independent, and well-resourced risk management, compliance, and actuarial functions should be clearer and extended to individual insurers on a risk-based basis. - Supervision of governance and risk management applied to major groups but needs extension to all insurers risk-based. - Solvency and capital framework shortcomings pending ESR: - Assets and liabilities are not valued on an economic basis under current framework. - Policy reserves do not include an explicit Margin over the Current Estimate (MOCE). - Solvency Margin Ratio (SMR) is risk-based but not a coherent total balance sheet approach and is not consistently calibrated. - Insurers operate at close to 1000 percent SMR ratios; first solvency control level set at 200 percent (level where margin equates to risk); lowest solvency control level is 0 percent. - Inadequate supervisory review of Enterprise Risk Management (ERM) requirements and many ORSA reports are not systematically reviewed; the largest groups’ ORSA reports are reviewed annually. - Economic value-based Solvency Regulation (ESR) planned to apply to all insurers from fiscal year 2025; ESR expected to address valuation and solvency shortcomings. - Macroprudential coverage and data transparency: - Macroprudential supervision excludes kyosai business; Zenkyoren not included in FSA macroprudential supervision. - No assessment criteria for systemic risk of individual insurers; Holistic Framework monitoring of eight large insurers does not constitute systemic risk assessment. - Aggregated FSA data published is highly summarized and lacks granular aggregated disclosures or comparable data about individual insurers. ### Industry structure, market trends, concentration and key statistics - Market size and penetration: - Japan had the fourth largest insurance market globally in 2022 by total written premium in USD terms. - Insurance penetration (premiums/GDP): 8.2 percent. - Number of firms: - 42 life insurers. - 46 non-life insurers. - 9 reinsurers. - Market concentration: - Non-life: top four companies represent 82.7 percent of premiums and 88.8 percent of assets. - Life: top five life insurers have 62 percent of the sector’s assets and 42.6 percent of gross written premium. - Profitability and solvency: - Insurance sector profitable and well-capitalized under current SMR-based measures. - Return on equity increasing in recent years. - SMR-based solvency ratios high and stable; expected ESR will show much lower solvency ratios reflecting measurement differences rather than weakness. - ESR expected to be much closer to 200 percent (margin equates to risk at ESR of 100 percent) rather than 500 percent to 1000 percent range seen under current SMR metrics. - Asset mix and credit quality: - Life insurers: conservative portfolios with significant investments in Japanese Government Bonds; most assets interest-bearing. - Foreign currency bond investments: 26 percent of all bond investments for life insurers; USD exposure 19 percent. - Life insurer rated portfolio (2019–2023): AAA declined from 73 percent to 68 percent; AA declined from 9 percent to 8 percent; A increased from 12 percent to 14 percent; BBB increased from 5 percent to 8 percent; Below investment grade increased from 1 percent to 2 percent. - Non-life bond ratings (2020–2023): AAA declined from 54 percent to 48 percent; AA increased from 12 percent to 16 percent; small 1 percent increases in A and BBB bond portfolios. - Lapse rates and liquidity: - Life insurer lapse rates remained low; declined during 2020 and 2021 and returned to pre-pandemic levels in 2023. - FSA monitors liquidity risk for five largest life insurers and three largest non-life insurers; FSA considers foreign exchange settlement needs for a three-month period sufficient. ### Economic value-based Solvency Regulation (ESR) — design, calibration, and implications - ESR timeline and purpose: - ESR planned to apply to all insurers from fiscal year 2025 to replace current solvency requirements. - ESR intended to align solvency requirements in Japan closely with the IAIS global Insurance Capital Standard (ICS) for IAIGs. - ESR calculation and requirements: - ESR calculated on a solo basis and on a group-wide basis as a prescribed capital requirement. - Insurers and groups required to maintain an ESR level of 100 percent or higher. - The minimum capital requirement will use an ESR calculation; calibration level of the minimum capital requirement still under discussion. - FSA will treat group-wide ESR as implementation of ICS for IAIGs in Japan. - Valuation and MOCE: - Accounting-based balance sheets (J-GAAP and IFRS) are the starting point of ESR; FSA considering differences between IFRS and ESR. - MOCE approach: FSA will adopt a cost of capital approach using a 3 percent cost of capital (similar to Solvency II) rather than the ICS percentile method. - Result: MOCE by cost of capital is materially higher than the percentile method used in the ICS for life insurers and a lesser, but still material difference for non-life insurers. - Discount curve and risk calibration: - Base yield curve: last observable term of the Japanese yen at 30 years and an ultimate forward rate of 3.8 percent (basic ICS construction). - Spread over the base yield curve to reduce volatility is under discussion. - Risk factor calibration: ICS risk factors calibrated on IAIG data may not be appropriate for small/medium domestic insurers; FSA field testing indicates risk factors for life and non-life risks should generally be higher in Japanese domestic context. - Approach to catastrophe risk likely to rely more on standard measurement models than catastrophe models for earthquake, windstorm, and flood risks in Japan; internal models focus on natural catastrophe risk. - Tax effect of the capital requirement remains under study. - Pillars, verification, disclosure: - Introduction of ESR requires robust risk management; Pillar 2 requirements for risk management further developed. - Verification framework being developed: - Actuarial function will verify insurance liabilities. - Newly created ESR verification function will ensure appropriateness of ESR calculations. - Verifications by independent experts are being considered. - Pillar 3 disclosure measures under discussion: quantitative ESR, balance sheet, sensitivity analysis; qualitative risk management information. - Current practice and macroprudential use: - Major Japanese insurers already report ESR in parallel runs. - Rating agencies and analysts use reported ESR to assess capitalization. - FSA uses reported ESR in macroprudential supervision and as one of the indicators tracked. - Ladder of intervention: - Decision on ladder of intervention design yet to be made. - Under SMR ladder, intervention starts at 200 percent SMR with most severe actions at 0 percent. FSA should consider ladder where most severe measures occur before bankruptcy. ### Natural catastrophe insurance and residential earthquake insurance - Residential earthquake insurance structure and take-up: - Earthquake insurance add-on to fire insurance: insured amount between 30 percent and 50 percent of fire insurance amount. - Fire and earthquake insurance are not compulsory. - Take-up rate for earthquake insurance remains below 35 percent. - Take-up gap constitutes a significant protection gap in Japan. - Reinsurance and indemnity limits: - Policies underwritten by private insurers but ceded to the Japan Earthquake Reinsurance Co. Ltd which retrocedes to insurers and government up to predefined indemnity limits. - As of April 1, 2022, the scheme provided indemnification for earthquake losses up to 12 trillion JPY with non-life insurers retaining only JPY 228.7 billion of that risk. - Premiums, underwriting and long-term contracts: - Premiums calculated based on structure and location with discounts for earthquake-resistance capability. - Premium-setting and underwriting exposures: long-term household fire insurance maximum term shortened from 36 years to 10 years in October 2015, and to 5 years in October 2022. - GIROJ increased household fire insurance reference loss cost rate by 10.9 percent in May 2021. - Insurers increased premiums by between 4.9 percent and 21 percent since October 2022. - Corporate fire insurance reference loss cost rates increased by 6.5 percent; individual insurer increases between 5 percent and 12 percent. ### Stress testing, systemic risk analysis, liquidity tests and solvency metrics - SMR and ESR definitions and calibration observations: - SMR = Total Solvency Margin / {(1/2) ×Total Risks} with the minimum level set at 200 percent (level at which margin equates to risk). - ESR = Capital Resources/Capital Requirement with the minimum level set at 100 percent for exercises. - SMR calibration issues: insurers operating close to 1000 percent SMR with first solvency control level at 200 percent; lowest solvency control level is 0 percent. - Likely ESR calibration results in an ESR around 200 percent (margin equates to risk at ESR of 100 percent), implying SMR not calibrated to provide sufficient buffer. - Stress test outcomes: - Insurers mostly resilient to FSAP adverse scenario in terms of solvency. - Out of 12 life insurers involved in SMR stress test, only 2 would not remain over 200 percent SMR (first ladder intervention level). - Non-life sector more resilient under adverse scenario: no insurers below 200 percent SMR threshold. - ESR-based stress testing: post-stress all insurers involved remained above the hurdle rate of 100 percent. - ESR feature: less sensitive to interest rate changes because liability values respond with assets; under SMR only asset values respond. - Liquidity stress testing: - Liquidity stress tests used two approaches: a stock-based approach and a cash flow approach. - Finding: insurers not significantly exposed to liquidity risk under baseline conditions, but available reserves and tradable securities may fall short of covering outflows under FSAP adverse shocks. - Liquidity pressures more prominent for insurers showing larger declines in SMR; liquidity shortfalls correlated with solvency deterioration. - Supervisory monitoring and EWS: - FSA operates an Early Warning System (EWS) and a market risk dashboard (quarterly) estimating impact of interest rates, exchange rates, stock prices and credit spreads on SMR. - EWS components: Profitability (fundamental profit index), Stability (impact of changes in securities prices), Credit risk (status of concentration of large borrowers), Cash flow (ratio). - EWS limited under current framework and requires redesign for ESR introduction. ### Supervision of intermediaries, conduct, fraud and AML/CFT - Intermediaries supervision: - Agents and brokers registered and supervised; delegation to LFBs for registration and enforcement. - Market statistics (FY 2022): Life insurance: agents 32 percent of sales, financial institutions 31 percent, direct sales 37 percent; ~34,000 agents and over 240,000 individual sales persons. Non-life: agents 90.5 percent of sales, direct sales 8.6 percent, brokers 0.9 percent; over 150,000 agencies and over 1.8 million individual sales persons; 55 broker companies with some 1,500 staff. - Assessment: Largely Observed with recommendation to strengthen governance requirements for intermediaries and require agents to disclose basis of remuneration. - Conduct of business: - Extensive legal and supervisory framework (IBA, OEIBA, FSA Guidelines); product approval processes; guidance on advice, pre-contractual information, claims handling and complaints. - Assessment: Largely Observed; supervision mainly reactive; recommendation to develop market-wide intelligence and proactive conduct supervision. - Fraud: - Legal framework available; supervisory approach largely reactive; no dedicated FSA fraud specialists; assessment: Largely Observed. - Recommendation: establish risk-based tools, specialist expertise, and strategy in cooperation with law enforcement and industry. - AML/CFT: - Robust legislation: Act on the Prevention of Transfer of Criminal Proceeds 2007 and related instruments; FSA Guidelines for AML/CFT (latest November 2021) with deadline March 2024 for satisfying requirements. - CRR system assesses AML/CFT risks at institutions; sample monitoring exercises performed (2021, 2022). - Assessment: Observed. ### Group-wide supervision, cross-border cooperation and IAIGs - Group-wide supervision: - FSA is group-wide supervisor for 15 groups headed by Insurance Holding Companies (IHC), including four IAIGs. - ComFrame elements incorporated in Guidelines; Section VII of Guidelines updated 2020. - Group-wide and IAIG mapping: four designated IAIGs: Tokio Marine Holdings, Inc.; MS&AD Insurance Group Holdings, Inc.; Sompo Holdings, Inc.; Dai-ichi Life Holdings, Inc. - FSA not currently collecting detailed entity-level information on IAIG subsidiaries in all cases nor routinely undertaking on-site work at overseas entities; recommends strengthening entity-level information collection and inspections where necessary. - Cross-border cooperation: - Supervisory colleges established for four IAIGs; FSA participates as involved supervisor in 13 colleges. - Colleges used to share information; meetings typically short (~three hours) and chaired by senior FSA management. - Crisis Management Groups (CMGs) established for IAIGs where FSA is group-wide supervisor; FSA decided not to develop resolution plans as IAIGs not seen as systemically important. - Assessment: Observed; recommendation to develop group-wide risk assessments, cross-border crisis protocols and consider cross-border on-site cooperation. ### Macroprudential supervision, data collection and transparency - Macroprudential coverage and practices: - FSA collects macroprudential data: ORSA (annually); financial reports semiannually; market risk information quarterly; voluntary submissions for quarterly BS/PL, monthly questionnaires and management materials. - Holistic Framework (HF) monitoring covers five largest life insurers and three largest non-life insurers (FSA-supervised only); Zenkyoren excluded. - No formal criteria for assessing systemic risk of individual insurers; HF monitoring does not constitute systemic risk assessment without thresholds. - EWS and market risk dashboard use SMR valuation basis; top-down stress testing limited by exclusion of assets at amortized cost backing reserves. - Data publication and transparency: - FSA publishes Insurance Monitoring Report annually and major insurers’ results annually and half-yearly; aggregated industry data in FSA annual report is highly summarized. - Recommendation: publish more granular aggregated data and individual insurer data to support analysis and market discipline. - Recommendations for macroprudential improvement: - Coordinate with ministries supervising kyosai to include large kyosai organizations in macroprudential monitoring. - Develop methodical assessment criteria for systemic risk of individual insurers and conduct regular exercises. - Reconsider publication approach to disclose data on all insurers and granular aggregate data for life and non-life sectors. ### Key policy recommendations and reform priorities (summarized) - Increase FSA resources for insurance supervision to enable: - A shift from primarily thematic, reactive supervision to a comprehensive, risk-based supervisory cycle with regular risk assessments of individual insurers. - Expanded on-site inspections and proactive supervision of governance, risk management, and control functions across insurers and larger intermediaries. - Strengthen FSA independence and budgetary autonomy: - Delegate insurer licensing powers currently reserved to a minister to the Commissioner of the FSA. - Provide the FSA increased freedom to determine its expenditure budget and to finance itself independently of government. - Use ESR introduction (FY 2025) to: - Require economic valuation of assets and liabilities. - Introduce an explicit MOCE in policy reserves. - Calibrate solvency control levels above zero percent to ensure meaningful intervention thresholds. - Enhance supervisory review of ERM and extend systematic ORSA reviews beyond largest groups. - Improve governance, fit and proper, and control function requirements: - Ensure suitability requirements apply to all board members, senior managers, and key control function staff with clear qualification guidance. - Require effective, independent, and well-resourced risk management, compliance, and actuarial functions for individual insurers on a risk-based basis. - Strengthen resolution framework and planning: - Review and streamline legislative paths to resolution and clarify decision-making authorities in the resolution process. - Consider requirements for resolution planning, including assessment of systemic importance and potential access to public funding in defined circumstances. - Review funding levels and caps for policyholder protection corporations (priority on LIPPC) and update pre-funded and post-funded limits set in 1998. - Enhance supervision of intermediaries and conduct: - Strengthen governance requirements for intermediaries and undertake more proactive supervision of insurers’ oversight of agents and brokers. - Integrate fraud risk into supervisory programs and develop specialist expertise. - Expand macroprudential coverage and transparency: - Coordinate with ministries supervising kyosai organizations to include kyosai risks in macroprudential monitoring. - Develop assessment criteria for systemic risk of individual insurers. - Improve public disclosures and aggregated data granularity for the insurance sector. - Supervisory operational recommendations: - Develop supervisory plans for each insurer based on risk profiles with a cycle of supervisory activities, revised risk assessments, and routine on-site inspections. - Revise EWS and market risk dashboards to reflect ESR market valuation and publish more details to encourage insurer risk management enhancements. - Require frequency and audit of regulatory reporting appropriate for ESR and consider statutory quarterly reporting where relevant. *Source: 1jpnea2024002 - EXECUTIVE SUMMARY and selected chapters/excerpts from the provided IMF content unit.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Scope and methodology - Assessment conducted as part of the 2024 Financial Sector Assessment Program (FSAP). - Benchmarked against the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in November 2019, including ComFrame standards. - Based on laws, regulations, supervisory requirements, and practices in place in September and October 2023. - Assessment covered only FSA-regulated insurance sector; kyosai (cooperative insurance) supervised by other ministries was excluded from the assessment scope but is described in Box 1. ### Institutional and market setting - The Financial Services Agency (FSA) is the integrated regulator for financial services including insurance, except for insurance activities of cooperatives (kyosai). - Kyosai business: - 78 million members and 130 million policies at end-FY2021. - Kyosai gross written premiums (GWPs) in FY2021: JPY 8 trillion. - FSA-regulated sector GWPs in FY2021: JPY 41 trillion. - Kyosai assets: JPY 67 trillion, with Zenkyoren accounting for around 85 percent. - Kyosai entities are not covered by the policyholder protection arrangements that apply to FSA-regulated insurers and are supervised by relevant ministries under cooperative legislation. ### Overall observance of ICPs - Overall assessment: good level of observance. - ICP ratings summary: - Observed: 6 ICPs. - Largely Observed: 12 ICPs. - Partly Observed: 6 ICPs. ### Key strengths and areas of observance - Licensing and approval: - Regulatory material contains extensive requirements for licensing insurers. - FSA works closely with applicants to assess requirements; final licensing decisions are taken by a minister. - FSA approval requirements for changes in control and portfolio transfers are comprehensive. - Cooperation and information sharing: - FSA has broad powers to exchange and protect confidential information and does so in practice, including in supervisory colleges. - Supervisory colleges established for four insurance groups identified as IAIGs. - AML/CFT: - Extensive framework of legislation, guidelines, and supervisory practices on AML/CFT. - Supervisory tools and sanctions: - FSA equipped with an escalating set of preventative and corrective measures and an extensive list of possible sanctions applied in practice. - Macroprudential progress: - FSA obtains adequate data, performs macroprudential analysis, and uses results to inform supervision of individual insurers. - Implementation of IAIS Holistic Framework for assessment and mitigation of systemic risk in the insurance sector applied to major insurers. ### Significant gaps and supervisory challenges - Resource constraints: - Resourcing constraints at the FSA underlie many shortcomings in observance of the ICPs. - Meeting most recommendations will require more resources. - FSA expenditure is determined and financed by the government, constraining its ability to deliver new resources and exposing it to potential political interference. - Supervisory approach: - Largely reactive approach; most supervisory activities are industry-wide thematic work rather than regular risk assessment on individual insurers. - Regular risk assessment on individual insurers is not undertaken as part of a supervisory cycle. - On-site work has been limited and typically takes the form of intensive investigations after problems have crystalized. - Supervision reforms should focus on supervision of individual insurers and larger intermediaries and will require significant enhancement of supervisory resources. - Resolution framework: - Resolution plans are not required for insurers; FSA does not regard any insurer as systemically important. - Multiple legislative paths to resolution exist (as many as three), but only one is practically contemplated. - The FSA may petition the court and state opinion but lacks decision-making authority in the resolution process. - For life insurers, access to public funding in resolution is allowed under limited circumstances where severe social impacts or impacts on financial markets could arise. - Governance, fit and proper, and control functions: - Need to strengthen suitability (fit and proper) requirements to apply to all board members, senior managers, and all key persons in control functions, with appropriate guidance on qualifications. - Requirements for effective, independent, and well-resourced risk management, compliance, and actuarial functions should be clearer and extended to individual insurers (group requirements improved through ComFrame). - Supervision of governance and risk management has been applied to major groups but should be extended to all insurers on a risk-based basis. - Solvency and capital requirements: - Current solvency framework falls short of ICP standards pending ESR introduction: - Assets and liabilities are not valued on an economic basis. - Policy reserves do not include an explicit Margin over the Current Estimate (MOCE). - Solvency Margin Ratio (SMR) is risk-based but not a coherent total balance sheet approach and not consistently calibrated. - The lowest solvency control level is zero percent, which is too low to serve as an effective intervention point for the strongest supervisory powers. - Inadequate supervisory review of Enterprise Risk Management (ERM) requirements. - Many insurers’ ORSA reports are not systematically reviewed; the largest groups’ ORSA reports are reviewed annually. - Economic value-based Solvency Regulation based on the Economic value-based Solvency Ratio (ESR) planned to apply to all insurers from fiscal year (FY) 2025; ESR introduction is expected to address valuation and solvency shortcomings. - Intermediaries, conduct, and fraud: - Extensive requirements apply to intermediaries, business conduct, and insurance fraud. - Intermediaries are subject to registration, some supervision, and regulatory standards, but governance requirements for intermediaries should be strengthened. - Supervision of intermediaries is mainly reactive; more proactive supervision (for example, on insurers’ oversight of agents) is needed. - Given fraud risks, fraud issues should be more fully covered in supervisory work. - Macroprudential coverage and data transparency: - Macroprudential supervision excludes kyosai business; one of the largest institutions conducting insurance activities (Zenkyoren) is not included in FSA macroprudential supervision because it is not supervised by the FSA. - No assessment criteria exist for assessing systemic risk of individual insurers; holistic framework monitoring of eight large insurers’ own risk management does not constitute a systemic risk assessment. - Aggregated FSA data published in its annual report is highly summarized and lacks granular aggregated disclosures or comparable data about individual insurers. ### Policy recommendations and reform priorities (summarized) - Increase FSA resources for insurance supervision to enable: - A shift from primarily thematic, reactive supervision to a comprehensive, risk-based supervisory cycle with regular risk assessments of individual insurers. - Expanded on-site inspections and proactive supervision of governance, risk management, and control functions across insurers and larger intermediaries. - Strengthen FSA independence and budgetary autonomy: - Delegate insurer licensing powers currently reserved to a minister to bolster FSA independence. - Provide the FSA increased freedom to determine its expenditure budget and to finance itself independently of government. - Use ESR introduction (FY 2025) to: - Require economic valuation of assets and liabilities. - Introduce an explicit MOCE in policy reserves. - Calibrate solvency control levels above zero percent to ensure meaningful intervention thresholds. - Enhance supervisory review of ERM and extend systematic ORSA reviews beyond largest groups. - Improve governance, fit and proper, and control function requirements: - Ensure suitability requirements apply to all board members, senior managers, and key control function staff with clear qualification guidance. - Require effective, independent, and well-resourced risk management, compliance, and actuarial functions for individual insurers on a risk-based basis. - Strengthen resolution framework and planning: - Review and streamline legislative paths to resolution and clarify decision-making authorities in the resolution process. - Consider requirements for resolution planning, including assessment of systemic importance and potential access to public funding in defined circumstances. - Enhance supervision of intermediaries and conduct: - Strengthen governance requirements for intermediaries and undertake more proactive supervision of insurers’ oversight of agents and brokers. - Integrate fraud risk into supervisory programs. - Expand macroprudential coverage and transparency: - Coordinate with ministries supervising kyosai organizations to prioritize regulation and supervision of the largest kyosai organizations and to include kyosai risks in macroprudential monitoring. - Develop assessment criteria for systemic risk of individual insurers. - Improve public disclosures and aggregated data granularity for the insurance sector. *Source: 1jpnea2024002 - EXECUTIVE SUMMARY* ### 6. In line with paragraph 50 of the Introduction and Assessment Methodology of the ### 6. In line with paragraph 50 of the Introduction and Assessment Methodology of the ### Inclusion of ComFrame Standards and Scope of Assessment - The IMF and Japanese authorities agreed that ComFrame standards would be included in the assessment in line with paragraph 50 of the Introduction and Assessment Methodology of the ICPs. - The FSA is the group-wide supervisor for four IAIGs and therefore the ComFrame standards applicable to group-wide supervisors have been assessed as part of the assessment of each ICP that contains ComFrame standards. ### Engagement and Inputs - Assessors benefitted from meetings and inputs from: - Staff of the FSA - The MOF including one of its Local Finance Bureaus (LFBs) - MAFF - Insurance companies - Industry and professional organizations ### Institutional and Macroprudential Setting - The FSA is the integrated regulator of financial services, including insurance excepting the insurance activities of cooperatives. - The FSA conducts both prudential oversight and business conduct regulation and supervision for all sectors, including insurers and insurance intermediaries. - The FSA’s responsibilities are: - (i) ensuring the stability of the financial system in Japan, - (ii) protecting depositors, insurance policyholders and securities investors, and - (iii) ensuring smooth finance functions. - The FSA has a policy role in formulating proposals for new legislation to be enacted by the Diet (Parliament). ### Kyosai (Cooperative) Insurance Activities - Insurance activities of cooperative sectors (known as kyosai business) that serve, for example, agriculture and fisheries are not subject to FSA supervision. - Kyosai business falls within the scope of an insurance policy as defined in Article 2 (i) of the Insurance Act 2008, but is exempt from insurance business defined in Article 2 of the IBA and regulated under dedicated legislation. - Kyosai business is regulated under separate laws and supervised by relevant government ministries as part of their oversight of the wider cooperative organizations; separate institutional and regulatory arrangements are well-established. - Although kyosai organizations include, in the agricultural sector, one of the largest institutions conducting insurance activities in Japan, this assessment focuses on the FSA-regulated insurance sector. ### Supervision of Intermediaries and Local Finance Bureaus (LFBs) - Insurance intermediaries are subject to supervision by the FSA with many responsibilities delegated to 11 LFBs of the MOF. - Agents: - Supervised both directly by the FSA and LFBs and indirectly via the FSA’s supervision of insurance companies who use agents. - Brokers: - Directly supervised by FSA and LFBs. - The 11 LFBs are located in Japan’s prefectures. - LFB responsibilities include: - Regulation and supervision of small amount and short-term insurers (SASTIs); - All insurance agents with full powers including registration and enforcement delegated to the LFBs; - All insurance brokers with full powers, including registration and enforcement delegated to the LFBs. - For both SASTIs and agents, the FSA retains certain enforcement powers, and it also has powers to order a SASTI, agent or broker to submit reports or data and undertake inspections. - Footnote: 120 firms at end-March 2023 with total written premiums in the financial year 2022 of JPY 134.6 billion, less than 0.5 percent of the industry total. (See ICP 1 detailed assessment for more details.) ### Regulatory and Supervisory Reforms — Economic Value-Based Solvency Regulation (ESR) - The FSA has undertaken regulatory and supervisory reforms in line with international standards and plans to introduce Economic Value-Based Solvency Regulations based on the Economic value-based Solvency Ratio (ESR) in fiscal year 2025. - Reforms include instituting monitoring of the three largest non-life insurers and five largest life insurers in line with the IAIS Holistic Framework. - The FSA has made efforts to incorporate the requirements of ComFrame within its Comprehensive Guidelines for Supervision of Insurance Companies (the Guidelines). - The introduction of ESR in fiscal year 2025 will very closely align solvency requirements in Japan with the IAIS global Insurance Capital Standard (ICS). ### Box 2 — Key Elements of Japan’s Economic Value-Based Solvency Regulation Findings and background: - ESR planned for fiscal year 2025 to replace current solvency requirements. - Study Team on Solvency Margin Standard convened between November 2006 and March 2007; field tests of economic value-based valuation and supervisory approach began from 2010. - Drivers: declining and aging population, prolonged low interest rates, insurer globalization, evolving product demand toward healthcare and nursing care, volatility in domestic and foreign economies, increasing severity of natural disasters due to climate change, emergence of new risks such as cyber risk. - IAIS developments: ICS field testing began in 2014; ICS Version 2.0 adopted by the IAIS in November 2019; ICS intended to be adopted as the prescribed capital requirement for IAIGs by the end of 2024. Design and calibration: - ESR will be calculated both on a solo basis and on a group-wide basis as a prescribed capital requirement with insurers and groups required to maintain an ESR level of 100 percent or higher. - The minimum capital requirement will use an ESR calculation; calibration level of the minimum capital requirement is still under discussion. - The FSA will treat the group-wide ESR as the implementation of the ICS for IAIGs in Japan. - Accounting-based balance sheets are the starting point of ESR. J-GAAP and IFRS balance sheets can be used as the starting point; the FSA is considering differences between IFRS and ESR. Valuation differences with ICS: - Margin Over Current Estimate (MOCE): - The FSA will adopt a cost of capital approach, similar to the method applied in Solvency II, rather than the percentile method included in the ICS. - The cost of capital method uses a 3 percent cost of capital and results in a MOCE that is materially higher than the percentile method used in the ICS for life insurers and a lesser, but still material difference for non-life insurers. - Discount curve construction: - The basic ICS construction of the base yield curve will be used with a last observable term of the Japanese yen at 30 years and an ultimate forward rate of 3.8 percent. - Issues arise for calibration of the interest rate risk charge as Japanese insurers do not use these specifications for their own internal risk management; hedging programs may not fit with this standard construction of a yield curve. - It is usual to allow a spread over the base yield curve to be recognized to reduce volatility across asset and liability components; calibration of the spread is under discussion. Risk factor calibration and models: - ICS risk factors are calibrated based on data from IAIGs and might not be appropriate for small and medium Japanese domestic insurers. - FSA field testing indicates that risk factors for life and non-life insurance risks should generally be higher in the Japanese domestic context than for the ICS. - Approach to catastrophe risk is likely to rely more on standard measurement models than catastrophe models for earthquake, windstorm, and flood risks in Japan; FSA is focusing consideration of internal models on natural catastrophe risk. - Market risk factors are likely to be consistent with the ICS, but the FSA continues to consider approaches to interest rate risk and equity risk. - The tax effect of the capital requirement is a continuing area of study. Pillars, verification, and disclosure: - Introduction of ESR requires robust risk management; Pillar 2 requirements for risk management are being further developed. - FSA view: many insurance companies have used economic value-based measures in ERM and ORSA, but further sophistication is needed. - FSA is developing a verification framework for the ESR: - The actuarial function will verify that insurance liabilities are properly calculated. - A newly created ESR verification function will ensure the appropriateness of ESR calculations. - Verifications by independent experts are also being considered. - Pillar 3 disclosure measures remain under discussion: - Direction is to disclose quantitative information on the ESR, the balance sheet and sensitivity analysis. - Qualitative information will include matters related to risk management. - The FSA acknowledges the need to balance decision-useful information with workload and focus. Current practice and macroprudential use: - Despite not yet being a regulatory requirement, ESR is being reported by major Japanese insurers. - Rating agencies and other analysts are using reported ESR to assess capitalization. - The FSA is using reported ESR in its macroprudential supervision — these are one of the indicators tracked. Ladder of intervention: - One key decision yet to be made at time of writing is the design of the ladder of intervention. - Under the SMR, the ladder of intervention starts at 200 percent SMR with the most severe actions taken at 0 percent. - The FSA should consider a ladder of intervention where the most severe measures occur before bankruptcy. ### Industry Structure and Recent Trends (FSA-supervised insurers only) - The insurance market statistics in the report are based on insurers supervised by the FSA only and do not include cooperatives. - Japan had the fourth largest insurance market globally in 2022 by total written premium in USD terms. - Japan remained the third largest insurance market in the world for several years, but in 2022 ranked fourth due to strong growth in the UK insurance market and the depreciation of the Japanese yen vis-à-vis the USD reducing the value of Japanese written premium in USD terms. - Insurance penetration (premiums/GDP) of 8.2 percent. - Insurance density (premiums/population) is relatively low, possibly reflective of Japan’s aging population. Market composition and concentration: - Number of firms: - 42 life insurers - 46 non-life insurers - 9 reinsurers - Market stability: number of insurers has remained highly stable with few new entrants, exits or mergers in the last five years. - Non-life concentration: - Top four companies represent 82.7 percent of premiums and 88.8 percent of assets. - Life concentration: - Top five life insurers have 62 percent of the sector’s assets and 42.6 percent of gross written premium. - Competitive dynamics: - Smaller life insurers find it difficult to compete with large life insurers and their agent networks. - Other sales channels (e.g., through banks or directly over the internet) have exposed the life insurance sector to more competition. Profitability and solvency: - The insurance sector is profitable and well-capitalized. - Return on equity has been increasing in recent years. - Solvency ratios have remained high and stable over time based on the current Solvency Margin Ratio (SMR). - The FSA is moving towards introduction of a more internationally comparable ESR which will show much lower solvency ratios; this reflects measurement differences rather than an indication of weakness. - ESR will be much closer to 200 percent (margin equates to risk at ESR of 100 percent whereas with SMR margin equates to risk at 200 percent) rather than the 500 percent to 1000 percent range seen for current solvency requirements. - Note: In the SMR formula, the denominator is total risk divided by 2 so a 200% SMR is needed for margin to equal risk. Demographic and product trends: - Japan’s population is expected to continue declining with greater share of people aged 65 or older (projections based on medium fertility variants with medium-mortality assumption). - Life insurance product mix: - Decline in traditional life insurance products such as endowment, whole life and annuities. - Increase in third-sector products: health and medical insurance, including health and cancer insurance. - Business impact: - Growth in new business and policies in force is coming from health and cancer insurance, but declines in policy reserves of traditional long-term life products are outstripping additions from newer protection products. - If trends continue, life insurer balance sheets will continue to shrink. Non-life sector: - Business mix has remained relatively stable with some growth in voluntary automobile insurance. - Gross written premiums (GWPs) were relatively flat from 2018 to 2021. - Compulsory Automobile Liability Insurance (CALI) is written on a no loss, no profit basis: - CALI premiums are set by the General Insurance Rating Organization of Japan (GIROJ). - Investment earnings made on premiums received for CALI are used for measures to prevent automobile accidents and support victims of automobile accidents. - Under the Automobile Liability Security Act, investment income on CALI must be set aside in a reserve and dispersed for these purposes. - The GIAJ manages the CALI Investment Income Contribution Program. ### General Insurance Rating Organization of Japan (GIROJ) - GIROJ is established under the Act on Non-Life Insurance Rating Organizations and is the only rating organization in Japan. - GIROJ is supervised by the FSA. - GIROJ functions: - Setting standard full rates for CALI and residential earthquake insurance. - Providing reference loss cost rates for other lines of business. - Acting as a databank for the non-life insurance industry in Japan to enable calculation of reference loss cost rates and standard full rates for CALI and earthquake insurance. *Source: 1jpnea2024002 - 6. In line with paragraph 50 of the Introduction and Assessment Methodology of the* ### 22. Residential earthquake insurance in Japan is conducted through a public-private ### 22. Residential earthquake insurance in Japan is conducted through a public-private partnership. ### Insurance structure, coverage limits, and take-up - Earthquake insurance can be added to fire insurance (homeowner insurance) with the amount insured under the earthquake insurance contract between 30 percent and 50 percent of the amount insured under the fire insurance contract. - Fire insurance and earthquake insurance are not compulsory. - The take up rate for earthquake insurance remains below 35 percent, with only small growth shown in Figure 5. - This low take-up constitutes a significant protection gap in Japan. ### Premium calculation, underwriting, and reinsurance arrangements - The premium rate is calculated based on the structure and location of the insured building with a discount applied according to the earthquake-resistance capability of the structure. - Earthquake insurance policies are underwritten by private insurers but are ceded to the Japan Earthquake Reinsurance Co. Ltd which was established by non-life insurers. - The Japan Earthquake Reinsurance Co. Ltd retrocedes the risk to insurers and the government up to their predefined indemnity limits and retains any remaining risk. - Residential earthquake premium rates are standardized by the GIROJ. - As of April 1, 2022, the scheme provided indemnification for earthquake losses up to 12 trillion JPY with non-life insurers retaining only JPY 228.7 billion of that risk. - Non-life insurers are also exposed to earthquake risk through other lines of business such as commercial property insurance and automobile insurance and must manage this risk without government support. ### Long-term insurance contracts and implications for insurers - Until 2015, the maximum insurance period for household fire insurance was 36 years. - In October 2015, the maximum period was shortened to 10 years. - In October 2022 the maximum term was shortened to 5 years. - Premiums for long-term contracts are set at the beginning of the contract, so inflation in the value of the insured property increased the retained risk of the policyholder. - These long-term insurance contracts have been loss making for the non-life insurers in recent years, creating downward pressure on non-life insurer profits. ### Claims costs, reference loss cost rate changes, and premium adjustments - In May 2021, the GIROJ increased the reference loss cost rate on household fire insurance by 10.9 percent. - Insurers increased insurance premiums by between 4.9 percent and 21 percent since October 2022. - Corporate fire insurance reference loss cost rates increased by 6.5 percent with individual insurers increasing premiums by 5 percent to 12 percent. - Global reinsurance market developments: reinsurance premiums have increased and coverage can be more difficult to obtain, adding to insurer costs. ### Asset mix of insurers - Life insurers have conservative investment portfolios with significant investments in government bonds, particularly Japanese Government Bonds. - Most life-insurer assets are interest-bearing. - Non-life insurers have less allocation to government bonds and higher allocations to other bonds and to equities. - (Figure 6 shows the comparative asset mixes: Life Insurers Very Conservative; Non-Life Insurers Much Less Reliant on Government Bonds with a Higher Allocation to Equity.) ### Credit quality trends in bond portfolios (2019–2023) - Life insurer rated portfolio changes from 2019 to 2023: - AAA declined from 73 percent to 68 percent. - AA declined from 9 percent to 8 percent. - A increased from 12 percent to 14 percent. - BBB increased from 5 percent to 8 percent. - Below investment grade increased from 1 percent to 2 percent. - Non-life sector bond ratings (2020–2023): - AAA declined from 54 percent of bonds in 2020 to 48 percent in 2023. - AA increased from 12 percent in 2020 to 16 percent in 2023. - Small 1 percent increases in A and BBB bond portfolios were also observed. ### Foreign currency bond investments and hedging - Foreign currency bond investments accounted for 26 percent of all bond investments for life insurers. - USD exposure dominates with 19 percent of bond investments in USD. - Foreign currency exposure increased from 2019 (27 percent) to 2022 (30 percent) but reduced significantly in 2023, with the increasing cost of currency hedging cited as the reason. - The BoJ’s Financial System Report October 2023 reported the currency hedging ratio of major life insurers decreased below 50% in 2022 down from above 60% in the prior year. - Significant foreign currency liabilities provide some natural hedging, though the size of foreign currency liabilities was not provided to assessors. - Some foreign currency exposures are naturally hedged through liabilities denominated in the same currency; nevertheless, significant net currency risk remains on the balance sheet alongside significant hedging of foreign currency positions. ### Lapse rates and liquidity monitoring - Lapse rates for life insurers remained low even through the COVID-19 pandemic; lapse rates declined during 2020 and 2021 and returned to pre-pandemic levels in 2023. - The FSA monitors liquidity risk as part of its monitoring of the five largest life insurers and three largest non-life insurers. - Liquidity risk monitoring includes insurers’ internal liquidity stress testing, requirement for contingency funding plans for large insurers, and group-wide liquidity risk management. - The FSA monitors mass lapse risk through comparison of policy reserves most vulnerable to lapse—those with guaranteed rates lower than one percent—and holdings of liquid assets. - Life insurers are exposed to liquidity risk through derivative positions, though exposure is considered low compared to holdings of liquid assets. - The FSA considers potential foreign exchange settlements required for a three-month period and has found holdings of liquid foreign exchange positions to be sufficient. ### Natural catastrophe and contingency reserves - Non-life insurers are exposed to natural catastrophe risk mainly through typhoons, earthquakes, and flooding. - Non-life insurers must maintain extraordinary contingency reserves on their balance sheet (see ICP 14 valuation for more details). - In the SMR, non-life insurer risks include catastrophe risks based on the scenarios of the Great Kanto Earthquake in 1923 and the Ise Bay Typhoon in 1959. ### Systemic risk analysis and stress testing outcomes - Insurers are mostly resilient to the adverse scenario in terms of solvency. - Life insurers show significant sensitivity to interest rates and equity prices due to large equity holdings. - Out of 12 life insurers involved in the SMR stress test, only 2 would not remain at over 200 percent SMR (the first level in the FSA’s ladder of intervention). - The non-life insurance sector is more resilient under the adverse scenario with no insurers below the 200 percent SMR threshold. - The systemic risk analysis included a stress test based on the yet to be introduced ESR. - A key feature of the ESR regime is that it is less sensitive to interest rate changes because liability values respond along with assets. - Under SMR, only asset values respond to interest rate changes. - Under the ESR stress test, post-stress all insurers involved remained above the hurdle rate of 100 percent. - Note on thresholds: both the SMR and the ESR thresholds are the level at which the margin equates to the risk, as the risk is halved only when calculating an SMR. *Source: Chapter 22 from the provided IMF content unit.* ### 34. Systemic risk analysis also included a liquidity stress test considering the impact of ### 1jpnea2024002 - 34. Systemic risk analysis also included a liquidity stress test considering the impact of ### Liquidity stress testing and systemic risk findings - Systemic risk analysis included a liquidity stress test considering the impact of variation margining. - Two approaches were used in the liquidity stress tests: a stock-based approach and a cash flow approach. - Overall finding: insurers are not significantly exposed to liquidity risk under baseline conditions, but: - Outflows under the FSAP adverse scenario show that available reserves and tradable securities may fall short of covering outflows under stress. - Under the prescribed shocks, liquidity pressures are more prominent for insurers showing larger declines in the solvency margin ratio. - Underlying implication: liquidity shortfalls in adverse scenarios are correlated with solvency deterioration. ### Solvency and regulatory metrics (definitions and calibration issues) - SMR definition (from the source): - The SMR is calculated as Total Solvency Margin / {(1/2) ×Total Risks} with the minimum level set at 200% which means total risks are covered - 200% x ((1/2) x Total risks). - ESR definition (from the source): - The ESR is calculated as Capital Resources/Capital Requirement with the minimum level set at 100% for this exercise, so total risks represented by the capital requirement are covered. - Key calibration and design observations: - The SMR is calibrated at a level that solvency control levels do not provide any constraint to the operations of insurers. - Insurers are operating at close to 1000 percent SMR ratios with the first solvency control level at 200 percent, the level at which margin equates to risk. - The likely ESR calibration results are in an ESR of around 200 percent (margin equates to risk at ESR of 100 percent). This is indicative that the SMR is not calibrated at a sufficient level so that in adversity the insurer’s obligations will continue to be met as they fall due. - The lowest solvency control level is 0 percent. This is too low for an MCR as it only allows the strongest intervention—suspension of business and possible resolution—when losses have crystalized for creditors including policyholders. - In fiscal year 2025, the FSA will introduce the economic value-based solvency regulation including the introduction of ESR; the regulation is being developed in an open and transparent process and is likely to address the issues raised. ### Institutional and market context relevant to systemic resilience - Governance and supervisory structure: - The FSA is the single integrated regulator of financial services; the FSA employed 1,644 staff at mid-2023. - The BOJ formulates and operates monetary policy independently and sets a target for inflation (currently 2 percent per annum). - Coordination mechanisms: Council for Cooperation on Financial Stability; Financial Crisis Response Council (composition and activation described). - Market infrastructure and exposures: - The market in Japanese Government Bonds is one of the largest in the world; maturities at issuance extend to 40 years (fixed rate coupon-bearing bonds), 10 years (inflation-indexed bonds) and 15 years (floating rate bonds). - Japanese insurers hold a large share (around 20 percent) of total government bonds. - Insurers were able to invest in foreign securities, comprising around 30 percent of their securities portfolios in 2022. - Supervision and disclosure context that affect systemic risk monitoring: - The FSA conducts macroprudential analysis but macroprudential supervision does not include all major insurers in Japan (one major insurer is not included as it is not supervised by the FSA). - There are no assessment criteria for assessing the systemic risk of individual insurers and therefore insurers are not subject to a systemic risk assessment. - Aggregated data published by the FSA is highly summarized and does not include granular disclosures such as breakdowns by business line, asset holdings, or technical provisions. ### Selected recommendations addressing liquidity, solvency, and systemic resilience - Solvency framework and calibration: - As planned, the FSA should introduce the ESR in FY 2025 and ensure that all of the requirements of ICP 17 are met. - The FSA should introduce the economic value-based solvency regulation and ensure that all the requirements of ICP 14 are met. - Supervisory reporting, early warning and stress testing: - As part of the economic value-based solvency regulation introduction, the FSA should ensure that the frequency and audit of regulatory reporting is appropriate for the new framework. - The FSA will have to revise the Early Warning System (EWS) for the introduction of ESR which will use market valuation, and update methodologies and assumptions where relevant to reflect changes in insurer portfolios and market environment. - The FSA should publish more details of its EWS in order to encourage insurers to enhance their risk management processes to address a wide range of circumstances. - Macroprudential and systemic risk assessment: - The FSA should create a methodical approach to assessing the systemic risk of individual insurers, starting with assessment criteria and then regular exercises to assess systemic risk of individual insurers. - The FSA should coordinate with other ministries as relevant, for the purpose of macroprudential supervision to ensure all major entities conducting insurance activities are included in macroprudential supervision. - The FSA should reconsider its approach to publication of data and requirements applicable to insurers with a view to publishing data on all insurers and granular aggregate data on the insurance sector to encourage research, analysis, and market discipline. - Liquidity and reinsurance considerations: - Supervisory guidelines should be updated by the FSA to require insurers to consider the impact of supervision in the reinsurer’s jurisdiction and should be updated so that liquidity risk considerations in relation to reinsurance are explicitly required by insurers. - As part of addressing ICP 9 recommendations to implement individual insurer supervision and risk assessment, the FSA should consider the importance of reinsurance arrangements for all insurers and direct supervisory resources to focus more on reinsurance arrangements of reinsurers that may be more vulnerable to issues with their reinsurance programs. - Supervisory resourcing and approach: - The FSA should take steps to allocate to insurance sector supervision, over an appropriate timeframe and taking account of its overall budgetary resources, significant additional financial and human resources to support skills, and infrastructure as necessary. - Supervisory plans should be developed by the FSA for each insurer based on their risk profile detailing a cycle of supervision that involves supervisory activities, leading to revised risk assessment and to revisions of the supervisory plan as necessary. - On-site inspections should be instituted as part of the regular FSA supervisory process, which will require an increase in staff resources. *Source: IMF staff summary of the specified chapter/section.* ### 46. The FSA would like to express our sincere gratitude to the IMF mission team for the ### 1jpnea2024002 - 46. The FSA would like to express our sincere gratitude to the IMF mission team for the ### Executive acknowledgements and appraisal - The FSA expresses "sincere gratitude to the IMF mission team for the efforts they have devoted to complete the assessment of compliance with Insurance Core Principles (ICP)." - The assessment was "conducted in a fair, thorough and professional manner throughout the process." ### Supervisory developments since the 2012 Detailed Assessment - Since the last Detailed Assessment in 2012, the FSA has: - "strengthened its supervisory framework for insurers’ governance and enterprise risk management" - emphasized "group-wide supervision" - "made significant steps towards the introduction of the Economic value-based Solvency Regulation" - "also has incorporated elements of ComFrame and the Holistic Framework by the IAIS into our supervisory framework." ### Resource constraints and supervisory approach - The FSA acknowledges that upgrading a "risk-based supervisory framework" "would require more resources." - Current supervisory actions: - Wide-ranging thematic supervisory programs on "governance, risk management, conduct risks and financial soundness." - Swift and rigorous action when "company-specific or sector-wide issues are identified." - Self-assessed areas for enhancement: - Need for more focus on "monitoring individual insurers." - Importance of more "proactive" supervisory approaches, contingent on additional resources, as highlighted in the Detailed Assessment. ### Legislative and institutional foundations - The FSA views existing legislative and institutional arrangements as "a solid foundation" to address supervisory challenges. - Key legal instruments and roles: - The Insurance Business Act (IBA) and other key legislations provide the FSA with "a wide range of powers and tools." - The Supervisory Guidelines function as "a flexible and effective tool to set supervisory expectations." - Coordination among authorities and the FSA’s resources "could be strengthened under the existing institutional arrangements." - Emphasis on an "effective and pragmatic approach" to enhance the supervisory framework given complexity and breadth of challenges. ### Immediate priorities and implementation stance - The FSA will "continue to update our supervisory framework" to respond more proactively to sectoral challenges. - One "most immediate and important steps" is the "effective introduction of the Economic value-based Solvency Regulation," which will have "significant implications for our risk-based supervisory approach." - Commitment to "take steady steps to upgrade our supervisory framework," while recognizing that "prioritization is key given limited resources." ### ICP 1 — Objectives, Powers, and Responsibilities of the Supervisor (excerpts) - Core statement: "Each authority responsible for insurance supervision, its powers and the objectives of insurance supervision are clearly defined." - Legislation identifies the FSA as the principal regulator and assigns responsibilities for: - "(i) ensuring the stability of the financial system in Japan, (ii) protecting depositors, insurance policyholders and securities investors, etc., and (iii) ensuring smooth finance functions (Article 3(1) of the Law on the Establishment of the FSA, (LEFSA))." - Additional LEFSA requirements include "(i) matters related to the planning of the financial system; (ii) matters related to supervision, including on-site inspection, of financial institutions including insurers (and insurance holding companies); (iii) matters related to the planning of a system regarding international business conducted by financial institutions; and (iv) matters related to international cooperation concerning the affairs for which the FSA is responsible (Article 4 of the LEFSA)." - Relationship between IBA and FSA: - The purposes of the IBA mirror FSA objectives: "to protect policyholders etc. by ensuring the sound and appropriate operation of insurance business etc., contributing to the stability of the lives of the people and the sound development of the national economy (Article 1 of the IBA)." - The IBA gives powers for insurance supervision to the Prime Minister; "most are delegated to the FSA under Article 313 of the IBA and Article 46 of the Cabinet Office Order for Enforcement of the IBA," while licensing and cancellation powers are "retained by the Prime Minister but delegated in practice to the Minister of State for Financial Services." - FSA strategic guidance and supervisory orientation: - FSA has issued materials on supervisory approach: "Replacing checklists with engagement, June 2018" and "FSA’s Approaches to Prudential Supervision, March 2019." - Recent strategic plan required insurers to "build sustainable business models and develop products meeting changes in customer needs" and to enhance "group-wide governance" in light of overseas expansion (The FSA Strategic Priorities, July 2022-June 2023). - Supervision of kyosai (cooperative insurance activities): - Kyosai activities fall within the scope of an insurance policy (Article 2 (i) of the Insurance Act 2008) but are "exempt from insurance business defined in Article 2 of the IBA and regulated under dedicated legislation." - Examples: Zenkyoren is supervised by the Ministry of Agriculture, Forestry, and Fisheries (MAFF) under the Agricultural Cooperatives Act; other kyosai supervised by the Ministry of Health, Labor, and Welfare and the Ministry of Economy, Trade and Industry. - Ministries "communicate with the FSA on policy matters." - Delegation to Local Finance Bureaus (LFBs): - Under "Article 313(2) of the IBA and Articles 48 and 49 of the Cabinet Office Order for Enforcement of the IBA," the FSA has delegated certain powers to the LFBs of the Ministry of Finance (MOF). - The powers cover: - "Regulation and supervision of Small Amount and Short Term Insurers (SASTIs) (120 firms at end-March 2023 with total written premiums in the financial year 2022 of JPY" *Source: 1jpnea2024002 — excerpt* ### 134.6 billion, less than 0.5 percent of the industry total); they can write only short- ### 1jpnea2024002 - 134.6 billion, less than 0.5 percent of the industry total); they can write only short- ### Regulatory structure, delegation and scope of supervised entities - Small-amount and short-term insurance (SASTI) characteristics: - amount insured less than up to JPY 10 million depending on the product; - short-term: under one year for life, two years for non-life; - subject to lower minimum capital than insurers; - may operate as composites but are not covered by the Policyholder Protection Corporations. - Delegation of supervisory powers: - All insurance agents: full powers, including registration and enforcement, are delegated to the LFBs under 49 (1) of the Cabinet Office Order for Enforcement of the IBA. - Insurance brokers: full powers, including registration and enforcement, are delegated to the LFBs under 49 (2) of the Cabinet Office Order for Enforcement of the IBA. - For both SASTIs and agents, the FSA retains certain enforcement powers (Articles 48(1) and 49(1) of the Cabinet Office Order for Enforcement of the IBA). - FSA powers to order an agent or broker to submit reports or data and undertake inspections (Article 305 of the IBA); power to issue an order to improve business operations (Article 306) is delegated to LFBs. - FSA cooperation: - The FSA retains staff to support the LFBs with supervision of SASTIs and intermediaries and cooperates actively with LFBs in regulatory and supervisory work. ### Legal and regulatory instruments - Hierarchy of instruments and issuer: - Primary legislation: IBA (approved by the Cabinet, passed by the Diet); FSA drafts laws and Cabinet Orders relevant to insurance supervision. - Orders for enforcement of laws: approved and issued by the Cabinet; OEIBA sets out delegation to LFBs and other provisions. - Ordinances: may be issued by ministries or by the FSA (detailed requirements; many relevant provisions set out in the OEIBA). - Guidelines: issued by the FSA (Comprehensive Guidelines for Supervision of Insurance Companies). The FSA considers the guidelines to be binding on insurers; insurers take the same view. - Regulatory notices: issued by ministries or by the FSA for matters of detail. - “No action letters”: issued by the FSA in response to inquiries; procedures set out in FSA’s guidelines (III-1-9-3); answers posted on the FSA’s website. - FSA authority (IBA and OEIBA): - request information (Articles 128 and 271-27 of the IBA); - issue orders for business suspension and business improvement (Articles 132 and 271-29); - conduct inspections and off-site monitoring; - approve insurance products; - issue ordinances and guidelines. - Limitations: - The FSA has no powers to waive or modify its requirements in their application to individual insurers or intermediaries; - lacks an explicit power to apply requirements to an individual insurer or intermediary (e.g., to impose additional solvency margin requirements). ### Institutional coordination on financial stability - Official bodies where the FSA participates: - Council for Cooperation on Financial Stability — meets with the BOJ (usually the FSA Commissioner and the Deputy Governors of the BOJ). - Financial Crisis Response Council — advises the Prime Minister on systemic risks at the point of a financial institution’s failure; chaired by the PM; comprises the Minister of Finance, the Minister for State for Financial Services, the Commissioner of the FSA, the Governor of the BOJ, and the Chief Cabinet Secretary. ### Assessment of the FSA’s statutory role and sector coverage - Assessment: Largely Observed (for principal insurance sector authority responsibilities covered by the assessment). - Comments and sectoral issues: - FSA is principal authority empowered to supervise insurers, intermediaries and groups; Local Finance Bureaus empowered by delegation. - FSA focuses on policyholder protection and financial stability; balancing development objectives could give rise to conflicts. - Separate institutional/regulatory arrangements for cooperative insurance activities (kyosai) account for some 15 percent of total premium income and include one of the largest institutions conducting insurance activities in the country. - Kyosai arrangements could give rise to differences in approach (including solvency requirements) and levels of protection for policyholders and hamper effective macroprudential supervision covering the whole sector. - No standing arrangements for coordination and information-sharing between the FSA and responsible ministries on supervision of largest institutions conducting insurance business. - Recommendation: - FSA and ministries responsible for kyosai supervision should increase cooperation on regulatory initiatives and supervisory practices, prioritizing coordination between the FSA and MAFF on regulation and supervision of the largest institutions (including application of fully risk-based solvency requirements); and periodically review the need for unification of insurance sector responsibilities. ### ICP 2 — Supervisor: independence, accountability, resources - High-level findings: - FSA established as external agency of the Cabinet Office (Article 49 of the Act for Establishment of the Cabinet Office and Article 1 of the LEFSA); accountable to the Diet. - Insurance regulatory and supervisory powers set out in the IBA are assigned to the Prime Minister but generally delegated to the Commissioner of the FSA under Article 313 (1) of the IBA. - Certain powers retained by the Prime Minister (Article 46 of the OEIBA): licensing and revocation of licenses under Articles 3, 185 and 219 of the IBA; approval of establishment of an Insurance Policyholders Protection Corporation (Article 265-9 of the IBA); authorization and revocation of authorization of an IHC (Article 271-18 and Article 271-30 of the IBA). - In practice, licensing powers are delegated to the Minister of State for Financial Services (currently the Minister of Finance); Minister takes licensing decisions based on FSA proposals. - Resources and budget: - FSA budget: JPY 23.19 billion in FY 2023, an increase of JPY 560 million from the previous year. - Total number of staff covered by this budget: 1649, an increase of 15 from the previous year. - FSA bureaus and staff (June 2023): Strategy Development and Management Bureau 609 staff; Policy and Markets Bureau 190 staff; Supervisory Bureau 387 staff. - Overall resources allocated to insurance sector regulation and supervision comprise 88 in the Insurance Business Division and around 40 staff in other roles within the FSA; estimated 50 staff involved in insurance sector work at the Local Finance Bureaus. - Independence, governance and protections: - No industry representatives in FSA governance; no board or governing body; senior management not generally drawn from industry. - FSA staff and Commissioner are national public officials protected by the National Public Service Act; Commissioner not appointed for a fixed term. - FSA is almost entirely government-funded; budget set by law as part of general government budgeting process. - Transparency and accountability: - FSA publishes strategic plans and an annual Insurance Monitoring Report; publishes information on corrective actions and sanctions in a spreadsheet on its website; publishes regulatory material and “no action letters”. - Comprehensive information on the insurance sector (including kyosai) is not readily available on FSA website; some aggregate statistics and lists of licensed insurers and IHCs are published. - Internal decision-making and quality assurance: - Decision-making relies on escalation to management (Head of Insurance Business Division, Supervision Bureau senior management); no formal committees (e.g., no risk committee) or formal quality assurance function for ex post reviews of supervisory judgments. - Assessment: Partly Observed - Key comments: - High degree of operational independence despite being an agency within Government of Japan, but reservation of key licensing powers to a minister and dependence on central government budgeting process expose the FSA to potential interference. - Insurance sector resources are low relative to comparators given sector size and IAIGs; constraints on monitoring, on-site inspections and engagement with overseas operations of Japanese groups. - Regular rotations of staff constrain development of specialist expertise. - Recommendations: - Government of Japan should delegate to the Commissioner of the FSA the licensing powers currently reserved to the Minister of State for Financial Services; review (taking into account constitutional constraints) whether FSA can have increased freedom to determine its expenditure budget and finance itself independently. - FSA should allocate, over an appropriate timeframe, significant additional financial and human resources to insurance sector supervision to support skills and infrastructure. - FSA should publish more information about the insurance sector itself rather than relying on industry publication of aggregate data. ### ICP 3 — Information sharing and confidentiality - Legal and operational framework: - FSA has powers to request other supervisory agencies, domestic and foreign, to provide information (IAIS Multilateral MoU signed; bilateral MoUs/Exchanges of letters with several foreign supervisory authorities). - LEFSA Article 5 empowers FSA to request other agencies to “submit materials, provide explanations, and provide other necessary cooperation”. - LEFSA Article 4 (24) empowers FSA to provide information to other parties in context of international cooperation; scope drawn widely. - Practices: - FSA relies on MoU frameworks for exchange; will exchange even absent formal agreement after confirming purpose, need and confidentiality protections. - Requests handled by relevant supervisory area with support from International Affairs Office; approval of FSA senior management sought ad hoc. - Supervisory Guidelines require FSA to provide information that contributes to foreign supervisors’ supervision of insurance groups (Guidelines VII-5-2). - Observed usage: - FSA has exchanged confidential information in practice, including in supervisory college contexts and in a case leading to issuance of a business improvement order. - During licensing of foreign insurers, FSA does not always proactively exchange information with relevant foreign supervisors but uses supervisory colleges where applicable. - Assessment: Observed - Comment: - Scope for the FSA to exchange information more proactively with home supervisors when considering applications from foreign-owned insurers. ### ICP 4 — Licensing - Definitions and licensing requirements: - Definitions: life insurance business (Article 3(4) of the IBA) and non-life insurance business (Article 3(5) of the IBA); same entity cannot hold both life and non-life license (Article 3(3) of the IBA). - Penalty for conducting insurance business without license: imprisonment with work for not more than three years or a fine of not more than three million yen, or both (Paragraph 1 of Article 315 of the IBA). - Exceptions to licensing: kyosai, activities for members only, businesses with fewer than 1000 counterparties (license required if policy amount exceeds half-a-million JPY if policyholder is an individual or ten million JPY if the policyholder is a corporation). - Applicant must demonstrate adequate capital: must not be less than one billion yen (Article 6 of the IBA and Article 2-2 of the Cabinet Office Order for Enforcement of the IBA). - Licensing criteria (Paragraph 1 of Article 5 of the IBA): sufficient financial basis; good prospects for income and expenditure; knowledge and experience and social credibility of personnel and structure; contents of insurance contract consistent with policyholder protection; reasonable calculation procedures for premiums and technical provisions based on actuarial science. - Profitability demonstration: life insurers must demonstrate profitability before the end of the tenth year; non-life insurers before the end of the fifth year (Article 10-2 of the OEIBA). - Process and practical features: - Decisions on licensing retained by the Minister of State for Financial Services (not delegated to Commissioner); Article 246 of the OEIBA: FSA shall endeavor to make licensing decision in 120 days. - Extensive pre-application engagement: multiple hearings (~two-hour meetings) with senior executives; application improved until likely to be approved; practical decision-making largely performed by the FSA. - No official rejections due to pre-application process; no examples of license conditions imposed; applicants typically withdraw if not likely to succeed. - Foreign insurers: branches or subsidiaries allowed; branches require home supervisor certification; foreign insurers are not allowed to conduct cross-border business in Japan without licensing; permission to obtain cover from foreign insurer possible (about one application per year). - Publication: - FSA publishes a list of licensed insurers by type of license on its website. - Assessment: Observed - Comment: - Extensive IBA and OEIBA requirements; practical licensing decision-making effectively done by FSA though formal decision retained by a minister (issue noted under ICP 2). ### ICP 5 — Suitability of persons - Legal coverage and expectations: - Eligibility criteria in IBA (Article 8-2 (1)) cover directors engaged in day-to-day business, corporate auditors, and audit committee members — required to have “knowledge and experience” and “social credibility”. - Guidelines elaborate that qualifications required are “extremely high” (Guidelines II-1-2). - Responsible actuary eligibility: must be regular member of The Institute of Actuaries of Japan with necessary knowledge and minimum years of actuarial experience (Article 120 (2) of the IBA; Article 78 of the OEIBA). - Major shareholders defined as entities with 20 percent or more voting rights, or 15 percent with significant influence (Article 2 (13) of the IBA). Those intending to become major shareholders must obtain authorization (Article 271-10 (1) of the IBA). - FSA practices: - Insurers must notify FSA of certain appointments (Article 85-1(2) of the OEIBA); FSA conducts background checks using databases of past administrative actions, criminal records etc. - FSA holds hearings with nominees when suitability is in question (Guidelines II-1-3-6(2)). - FSA may issue business improvement orders, business suspension orders, require dismissal of directors, or withdraw licenses for violations (Articles 132, 133 of the IBA). - FSA has in practice prevented unsuitable appointments (including requiring removal of CEOs), often via supervisory discussion rather than formal powers. - Gaps and limitations: - No explicit suitability requirements for all members of senior management or all key persons in control functions (other than responsible actuary). - No explicit requirement on insurers to assess suitability or to notify FSA of circumstances materially adversely affecting suitability, though Guidelines expect insurers to take responsibility. - Limited FSA resources to conduct regular effective supervision to ensure insurers meet responsibilities in practice. - Assessment: Partly Observed - Recommendations: - FSA ensure competence and integrity requirements apply to all persons within ICP scope. - FSA develop supervisory processes to assess, on risk-based principles, whether insurers meet responsibilities on suitability of persons in practice. ### ICP 6 — Changes of control and portfolio transfers - Major shareholder and IHC approvals: - Major shareholders: authorization required (Article 271-10 (1) of the IBA); assessment criteria include acquisition funding, purpose, financial condition, understanding of public nature of insurance business and social credibility (Article 271-11 of the IBA). - FSA can require reports, conduct on-site inspections of major shareholders, require submission of business improvement plans, and rescind authorization (Articles 271-12, 271-13, 271-15, 271-16). - Insurance holding company authorization requirements (Article 271-18 of the IBA); authorization is not delegated to the Commissioner but to the Minister of State for Financial Services. - Notifications: - Notification required when becoming or ceasing to be a major shareholder or holder of more than 50 percent voting rights (Article 271-32(1)); similar notification for IHCs (Article 271-32(2)). - Entities holding more than 5 percent of voting rights must notify the FSA (Article 271-3 (1) of the IBA). - Portfolio transfers: - Insurer may transfer insurance contracts with FSA approval (Article 135(1) of the IBA; Article 139 of the IBA; Article 90 of the OEIBA). - FSA considers policyholder protection, actuarial bases for Policy Reserves, policyholder dividend reserves, post-transfer solvency of transferor/transferee, and proper distribution of surplus (Article 90-2 of the OEIBA). - Transfers are uncommon; example discussed involved transfer of a SASTI’s insurance contracts within a group. - Assessment: Observed - Comment: - Requirements are comprehensive and followed in examples reviewed. - FSA may wish to consider implications of structuring reinsurance transactions effectively as transfers of business if this trend emerges. ### ICP 7 — Corporate governance - Framework and sources: - Governance requirements: IBA, OEIBA, FSA Guidelines; Companies Act; TSE Corporate Governance Code (CGC) applies to listed insurers on a comply-or-explain basis. - Guidelines include extensive expectations on boards, governance culture, risk management policy and group governance (Section VII for groups). - Board role, composition and responsibilities: - Board duties required by IBA (Article 53-14) and OEIBA (Article 23-8); Guidelines require boards to establish corporate management policy and enterprise risk management. - IBA requires directors to have knowledge, experience and social credibility (Article 8-2). - No explicit legal requirement on adequacy of resources for boards (ICP 7.3), and no explicit universal requirement on “exercise of independent judgment” by all directors (ICP 7.4). - Remuneration: fixed by shareholder resolution; Guidelines expect compensation committees and disclosure of control environment for compensation. - Supervisory engagement: - FSA collects board materials, holds hearings with nominees, meets annually with CEOs of major groups, and conducts thematic governance reviews (including IAIGs). - FSA lacks a systematic risk-based process for assessing all aspects of governance across all insurers and lacks regular on-site evaluation such as interviews with board members. - Groups and IAIGs: - Extensive group governance expectations in Guidelines (group structure documentation, group-wide control environment, reporting lines, attention to foreign jurisdiction risks). - FSA supervisory work on IAIGs included a major exercise assessing governance over international operations (results published 2020). - Assessment: Largely Observed - Gaps and recommendations: - Gaps: boards’ powers and resources; exercise of independent judgment by all directors; insurer board systems for timely and effective communication with supervisor on governance; role and responsibilities of senior management applying to all insurers; absence of systematic risk-based governance assessment with appropriate on-site tools. - Recommendations: - FSA address gaps in requirements and amend Guidelines or legislation as appropriate. - FSA review TSE’s Corporate Governance Code for provisions that should be included in Guidelines (and applicable to all insurers) or in legislation, including standards of independence for outside directors. - FSA establish risk-based tools and procedures for regular in-depth assessment of corporate governance, including board effectiveness, and develop on-site monitoring tools such as interviews with board members. ### ICP 8 — Risk management and internal controls - Regulatory expectations and scope: - No explicit legislative requirements; FSA Guidelines (Sections II, III, VII) set expectations for enterprise-wide risk management, risk tolerance, internal controls and the three lines of defense model. - ORSA requirements provide additional specific expectations (ICP 16 references). - Control functions: - Responsible actuary: statutory requirement (Article 120 of the IBA; Article 78 of the OEIBA) with defined roles (pricing, reserves, dividends). - Internal audit: Guidelines expect an independent internal audit division reporting to representative director and board; FSA assesses independence and effectiveness. - Risk management and compliance functions: no explicit universal legal requirement to establish independent functions, but Guidelines create expectations (e.g., “a section that implements enterprise risk management” and “supervising section for compliance”). - No explicit requirement on IAIGs to undergo independent assessment of internal control system coherence, completeness and effectiveness (CF8.2b). - Group-level expectations: - Group Guidelines (VII) expect group-wide risk management, group risk culture, annual reviews, internal/external independent evaluations, group compliance oversight division, group actuarial function, and group internal audit coordination. - Supervision and practice: - FSA conducts supervisory work on internal audit, and group-level controls; larger insurers typically have established control functions. - FSA lacks a systematic risk-based process for assessing all aspects of risk management and controls at all insurers, and lacks routine on-site evaluation/interviews of control function staff (except internal audit). - Assessment: Largely Observed - Recommendations: - FSA revise Guidelines (or consider legal/regulatory changes) to set explicit comprehensive expectations on establishment and adequacy of all control functions within ICP scope. - FSA establish risk-based tools and procedures for regular in-depth assessment of risk management and controls, including on-site tools such as interviews with board members and key persons in control functions. ### ICP 9 — Supervisory review and reporting (off-site monitoring and on-site inspections) - Reporting and powers: - FSA powers to require reports (Articles 110 and 128 of the IBA) and conduct on-site inspections (Article 129). - Insurers required to submit financial regulatory reports semi-annually (Article 110 of the IBA); FSA requests quarterly key financial data including an SMR calculation. - ORSA reports required annually; three annual written opinions from the responsible actuary required. - Business reports and risk reports required annually (Article 59 of the OEIBA). - Supervisory framework: - Comprehensive Guidelines for continuous monitoring and supervision; last major update in 2020 to implement ComFrame and IAIS Holistic Framework. - Off-site monitoring: - Insurance Prudence Monitoring Office (IPMO): 16 people; operates Early Warning System (EWS) and market risk dashboard. - Market risk dashboard: quarterly; if insurers flagged as likely to have a less than 200 percent SMR as result of market movements, flagged to relevant Life or Non-Life Insurance Section. - Life Insurance Section: 12 staff; Non-Life Insurance Section: 13 staff; sections divided into five sections each; insurers allocated to sections for follow-up. - Prudential supervision largely off-site and thematic; supervisory emphasis often on market conduct; prudential interactions often reactive when issues are flagged. - On-site inspections: - On-site inspections used primarily for significant issues; inspections last three to four months with substantial inspector teams (example: chief inspector + 17 staff for a little over four months). - No on-site inspection for prudential matters for about 10 years (inspectors focused on market conduct). - Inspections are escalation measures, not part of a routine supervisory cycle; reports issued to insurer chief executive with expected responses (example: report issued June 2021, insurer response July 2023). - Holistic Framework monitoring: - Eight insurers (five large life groups and three large non-life groups) subject to Holistic Framework monitoring; includes four IAIGs. - Enhanced monitoring for liquidity risk management, macroeconomic exposure, interconnectedness, and ESR-based stress testing (Lehman Brothers failure scenario shock). - ESR follow-up: where post-stress ESR is below 100 percent, FSA follows up to understand management actions; ESR used in parallel run for these insurers. - Analysis shared with other supervisors via supervisory colleges. - Supervisory planning and outsourcing: - Supervisory plans set at sector level; thematic reviews drive follow-ups; outsourcing arrangements assessed when issues arise but not routinely reviewed as part of a cycle. - Audit: - Audits required only for general purpose financial statements (Article 53-22 of the IBA; Article 396 of the Companies Act); other regulatory reports not subject to audit. - Reporting of reference ICS: - Reference ICS reported by Japanese insurers and discussed in supervisory colleges for the four IAIGs. - Assessment: Partly Observed - Comments and recommendations: - Reporting requirements comprehensive; statutory financial regulatory reports (including SMR) required semi-annually though FSA requests quarterly SMR data — statutory quarterly reporting would be desirable in light of ESR introduction. - Prudential supervision is largely reactive and sector-level themed rather than consistently insurer-specific with routine on-site assessments. - Audit coverage of regulatory reports could be expanded and should be considered in light of ESR implementation. *Source: 1jpnea2024002 (excerpt) — IMF assessment text as provided.* ### introduction of ESR. ### 1jpnea2024002 - introduction of ESR. ### Supervision approach and risk-based supervision - Supervision is mainly reactive to risk that has crystalized into a problem for an insurer. - Where FSA’s supervision is forward looking it relies on EWS, which has some limitations under the current framework. - Risk-based supervision is described as proactively identifying risks and building a supervisory plan for an insurer based on its net risk of failure or significant compliance issues and the size and importance of the insurer. - These elements cannot be seen in practice at the FSA. The lack of such a risk assessment does not meet the requirements of ICP 9.2 and CF 9.2a in relation to the four IAIGs. - Focus on supervision at the sector level means that ICP 9.3 is not met either as outsourcing arrangements are not routinely reviewed. ### On-site inspections, supervisory plans, and ORSA - On-site inspections are part of escalating measures for insurers operating outside the FSA’s own risk tolerance, but are not part of routine supervision. - On-site inspections are used more as an investigation tool to understand the root cause of risks that have crystalized; findings are used to require improvements. - The type of on-site inspections contemplated by ICP 9.6 are not carried out in the routine supervisory context. - Hearings where senior management are interviewed for about two hours at the FSA premises may cover parts of similar ground as an on-site inspection, but on-site inspections involve: - discussions with operational staff, - review of systems, - review of case files, - assessment of whether governance processes, internal control procedures and risk management practices are actually implemented. - There is no individual supervision plan for each insurer. Prudential supervision is based on thematic issues where a number of insurers are subject to analysis (but far from all insurers). - Example: the 2016 review of the implementation of ORSA. Issues found with individual companies were followed up but comprehensive review of ORSA was not carried out subsequently for many insurers. - ORSA reports are reviewed for the 8 largest insurers as part of the Holistic Framework monitoring. ### Resourcing and structural implications - The approach to supervision appears to be designed to fit the available resources. - As detailed in relation to ICP 2, resourcing at the FSA appears limited compared with peer supervisors. - Addressing recommendations in relation to this ICP and a number of others will require a significant increase in resources. ### Recommended supervisory framework changes (from source) - Each insurer (or at least all but the smallest) should have a supervisory plan for a year or longer. - Supervisory plan should detail a cycle of supervision that involves supervisory activities, leading to revised risk assessment, leading to revisions of the supervisory plan as necessary. - Supervisory activities should include a mix of off-site monitoring and on-site inspections. - Insurers should be allocated to different categories based on their risk and impact of failure. - For each category, there should be a policy on balancing both off-site monitoring and on-site inspection to ensure proper risk-based supervision, taking into account the insurers’ characteristics. ### Explicit recommendations (bulleted in source) - As part of the economic value-based solvency regulation introduction, the FSA should ensure that the frequency and audit of regulatory reporting is appropriate for the new framework. - Supervisory plans should be developed by the FSA for each insurer based on their risk profile detailing a cycle of supervision that involves supervisory activities, leading to revised risk assessment, leading to revisions of the supervisory plan as necessary. - A systematic approach to risk assessment of each insurer should be the foundation of supervisory plans of the FSA. The risk assessment should consider inherent risks, the quality of governance, risk management and controls and the possible impact of a failure of the insurer. - On-site inspections should be instituted as part of the regular FSA supervisory process, which will require and increase in staff resources as discussed in the context of ICP 2 and should generally be less intensive than the current practice under which inspections are used essentially as an enforcement tool. ### ICP 10 – Preventive Measures, Corrective Measures and Sanctions (description and practice) - The supervisor: - requires and enforces preventive and corrective measures; and - imposes sanctions, which are timely, necessary to achieve the objectives of insurance supervision, and based on clear, objective, consistent, and publicly disclosed general criteria. - Actions against individuals or entities that conduct unlicensed insurance activities: - FSA has powers to take action against a person who has operated an insurance business without a license through punishment by imprisonment with work for not more than 3 years or a fine of not more than three million JPY or both (Article 315 of the IBA). - If the FSA finds a person who is conducting unlicensed insurance business, then it will issue a written warning and also require correction. The FSA can require hearings and would also communicate with other investigating authorities. - Preventative and corrective measures in practice: - First step when concerns about an insurer are identified: require senior officers to attend a hearing, usually about a two-hour meeting. - If concerns persist after hearings, the FSA can request the insurer or insurance holding company to submit a report under Article 271-27 of the IBA. - If the report does not satisfactorily address concerns, the FSA will require an on-site inspection to understand the underlying reason for the insurer’s problems. - On-site inspections are significant undertakings lasting three to four months and involving a team of ten or more FSA staff. - Monitoring and Inspections Section within the Insurance Business Division will form the core of an on-site inspection team; other FSA staff may also be involved. - At conclusion of an on-site inspection a detailed report is issued to the chief executive of the insurer; the insurer is required to respond in writing. - If response does not satisfy the FSA’s concerns, it can issue a business improvement order that requires a plan to be provided to the FSA for how the insurer will address the identified issue; supervisors then ensure the plan is met. ### Ladder of Intervention and Early Warning System (EWS) - Ladder of Intervention based on the Solvency Margin Ratio: - Specific measures to be taken as the SMR declines below 200 percent with other thresholds at 100 percent and 0 percent. - Early Warning System (EWS) and Market Risk dashboard: - The FSA calculates the indicators needed in the framework of the EWS based on data collected from insurance companies. - Four components of the EWS: 1. Profitability: Fundamental profit index 2. Stability: Impact of changes in securities prices 3. Credit risk: Status of concentration of large borrowers 4. Cash flow: Ratio - The FSA publishes minimal information about the EWS in the Guidelines. - For an insurer deemed to need improvement for each indicator, the FSA conducts hearings regarding the cause of problems and improvement measures. - If necessary, the FSA may encourage early improvement by ordering a report and conducting on-site inspections or may issue a business improvement order. - The FSA prepares a market risk dashboard on a quarterly basis to estimate the impact of market risks related to interest rates, exchange rates, stock prices, and credit spreads on SMR. ### Sanctions excerpts (selected numeric penalties and applicability) - Imprisonment with work for not more than 3 years; Or a fine of not more than three million JPY; Or cumulative imposition — Article 315: - No. 1 A person who has conducted Insurance Business without a license; - No. 2 A person who has had another person conduct Insurance Business by name lending; - No. 3 A person who has committed an act of providing false information to the settlor with regard to the acceptance of a trust; - No. 4 Person who has not delivered the report on the status of trust property, etc. - No. 5 Persons who do not deliver investment reports, etc. - No. 6 A person who has been registered for Low-Cost, Short-Term Insurance Business by wrongful means; - No. 7 A person who has had another person engage in Low-Cost, Short-Term Insurance Business by means of [text continues in source]; - No. 8 A person who has made a false statement to the policyholder or the insured, or has failed to disclose important matters included in the contract clauses of an insurance contract that would affect the judgment of the policyholder or the insured; - No. 9 Any person who has made Compensation for Loss, etc. under the Specified Insurance Contract; - Imprisonment for a term not exceeding two years; Or a fine of not more than 3 million JPY; Or cumulative imposition — Article 315–(2): - No. 1 A person who has carried out the Establishment, etc. of an Insurance Holding Company without authorization; - No. 2 A Specified Holding Company that continued to be a Holding Company beyond the Last Day of the Grace Period; - No. 3 A person who, in violation of the measures required for the establishment, etc. of an Insurance Holding Company without authorization, etc., has remained as a Holding Company; - No. 4 A person who has carried out the Establishment, etc. of a Small Amount and Short-Term Insurance Holding Company; - No. 5 A Specified Small Amount and Short-Term Insurance Holding Company that continued to be a Holding Company beyond the Last Day of the Grace Period; - No. 6 A person who, in violation of measures required of a Small Amount and Short-Term Insurance Holding Company, etc. without authorization, etc., has remained as a Holding Company; - Article 316 (selected applicability): - No. 1 A person who has violated any of the conditions attached to the Insurance business license; - No. 2 A person who has violated an order for suspension of all or part of its business; - No. 3 A person who has violated an order of suspension of business pertaining to approval of amendments to contract conditions; - No. 4 A person who has violated the prohibition of business pertaining to a Foreign Insurer that has not established a branch office, etc. in Japan; - No. 5 A person who has violated the conditions attached to the license of a foreign life insurance business to a foreign insurer; - No. 6 A person who started Insurance Business, etc. before making notification of deposit money; - No. 7 A person who has carried out business in violation of the provisions on suspension of business due to a disposition ordering business and property management by an insurance administrator; ### Assessment and recommendations on EWS - Assessment: - The FSA has an escalating series of preventative measures and corrective measures which it applies in practice. - It has an extensive list of possible sanctions which are applied in practice. - The EWS in its current form has some limitations which can be addressed in its redesign to accommodate the introduction of ESR. - Publication of more details of the EWS will be helpful to insurers in enhancing their risk management processes to address a wide range of circumstances. - Recommendation: - The FSA will have to revise the EWS for the introduction of ESR which will use market valuation, and update methodologies and assumptions where relevant to reflect changes in insurer portfolios and market environment. - The FSA should publish more details of its EWS in order to encourage insurers to enhance their risk management processes to address a wide range of circumstances. ### ICP 12 — Exit from the Market and Resolution (legislative framework summary) - Legislation provides requirements for: - the voluntary exit of insurers from the market; and - the resolution of insurers that are no longer viable or are likely to be no longer viable, and have no reasonable prospect of returning to viability. - Four pieces of legislation provide paths to insurer resolution: - IBA (resolution conducted under supervision of the FSA), - Corporate Reorganization Act (CRA) applied to insurers structured as stock companies (procedures under CRA conducted under supervision of the courts), - Act on Special Measures for the Reorganization Proceedings of Financial Institutions (SMRPFI) applied to insurers structured as mutual companies (procedures conducted under supervision of the courts), - Deposit Insurance Act (DIA) where, in the case of systemic risk, orderly resolution measures would be used. - Exit from the market under the IBA: - Under the IBA, the FSA may use a range of powers to ensure the exit of an insurer. The conditions that must be met for the FSA to proceed include: 1. That it will be difficult for the insurer to continue undertaking insurance business in light of the status of its business or solvency or *Source: 1jpnea2024002 - introduction of ESR.* ### 2. When the operation of the business is extremely inappropriate such that continuation ### 1jpnea2024002 - 2. When the operation of the business is extremely inappropriate such that continuation ### Grounds for intervention and available FSA powers - Article 241 of IBA: where operation is "extremely inappropriate" such that continuation is likely to result in insufficient protection of policyholders, the FSA may: - suspend the whole or part of an insurer’s business; - require a merger; - seek an agreement on transfer of insurance contracts; - take any other necessary measures; or - make a disposition ordering administration of business and property by an insurance administrator. - These powers were used in the 1997 life insurance crisis. - Purpose: allow FSA action against insurers impairing confidence in the insurance sector or contrary to the public interest. ### Exit from the market: CRA and SMRPFI reorganization and bankruptcy pathways - Under SMRPFI: - FSA may file a petition for commencement of reorganization proceedings against an insurer, insurance holding company, or small amount and short-term insurer if a fact constituting grounds for commencement of bankruptcy proceedings is likely to occur (Bankruptcy Act Article 16: insolvency = liabilities exceeding assets). - The insurer or a creditor (e.g., corporate debt holder or policyholder) may also petition the court for reorganization. - The court decides whether to commence reorganization proceedings and appoint a receiver. - Under CRA: - Proceedings are similar to SMRPFI; FSA, insurer, or any party with a claim may petition the court. - The receiver develops a reorganization plan subject to approval at a stakeholders meeting and court approval. - Notable contrast with IBA: under CRA, general claims can be reduced in the reorganization plan; under IBA only claims related to insurance contracts (policyholders) can have rights limited. - FSA has chosen CRA / SMRPFI over IBA in all resolution cases after the 2000 SMRPFI revision enabled insurer application. ### Court–administrative agency interaction in reorganization - Court may request opinions from the administrative agency (e.g., FSA) on reorganization of an insurer or reorganization company (CRA Article 8 (3 & 4); SMRPFI Article 174). - For proposed reorganization plans specifying matters requiring permission, authorization, license, or other disposition by an administrative agency, the court shall hear the agency’s opinion (CRA Article 187; SMRPFI Article 280). - Court must issue an order confirming or disconfirming approved reorganization plans. - One requirement for confirmation: where a plan specifies matters requiring permission/confirmation/license/disposition by an administrative agency, it must not contradict, in material respects, the agency’s opinion (CRA Article 199(1 & 2); SMRPFI Article 290). ### Policyholder protection under CRA and SMRPFI - Rights of each creditor can be amended by a reorganization plan (CRA Article 168 (1); SMRPFI Article 260(1)). - Modifications must provide fair and equitable differences across holders of different types of rights; losses distributed according to order of priority (CRA Article 168 (3); SMRPFI Article 260(3)). - Policyholders are protected by policyholder protection corporations guaranteeing, in principle, up to 90 percent of the policy reserve at time of failure (IBA Article 270-3 (2); Order on Special Measures for the Protection of Policyholders Article 50-5(1)). ### Orderly resolution under the Deposit Insurance Act (DIA) - DIA orderly resolution provisions could apply to insurers when the Prime Minister finds a likely significant disruption to the financial market unless measures are taken. - If insurer is solvent: Deposit Insurance Corporation of Japan (DICJ) would inject capital and receive preferred stock (without voting rights). - If insurer is insolvent or likely to become insolvent: DICJ can transfer systemically important assets and liabilities (most likely to a bridge institution). - In practice: no insurer resolutions have used DIA; it is unlikely to be used. ### Policyholder protection mechanisms, coverage ratios, and funding limits - Two protection corporations: - Life Insurance Policyholders Protection Corporation (LIPPC) - Non-Life Insurance Policyholder Protection Corporation (NIPPC) - Reorganization under CRA/SMRPFI: - If a relief insurer is found, relevant policyholder protection corporation can provide financial assistance (IBA Article 259). - If no relief insurer, protection corporation will set up a subsidiary to accept insurance contracts. - Relief insurer may petition a Protection Corporation jointly with failed insurer for financial assistance for transfer of insurance contracts (IBA Article 266 (1)). - Transfer authorization by FSA required when applying for financial assistance (IBA Article 268 (1)); FSA may approve only if conditions met, such as contributing to protection of policyholders (IBA Article 268(3)). - Coverage ratios by contract type (Order on Special Measures for the Protection of Policyholders Article 50-5): - Life insurance contracts: 90 percent - Sickness and injury insurance policy; Automobile insurance contracts, personal non-life insurance contracts: 90 percent (note: text lists sickness and injury insurance policy; 90 percent; and on same line "Automobile insurance contracts, personal non-life insurance contracts;" which earlier section groups 80 percent—see table below) - Automobile insurance contracts, personal non-life insurance contracts; 80 percent - Automobile Liability Insurance Contract, Earthquake Insurance Contract: 100 percent - Amount of assistance = shortfall in assets after reduction of insurance liabilities (per the coverage ratios) plus costs of transferring and administering transferred insurance contracts (IBA Article 270-3(2)). ### LIPPC funding and contingency arrangements - LIPPC pre-funded limit: 400 billion JPY. - If pre-funded assets insufficient, LIPPC can borrow up to 460 billion JPY from financial institutions with a government guarantee (post-funded). Member contributions are required to repay the loan. - Maximum member contributions: 33 billion JPY per year. - If full loan drawn: - It would take approximately 14 years for members of LIPPC to pay down the debt; and - a further period of approximately 12 years to reestablish the pre-funded amount. - Pre-funded and post-funded amounts were determined in 1998 and have not been updated since. - If funding insufficient, Government of Japan may, in extremely limited circumstances, fund an amount equivalent to all or part of relevant costs (IBA Article 259 and subsequent; IBA Supplementary Provisions Article 1-2-14). - Conditions: whether members of LIPPC would face deteriorating financial positions making it difficult to maintain credibility of insurance industry and causing extremely serious problems for people or financial markets. - No recourse for government to be compensated for such subsidy (direct taxpayer subsidy). - Provision subject to renewal every 5 years. - Last decision to renew potential subsidy: March 31, 2022 (IBA Supplementary Provisions Article 1-2-14). - Rationale cited by Minister of State for Financial Services: business conditions of life insurers stable but environment expected to remain severe due to further decrease in birthrate and aging population, decrease in number of policyholders, continuation of low interest rate environment, and deterioration in profitability of various investments. ### NIPPC funding and recent experience - NIPPC pre-funded limit: 50 billion JPY. - NIPPC may issue debt up to 50 billion JPY (post-funded). - Contributions from members capped at 5 billion JPY per year. - If full pre-funded amount drawn: 10 years to replenish; further 10 years to pay off debts if post-funded loans required. - No government guarantee for NIPPC debt (unlike LIPPC). - Pre-funding and post-funding amounts established in 1998 and not revised. - Most recent failures handled by NIPPC: 2000 and 2001. Contributions required were relatively small compared to excess of liabilities over assets, reflecting guarantee of only 80 percent of reserves for most products. - Staffing: minimal without failures; focused on prudent management of pre-funded amount; staffing can be built up via member resources and temporary transfers; institutional memory of failure management has dissipated; no insurance failure simulation exercises undertaken. ### Assessment of resolution framework and supervisory practice - Resolution planning: - Not required for any insurers. - Decision made that resolution planning was not required by 4 IAIGs as they are not seen to perform critical functions. - This appears inconsistent with decision to extend possible government subsidy for life insurer resolution. - Key assessment points (Partly Observed / Largely Observed as indicated in text): - Practical path to voluntary exit: CRA and SMRPFI are primary; IBA impractical for larger insurers due to inability to modify non-policyholder creditor rights. - Trigger point for CRA and SMRPFI: risk that insurer will be unable to pay debts or will become insolvent (liabilities exceeding assets). This aligns with FSA ladder of intervention at below 0 percent SMR. - Concern: trigger occurs when losses likely already crystallized for policyholders/creditors; not aligned with ICP 12.6 and ICP 12.2 expectation that resolution framework protects policyholders. - Policyholder protection exists via legislation and protection corporations; funding stable for two decades. - Recommendation: review funding levels and caps on member contributions given insurer size and complexity increases since 1998, and current/medium-term market conditions, with particular focus on LIPPC funding given public subsidy possibility. - ComFrame 12.2b (minimize reliance on public funding) not met due to explicit possible government subsidy for life insurance resolution. - Resolution planning requirements of ICP 12.3 not met; IAIG with predominantly life business should be required to produce a resolution plan given justification for potential state subsidy. - ComFrame CF12.3a and CF12.3b not met. - No evidence of requirement to consider group-wide management information system ability to produce timely information in resolution; FSA has not analyzed IAIG resolution data needs despite complexity of foreign business and reinsurance interconnections. - FSA role in CRA and SMRPFI: may state opinions to the court but has no decision-making role; court cannot approve reorganization plan that materially contradicts FSA opinion where permissions/licenses involved. - FSA is an influential stakeholder but not decision-maker; this lacks clarity required by ICP12.5. - Power missing relative to CF12.7a: power to stay rights of reinsurers of the cedent insurer in resolution to terminate, or not reinstate, coverage for periods after commencement of resolution. Other expected powers for IAIG resolution are available and consistent with ICP 12.7. - Institutional knowledge erosion: given time since major failures, simulation exercises and updated procedures (public communication, insurer systems control for claims processing, asset valuation, resolution trigger, subsidy invocation processes) are recommended. ### Recommendations (concise) - Japanese authorities should carefully review the resolution framework and process for insurers, insurance groups, and IAIGs to ensure clarity on operations and procedures for resolution. - Use the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions (FSB KAs) and the FSB KA’s Assessment Methodology for the Insurance Sector as best practice references while addressing: - The disconnect between J-GAAP or IFRS accounting and valuation under the soon to be introduced economic value-based solvency regulation, necessitating a clear trigger point for resolution in light of revised regulatory requirements; and - The increasing complexity of Japanese IAIGs with a focus on increasing foreign business. - Review and determine criteria for adequate funding of policyholder protection corporations, prioritizing LIPPC given potential public subsidy activation. - Require resolution planning and IAIG-specific resolution plans, including analysis of group-wide management information systems and data needs for resolution. - Conduct insurance failure simulation exercises and update practical operational procedures (public communications, systems access, asset valuation, trigger criteria, subsidy invocation processes). - Update supervisory guidance to address identified gaps (see ICP 13 recommendations later in the chapter for reinsurance-related guidance updates). *Source: 1jpnea2024002 - 2. When the operation of the business is extremely inappropriate such that continuation* ### 1. Policies for appropriate risk management have been established ### 1. Policies for appropriate risk management have been established ### System and governance - Policies and subdivisions prescribed in the policies have been established and managed. - A system to comply with the policies is in place. - Insurers must appoint a responsible actuary under Article 120 of the IBA; the appointment is a matter for the board. - Three actuarial reports required: Opinion on the Status of Property, Opinion on Property Reserve, and Opinion on Distribution of Surplus (Article 121(1) of the IBA; Opinion on Status of Property also specified by Article 121(1)(iii) and Article 79-2 of the OEIBA). - Actuarial reports are provided to the Board and the FSA. The FSA places reliance on the actuary to provide an independent view on the valuation of assets and liabilities. ### Debt securities earmarked for policy reserve (DSR) and Price Fluctuation Reserve - Valuation of DSR is conducted in accordance with the Temporary Treatment of accounting and Auditing Concerning Debt Securities Earmarked for Policy Reserve in Insurance Industry issued by the Japanese Institute of Certified Public Accountants. - Insurers must maintain a Price Fluctuation Reserve in accordance with Article 115 of the IBA for trading securities; insurers may apply for exemption from this requirement. - The reserve must only be reduced where there is excess of losses on trading of securities. - Article 65 of the OEIBA sets out securities for which the Price Fluctuation Reserve is established, which include domestic and foreign shares, JPY denominated bond certificates, assets denominated in foreign currencies and gold bullion. - Article 66 provides a formula for determining the amounts to reserve. ### Valuation of policy reserves — life insurers - Article 116 of the IBA requires policy reserves to be accumulated by insurers from insurance premiums and investment income to ensure the payment of future insurance claims. - Policy reserves are valued using the locked-in method, in which the calculation assumptions (accident rate and assumed interest rate) estimated at the time of contracting are fixed. - Through Article 69(1) of the OEIBA, policy reserves of life insurance companies are divided into the following four categories according to their function: - Insurance Premium Reserve: A reserve that has been set aside for future payments of insurance claims, pensions and benefits. The amount is actuarially calculated using assumed interest rates and other key assumptions such as assumed mortality rates. - Outstanding Insurance Premiums: The amount of premiums written that corresponds to the liability for unexpired premiums. - Refund Reserve: An amount set aside for possible refunds when the insurance contract provides for the refund of the whole or a part of the amount of insurance premiums or profits obtained by investing money received as insurance premiums. - Contingency Reserve: Reserve that has been set aside to cover extraordinary risks in excess of the amount that the Insurance Premium Reserve and Outstanding Insurance Premiums covering insurance risk, insurance risk of third-sector insurance, scheduled interest rate risk, minimum guaranteed risk. Note that the contingency reserve is considered part of the Solvency Margin (capital resources) for the purposes of the SMR. - Calculation methods for premium: broadly divided into the Level Premium System and the Zillmer quota. The Level Premium System is generally used to determine Policy Reserves; the Zillmer quota is used when the company is unable to use the Level Premium System (Article 69(4)(iv) of OEIBA). - For individual insurance policies contracted on or after April 1996, if it is recognized that there is a concern that there will be an underfunding in the future at the current funding level due to a decrease in interest rates or other reasons, an additional insurance premium reserve needs to be accumulated for the amount equivalent to the shortfall (Article 69(5) of the OEIBA). - The analysis required is similar to an impairment test, called an income and expenditure analysis and is conducted during a 10-year analysis period. - If a shortfall is expected to occur within the first five years of the analysis period, an additional policy reserve is required to be recorded. - Any shortfall arising from the analysis period of more than five years is not currently reflected in the valuation of liabilities; additional policy reserves are posted as appropriate over time. - The calculation of the insurance premium reserve is based on set actuarial assumptions set out in Notice of the Ministry of Finance No. 48. Notable set assumptions on interest rates are: - 2.75 percent per annum for Contracts before March 31, 1999 - 2.00 percent per annum for Contracts from April 1, 1999 through March 31, 2001 - 1.50 percent per annum for Contracts from April 1, 2001 through March 31, 2013 - 1.00 percent per annum for Contracts from April 1, 2013 through March 31, 2015 - For contracts on or after April 1, 2015, depending on contract type the single interest rate applied is the sum of 50 percent of each of the 20-year government bond and 10-year government bond or the 10-year government bond, with conservative haircuts. - Valuation uses a single discount rate rather than a yield curve. - The addition to the insurance premium reserve has been required for a number of life insurers as evidenced during the assessment. - There is no indication that the valuation of policy reserves reflects the insurer’s own credit standing with respect to the assumptions used. ### Valuation of policy reserves — non-life insurers - Non-life policy reserves are divided into four functional categories (Article 70(1) of the OEIBA). Usual reserving requirements do not apply to Earthquake Insurance on Dwelling Risks and Compulsory Automobile Liability Insurance (CALI). - Regular Policy Reserve components include: - Insurance Premium Reserve: The amount calculated in accordance with actuarial methodology for future obligations under insurance contracts (akin to a claims reserve). - Outstanding Insurance Premiums: The amount equivalent to the liability corresponding to the unexpired risk based on the insurance premiums. - Extraordinary Contingency Reserve: The amount calculated based on insurance premiums received to cover losses arising from extraordinary disasters. Note that the extraordinary contingency reserve is considered part of the Solvency Margin (capital resources) for the purposes of the SMR. - Refund Reserve: An amount set aside for possible refunds when the insurance contract provides for the refund of the whole or a part of the amount of insurance premiums or profits obtained by investing money received as insurance premiums. - Policy Dividend Reserve: The amount of the policy dividend reserve and any other equivalent amount. - If the policy reserve set is likely to be insufficient to cover the performance of the future obligations, additional regular policy reserve and refund reserve must be set aside (Article 70(3) of the OEIBA). - Extraordinary contingency reserve: - Is set aside over multiple fiscal years and is drawn down in the fiscal year when a catastrophe occurs. - A certain percentage of the annual premium income is set aside as reserve in accordance with the statement of calculation procedures (Ministry of Finance Notification No. 232, Article 2, Paragraph 1). - A reserve reversal standard is set on a per business line basis; if the net loss ratio for a year is above the reversal standard, then the contingency reserve can be drawn down. - Functions as profit smoothing over time and covers large natural catastrophes that do not occur every year. ### Embedded options and minimum guarantees - Minimum guarantee risk is a component of the contingency reserve for life insurers; embedded options and guarantees are taken into account to some extent but calculations are on the basis of set formulas and assumptions. ### Actuarial reporting content and supervision practice - The Opinion on Status of Property is a financial condition report providing a forward-looking view on whether assets are sufficient under a variety of scenarios with a 10-year forward view. - The Opinion on Policy Reserves sets out a liability adequacy test; in one reviewed example it provided recommendations for strengthening reserves in certain lines of business. - Actuarial opinions appeared very process oriented with very little qualitative content to provide context to the numerical results of the report. - The FSA relies on the actuary for an independent valuation view. ### Assessment — Partly Observed (key findings and gaps) - Assets and liabilities are measured on a consistent basis to an extent by design but there are exceptions. The creation of the contingency reserve for life insurers that acknowledges current economic conditions over the next 5 years creates some inconsistency compared to assets backing policy reserves that are held at amortized cost. Therefore ICP 14.2 is not fully met. - Assets and liabilities are not valued on an economic basis: - Discounting of future cash flows is based on an assumption of a single rate rather than a yield curve. - Potential addition to insurance premium reserves for life insurance acknowledges changed circumstances but only to a limited extent with only 5 years of projections taken into account. - Risk-adjusted present value of cash flows is incorporated in policy reserves only to this limited extent. - For non-life insurance, the extraordinary contingency reserve is a profit smoothing tool and does not have an economic basis. - Therefore, the requirements of ICP 14.4, ICP 14.5 and ICP 14.8 are not met. - Policy reserves do not include an explicit Margin over the Current Estimate (MOCE) as required by ICP 14.7 and ICP 14.9. - As minimum guarantee risk is a component of the contingency reserve for life insurers, embedded options and guarantees are taken into account to some extent but this calculation is on the basis of set formulas and assumptions. Therefore, it is not clear that ICP 14.11 is fully met. - The FSA will introduce the economic value-based solvency regulation from fiscal year, *Source: 1jpnea2024002 - 1. Policies for appropriate risk management have been established* ### 2025. Economic valuation underpins this new approach, and it is likely to address the ### 1jpnea2024002 - 2025. Economic valuation underpins this new approach, and it is likely to address the ### ICP 15 Investments — Description, Supervisory Approach, Assessment - Description / Regulatory requirements: - An insurer must invest assets as set out in the IBA (Article 97(2) & (3) and Article 47 of the OEIBA). - Article 97(2) of the IBA states that an insurer must invest in assets that are specified in a Cabinet Office Order. The relevant Cabinet Officer Order is the OEIBA; Article 47 provides a list of allowable investments including securities as defined in Article 2 of the Financial Instruments and Exchange Act, real property, gold bullion, loans, deposits, trusts, securities related derivatives as defined in Article 2(20) and Article 28(8)(iv) of the Financial Instruments and Exchange Act, financial directives as defined in Article 98(1) of the IBA and foreign exchange futures. - To control investment concentration risk, Article 97-2 of the IBA states that an insurer cannot invest assets in excess of the amount specified by a Cabinet Office Order. Article 48-3 and Article 48-5 of the OEIBA is that cabinet office order. It is possible for an insurer to exceed the limit if it applies to the FSA and under Supervisory Guideline III-2-6 the FSA will require a plan for the insurer to reduce its exposure and monitor that plan. - The FSA specifies requirements in Guidelines II-3-11 Control Environment for Asset Management Risks and II-3-12 Control Environment for Managing Liquidity Risks. Guideline II-3-11-2(1) requires a control environment for managing asset risks that enables insurer management to understand the extent of risks from assets, including credit risks. - Guideline II-3-11-2 (1) 10 and II-3-11-2 (3) require appropriate investment policies for credit investment in low liquidity instruments and securitizations. - Guideline II-3-8 requires insurers to understand and manage the status of the total assets and liabilities; invest in a manner appropriate to nature and duration of liabilities. - ORSA reporting requirement includes transferability of funds and capital between group (ORSA Report Items 6. (2) (iii)). - Supervisory approach: - FSA monitors asset management via asset management hearings or ORSA report reviews. - Assessment: Largely Observed - Key comments / shortcomings: - ICP 15.2 is not fully met: "There are no explicit requirements related to insurers ensuring assets are sufficiently secure and held in an appropriate location for their availability." - How insurers manage their assets is not regularly reviewed other than through ORSA for the five largest life insurers and three largest non-life insurers — lack of regular oversight means item cannot be considered observed. - Recommendation: - "As part of revisions to the approach to supervision, the FSA should ensure that asset management practices at insurers are subject to review based on a risk assessment of the activities of individual insurers." ### ICP 16 Enterprise Risk Management for Solvency Purposes — ERM Framework, ORSA, Liquidity, Assessment - ERM Framework requirements: - FSA requires insurers and insurance groups to develop an ERM framework according to individual management strategies and characteristics of risks (Supervisory Guideline II-3 and VII-3); for large complex risks, develop control environments for integrated ERM (Supervisory Guideline II-3-1). - FSA requires insurers to: take into account all risks recognized as material, including difficult quantifiable risks; examine causes and impacts; analyze mutual relationships between risks (Supervisory Guideline II-3-2-2 (1), and II-3-2-2 (3)). - Guideline VII-3-2(3) requires group-wide ERM consistency and awareness of material differences across jurisdictions. - Guideline VII-3-2(5) requires identification of risks; risk profile; risk measurement; risk management policy development and review; ORSA. - No specified list of risks that must be covered in group-wide ERM (unlike CF 16.1b). - Risk management for intra-group transactions: - Guideline VII-3-2(9) requires control environments for compliance and risk management with intra-group transactions; Article 100-3 of the IBA requires arm’s-length intra-group transactions. - Quantification, stress testing and reporting: - Guideline II-3-3-1 requires periodic forward-looking quantitative methods, stress testing and scenario analysis. - All insurers and insurance holding companies must describe and report risk profile, approach to risk measurement and internal stress testing in annual ORSA reports. - Guideline II-3-3-3 requires management companies to implement stress testing, reverse stress testing, sensitivity testing according to financial conditions and risks. - In light of the Holistic Framework (HF), major insurers including IAIGs must submit risk management reports for macroeconomic exposures (e.g., stress tests based on in-depth macroeconomic scenarios). - Independent assessment: - Guideline VII-3-2 (6) requires periodic internal or external independent assessments of group-wide ERM framework. - ERM elements required: - Risk management policies, monitoring systems, management practices for material risks; quantitative and qualitative risk tolerance policies; incorporation into daily operations (Guideline II-3-4-1). - Risk appetite statement requirement (Guideline II-3-4-2) and group-wide dissemination (Guideline VII-3-2(7)). - ALM, Asset Management and Underwriting Policies: - ALM strategic objectives, risk tolerance, product/asset consistency (Guideline II-3-8-2; II-3-4-2). - Asset management policies to manage market, credit, liquidity and other risks; appropriate investment policy for low liquidity investments (Guideline II-3-11-2). - Group-wide asset management policies and concentration risk management required (Guideline VII-3-7-2); no counterparty risk appetite statement other than for reinsurance at group level (Guideline VII-3-6-2 (2)) — ICP 16.6 not fully met. - Underwriting policies and ORSA items require reporting of risk appetite and business line focus (ORSA Report Items 4. Risk Management Policy (Risk Appetite)); group-wide underwriting policies (Guideline VII-3-5-2(1)); validation of valuation of insurance liabilities and reinsurance recoverable assets to board (Guideline VII-3-5-2(4)). - Reinsurance and actuarial policies: - Group-wide reinsurance control environments required; monitoring points include correlation with risk appetite, group reinsurance strategy, laws and practices, credit risk limits for reinsurers, alternative risk transfer, effectiveness under stress (Supervisory Guideline VII-3-6-2). - Group-wide actuarial policy monitoring points include formulation of group-wide policy, group-wide actuarial methodology evaluation, actuarial reporting to board at least once a year, involvement in capital requirement evaluations (Guideline VII-2-2(4)). - Liquidity Risk Management: - Guideline II-3-12 requires classifying funding stress, rules for management, reporting, settlement; ORSA must describe liquidity risk status. - Under HF, major insurers including IAIGs must submit liquidity risk management reports; not clear HF reporting meets CF16.9d detailed liquidity reporting for IAIGs. - Group-wide liquidity stress tests and maintaining sufficient liquid assets with haircuts discovered in stress testing required (Guideline VII-3-8-2(4), (5)); timely group-wide countermeasures for liquidity crises required (Guideline VII-3-8-2 (6)). - ORSA and Recovery Planning: - Guideline II-3-5-1 requires periodic ORSA under board responsibility, including future economic conditions, quality and adequacy of capital; ORSA must take into account medium-to long-term (e.g., three to five years) business strategies (Guideline II-3-5-2 (1)). - IAIGs and large complex groups must develop and submit recovery plans annually and when material changes occur. Recovery plan items required: overview; group structure analysis; triggers; stress scenario analysis; recovery options analysis; communication strategy; governance over recovery plans. - FSA issued reporting orders and received initial IAIG management company recovery plans in December 2021 and updated plans in December 2022. - Supervisory review of ERM: - ERM monitoring process based on ORSA review initiated after 2014; assessment viewpoints included “Risk Culture & Risk Governance,” “Risk Control and Capital Adequacy,” “Risk Profile & Risk Measurement” and “Application to Business Management.” - ERM assessment results classified into Assessment Levels 1-5; FY 2017 saw intensive monitoring of 26 small and medium-sized companies assessed relatively low in FY 2016. - No on-site component to the ERM assessment; post-2017 activities targeted insurers at lower assessment levels; eight large insurance groups’ ERSA reports continue to be analyzed. - Assessment: Largely Observed - Key comments / shortcomings: - Many ComFrame requirements incorporated into Guidelines in 2020, with few requirements of ICP 16 not explicitly reflected. - No requirement for IAIGs to have a counterparty risk appetite statement other than for group reinsurance — ICP 16.6 not fully met. - Unclear whether HF reporting meets CF16.9d detailed liquidity reporting for IAIGs. - Supervisory review of ICP 16 requirements is inadequate: only one thematic review in 2016; thereafter supervisory action targeted mainly lower-level assessed insurers; many ORSAs are filed and not systematically reviewed; no on-site verification that ERM processes reported in ORSAs are implemented and operating as described. - Recommendation: - "As part of revisions to the approach to supervision, the FSA should ensure that risk management at insurers are subject to review based on a risk assessment of the activities of individual insurers." ### ICP 17 Capital Adequacy — SMR, Total Risks, Capital Resources, ESR development, Assessment - Legislative basis and high-level requirements: - Insurers required to maintain a Solvency Margin Ratio (SMR) at 200 percent or higher (Article 130 of the IBA, Article 86 of the Regulation for Enforcement of the IBA, Article 2 of the Order Providing for Classification, etc. prescribed in Article 132, Paragraph 2 of the IBA). - Insurers required to have at least one billion yen in capital (Article 6, Paragraph 2 of the IBA). - SMR calculation: - SMR = Total Solvency Margin / {(1/2) ×Total Risks} - SMR is based on Total Risk calculated using a factor-based approach with different calibration levels across risks: Earthquake risk: 99.5 percent, Storm and flood damage risk: 98.6 percent, Mortality risk: 99 percent, Investment risk: 95 percent. - Total amount of risk formulas (as presented): - Total amount of risk for life business = √(푅1+ 푅8)2+(푅2+푅3+푅7)2+푅4 - Total amount of risk for non-life business = √(푅5+푅8)2+(푅2+푅3)2+ 푅4+푅6 - Types of risks and measurement techniques (examples provided): - Insurance risk (Life) (R1): Insurance amount at risk* 0.6/1000 (mortality risk) - Insurance risk (Non-life) (R5): Net earned premiums or net incurred claims * factor by business line - Third sector insurance risk (R8): Accumulation Limit of Contingency Reserve * 1 (Catastrophe Death Risk) - Assumed Interest Rate risk (R2): Expected loss from a return on investment below the assumed interest rate - Asset Management Risk (R3): various components including Price fluctuation risk, Credit risk, Subsidiaries and other risks, Derivatives trading risk, Credit spread risk, Other risks - Minimum guarantees risk (R7): Policy reserve after asset price declines - Policy reserve for minimum guarantees - Operational risk (R4): Total amount of capital charge for risks other than Operational risk * 2 percent or 3 percent - Catastrophe risk (R6): The larger of the net claim amounts calculated based on prescribed scenarios for earthquake and windstorm damage. - Price fluctuation risk factors (calibrated at 95 percent VaR over 1 year level): - Domestic stocks 20 percent - Foreign stocks 10 percent - Bonds denominated in Japanese yen 2 percent - Bonds and loans denominated in foreign currency 1 percent - Real estate 10 percent - Gold bullion 25 percent - Trading account securities 1 percent - Items including exchange risk 10 percent - These factors combined through application of correlation matrix. - Group-wide capital requirements: - Apply on consolidated basis using similar method to SMR at solo level. - Internal models: - Potential for internal models for minimum guarantee risk (R7); 13 criteria exist for R7 internal model use but criteria are not as extensive as expected by ICP 17; no use test; no insurer has adopted an internal model for R7. - Potential for internal model for catastrophe risk (R6); two types allowed: engineering model and theoretical distributed accident occurrence model; basic criteria established but not as extensive as ICP 17; no insurer has adopted an internal model for R6. - Capital resources (Total Solvency Margin) items described with provisions and inclusion: - Stated capital or funds: total recorded in net asset section less amounts to be disbursed as disposition of surplus and valuation & translation adjustments (OEIBA Article 86). - Price fluctuation reserve: allocated when loss from sale/purchase of assets exceeds profit. - Contingency reserve: calculated for covering expected future risks to secure performance of obligations (Insurance risk, Assumed Interest Rate risk, Minimum guarantees risk and third sector insurance risk). - Extraordinary contingency Reserve: amount calculated based on insurance premiums received to compensate for losses from extraordinary disasters. - General loan-loss reserves: set aside for possible default on loans. - Valuation difference on available-for-sale securities: 90 percent inclusion in solvency margin based on risk factors for price fluctuation risks of domestic stocks. - Unrealized gains (losses) on land: 85 percent inclusion in solvency margin. - Excess of surrender value amount: Policy reserve (excluding contingency reserve) in excess of surrender value. - Dividend reserve not allocated: Dividend reserve in excess of amount allocated as policy dividends (Ministry of Finance Notice No. 50 Article 1). - Tax effect equivalent: introduced to capture tax burden reduction effect by reducing taxable income when risks occur. - Part of refund reserve (Non-life insurers): refund reserve set aside in excess of amount calculated per statement of calculation procedures. - Debt capital instruments: included in solvency margin since a claim arises when condition that other creditors are paid in full is satisfied. - Deductions: deduction of shareholding in other financial institutions when recognized as intentional means of raising capital to improve capital adequacy via another insurer or subsidiary specialized in banking and securities. - "There is no tiering of capital resources." - Total Balance Sheet Approach: - Observed that reserves in Solvency Margin cover risks similar to those covered in total risks calculation; lack of clarity about where risks are being addressed. - Solvency control levels: - Set out in a Cabinet Office Order Providing for Categories Prescribed in Article 132(2) of the IBA. - Development of regulatory capital requirements: - FSA developing the ESR to be introduced in fiscal year 2025 (a full description is in Box 1). - The development process is open and transparent with yearly field testing, consultations and hearings with public reports. - Assessment: Largely Observed - Key comments / shortcomings: - Shortcomings in how risk is measured, calibration inconsistency across risks, and valuation approach impact on measuring risk. Given different calibration of risks, no appropriate overarching target criteria — ICP 17.8 not met. - No coherent total balance sheet approach in SMR design — some risks measured in total risks, some in valuation through reserves, and those reserves then recognized as capital resources — ICP 17.1 not met. - SMR calibration: insurers operating at close to 1000 percent SMR ratios with the first solvency control level at 200 percent (level at which margin equates to risk). Likely ESR calibration results in an ESR of around 200 percent (margin equates to risk at ESR of 100 percent) — indicative SMR not calibrated at sufficient level to ensure obligations met in adversity. - Lowest solvency control level is 0 percent — considered too low for an MCR as it only allows strongest intervention when losses have crystallized for creditors including policyholders. - No explicit criteria for assessment of quality and suitability of capital; all capital resources assigned same level — no tiering. Some haircuts exist but far from best practice — ICP 17.11 arguably not met. - Introduction of ESR in fiscal year 2025 likely to address issues raised. - Recommendation: - "As planned, the FSA should introduce ESR in fiscal year 2025 and ensure that all of the requirements of ICP 17 are met." ### ICP 18 Intermediaries — Licensing, Supervision, Conduct, Assessment - General framework: - Provisions in the IBA and OEIBA on intermediary registration and supervision. FSA Guidelines set expectations separately for agents and brokers. Other general financial services legislation such as the Financial Instruments and Exchange Act (FIEA) also provide rules relating to solicitation. - Agents may be individuals or legal entities; insurers held liable for damage caused by an agent to a policyholder (Article 283 of the IBA). Brokers required to act for customers rather than insurers (Article 299 of the IBA). - Market statistics (FY 2022): - Life insurance: agents accounted for approximately 32 percent of total sales on an annualized premium basis in FY 2022; financial institutions acting as agents (mainly banks) accounted for 31 percent; direct sales by insurers 37 percent. There are around 34,000 agents and over 240,000 individual sales persons. - Non-life insurance: agents accounted for 90.5 percent of total (primary insurance sales measured by net direct premiums, FY 2022); direct sales by insurers approximately 8.6 percent; brokers 0.9 percent. There are over 150,000 agencies and over 1.8million individual sales persons; and 55 broker companies with some 1,500 staff. - Delegation and supervisory resources: - FSA delegates registration and supervision of agents and brokers to LFBs while retaining oversight and powers of intervention. FSA has small numbers of staff (two for each of life and non-life) dedicated to intermediary supervision and works closely with LFBs. - Licensing and supervision: - Agents (specified agents) and brokers must be registered by FSA (Articles 276 and 286 of the IBA), though in practice LFBs process registrations under delegation. - Agents make reports directly to LFBs; larger agents (15 or more affiliated insurers or 2 affiliated insurers and at least JPY 1 billion in annual fee income) must keep books/documents (Article 303 IBA) and make business report within three months of year-end (Article 304 IBA). - FSA supervises agents indirectly via insurer requirements on solicitation activities. - Extensive Guidelines (II-4-2) on insurer controls over solicitation including education, management and guidance for agents (Article 100-2 IBA; Article 53 (1) item 3 OEIBA). - Brokers directly supervised by both LFBs and FSA; submit annual business report; Guidelines Section V set detailed broker requirements. - Professional qualifications and training: - LIAJ and GIAJ provide curricula and examinations; all agents required to take an examination before engaging in sales; further examinations required periodically (e.g., every five years for non-life insurance). - JIBA manages broker curricula and examinations; brokers must certify required capacity when applying for registration (Article 287 IBA) and undergo qualification renewal training every three years. - LIAJ, GIAJ and JIBA consult FSA on scope but do not enforce examinations; insurers check that sales staff have passed examinations. - Governance and disclosure: - Legislation requires agents and brokers take measures to ensure sound operation (Article 227-7 OEIBA) but no explicit intermediary governance requirements beyond Companies Act. - Agents required to provide information when soliciting (Article 294 (1) IBA); must clarify affiliation and status as agent (Article 227-2 (10) OEIBA). Agents not required to disclose basis of remuneration. - Brokers must inform clients of name, authority particulars and broker compensation; on request brokers must disclose amount of commission, reward, or consideration (Article 297 IBA). - Client money and broker security: - Agents required to issue receipt separating premiums from agent's property and settle payment timely (Guidelines II-4-2-1 (4)). - Brokers are not permitted to handle client money; required to make security deposits: higher of JPY 20 million yen and total commissions received in past three years with upper limit of JPY 800 million (Article 291 IBA and Guidelines V-2). Brokers may obtain insurance instead of deposit with FSA approval. - Supervisory measures and enforcement: - LFB coordinates with FSA on supervisory responses; LFB or FSA may conduct on-site work. Powers to order information submissions (Article 305 IBA) and business improvement orders (Article 306) delegated to LFBs. - Unregistered solicitation identified by FSA/LFBs may involve law enforcement; most cases involved unqualified individuals within registered companies; corrective actions required but no sanctions imposed to date. - Assessment: Largely Observed - Key comments / shortcomings: - Extensive framework exists and delegation to LFBs has enabled supervision closer to markets. - Areas to better align with ICP standards: intermediary governance requirements and requirement for agents to disclose basis of remuneration. - FSA supervisory work on intermediaries is mainly reactive; on-site inspections are rare; no on-site supervision of brokers due to small scale. - Recommendation to increase proactive, risk-based supervisory work on agents and brokers, focusing on larger or higher-risk entities and insurers’ monitoring of agents; scope limited by FSA resources. - Recommended actions: - FSA review limited areas where approach does not clearly meet ICP standards (governance and some disclosure) and change existing Guidelines. - FSA develop process for risk-based supervisory work on agents and brokers (direct supervision on larger/higher risk entities; indirect supervision on insurers’ monitoring of agents). ### ICP 19 Conduct of Business — Framework, Supervision, Findings, Recommendation - General framework: - Insurers and intermediaries subject to IBA and OEIBA requirements on conduct; FSA Guidelines provide detailed expectations (Section II for insurers and agents; Section V for brokers; Section IV for product approval). - FSA works with trade associations (e.g., LIAJ) to improve conduct; after fraud cases in life insurers’ direct sales, FSA requested LIAJ develop principles and practices (LIAJ, February 2023). - Integrated supervision teams responsible for both prudential and conduct supervision; Insurance Products Office assesses new product approvals. - No wider risk assessment of conduct-related risks in the market; supervisory resource allocation decided in annual planning cycle; no dedicated risk assessment process or staff for conduct risks. - Due skill, care and fair treatment: - Article 100-2 IBA requires insurers ensure sound and appropriate management and explanation of material business particulars to customers; Article 100-2-2 requires measures so customers’ interests are not unjustly harmed. Guidelines II-4-4 elaborate detailed requirements. - Insurers must monitor agent performance and prevent unfair inducement to switch insurers (Article 53-11 OEIBA; Guidelines II-4-2-1 (4) (iii)). - Brokers expected to act in good faith and advise on appropriate products regardless of commission (Guidelines V-5-3). - Conflicts of interest: - Guidelines require identifying transactions with conflict risk, controls for managing them, and an outline Conflict of Interest Management Policy; supervisors assess disclosures (Guidelines II-4-6). - Group conflict sources addressed (Article 100-2-2 (1) IBA and Guidelines II-4-6-1). - Product approval, promotions and pre-contractual information: - Extensive Guidelines on product development controls and prior FSA approval of new products except where judged not likely to impair policyholder protection (Article 123 IBA). - Law prohibits misleading information or advertising (Article 300(1) IBA; Article 234(1) OEIBA). FSA does not check websites and advertisements on a sample basis, expecting insurers to follow LIAJ/GIAJ guidelines. - Insurers and intermediaries required to provide policyholders with information on insurance contract contents (Article 294 (1) IBA; Article 227-2 (3) OEIBA). Failure to disclose required information subject to penalties (Article 300(1) IBA). - Guidelines elaborate pre-contractual disclosures including for foreign currency insurance and market value adjustments; expectations for sales to the elderly. - Advice and suitability: - No specific legislative provisions on advice, but expectations on ascertaining customer intention and suitability in Guidelines (II-4-4-1-3), referencing Article 40(i) FIEA and Article 234-27(1)(iii) OEIBA for agents and brokers. - Service through policy life, claims handling, complaints: - No specific provisions citing post-sale service but general requirement for sound and appropriate management applies (Article 100-2 (1) IBA). - No specific legislative requirement on fair claims handling but FSA Guidelines II-4-4-2 set extensive expectations; FSA conducted extensive monitoring of claims during and after COVID-19; no corrective actions needed recently. - Complaints handling expectations in Guidelines II-4-3-2; insurers must contract with designated ADR institution since 2010; four main ADRs exist. Complaint volumes low (example: 9,298 received by GIAJ ADR in FY 2021). - Protection of customer information: - Legal requirements to prevent leaking, destruction or loss of customer information (Article 53-8 OEIBA) and Act on Protection of Personal Information apply; Guidelines II-4-5 set supervisory viewpoints. - Disclosures by supervisor: - FSA issues warning notices and publishes consumer information on its website. - Assessment: Largely Observed - Key comments: - Extensive provisions and Guidelines on conduct give FSA capability to identify and respond to conduct issues. Product approval work and integrated supervision are strengths. - Supervision mainly reactive and focused on addressing past misconduct; market-wide intelligence gathering and risk assessment could be developed to identify and respond to emerging misconduct and to enable proactive supervision of conduct, corporate culture, and compliance effectiveness. - Recommendation: - "FSA strengthen assessment of conduct risks, market wide and at insurers and intermediaries, through enhanced market intelligence and supervisory work, including on-site supervision as appropriate." ### ICP 20 Public Disclosure — Statutory Requirements, Guidelines, Assessment - Legislative disclosure requirements: - Insurers required to disclose per Article 111(1) IBA with annual business report matters in Article 59-2 and 59-3 OEIBA. - Required financial statements: consolidated balance sheet, consolidated profit and loss statement, consolidated cash flow statement, consolidated statement of change in shareholders' equity, and notes. If consolidated statements not available, insurer financial statements required. - Financial statements must be made available within four months from the beginning of the following business year (Article 59-4(1) OEIBA). Semi-annual interim report also required (Article 110(1) IBA; Article 59-1 OEIBA). - Audits of financial statements required (except for foreign branches) — Articles 54-4 and 199 of the IBA, Item 1 of Paragraph 2 of Article 436 of the Companies Act. - Article 59-2 and 59-3 OEIBA require disclosures on: framework for risk management; organizations for business management; capital adequacy; details of principal business; status of solvency margin soundness; acquisition value, contracted value, market value and loss or gain on valuation for securities, monetary trust and derivatives. - Appendix tables to Article 59-2 and 59-3 provide detailed lists and guidance on indicators for latest two business years including outstanding policy reserve and status of solvency margin. - Supervisory Guidelines: - Guideline III-2-15 elaborates statutory disclosure requirements, including risk management disclosures (III-2-15 (2) f). - Industry disclosure standards: - LIAJ and GIAJ publish Disclosure Standards for members (not regulatory). - Supervisory approach: - Disclosure by insurers is routinely assessed by FSA only in relation to the eight insurers part of the holistic framework monitoring. - Assessment: Largely Observed - Key comments: - Article 59-2 (1) (iv) (a) OEIBA requires insurers to disclose their risk management system; Supervisory Guidelines III-2-15-2 (2) clarifies it includes risk content, basic policy, and risk management systems such as examination, inspection and comprehensive asset-liability management. These and ERM, ALM and liquidity risk management Guidelines meet components of ICP 20.2, ICP 20.3 and address ICP 20.7, ICP 20.8, ICP 20.9, ICP 20.11. - Article 59-2 (1) (iii) (c) OEIBA and associated tables require disclosure by business segments and indicators by insurance product categories. - Routine supervisory assessment of disclosure limited to HF eight insurers only. *Source: Content unit 1jpnea2024002 (PDF chapter/section) — text as provided.* ### 20.3 is met. Article 59-2 (1) (iii) (a) requires the disclosure of the “overview of the business ### 1jpnea2024002 - 20.3 is met. Article 59-2 (1) (iii) (a) requires the disclosure of the “overview of the business ### Disclosures and ICP 20 (Market Conduct / Disclosure) - ICP 20.3: Requirement to disclose the “overview of the business for the Most Recent Business Year” is met via Article 59-2 (1) (iii) (a) and Supervisory Guidelines Section III-2-15-2 (2) b., which require “a general explanation of the business conditions, business performance, asset management, profit and loss status, and issues that the Company should address”. - ICP 20.4: Insurers must disclose organizations for business management (Article 59-2 (1) (i) (a) of the OEIBA, solo-basis) and details of the principal business and organizational framework of the Insurance Company and its Subsidiary Company (Article 59-3 (1) (i) (a) of the OEIBA, group-basis). Additional guidance: Guideline II-2-15-2. - ICP 20.5: Extensive disclosure requirements on policy reserves, rates and methodologies, outstanding assumptions (calculation coefficients) including assumed interest rates, and Responsible Actuary future cashflow analysis are prescribed in appendix tables to Article 59-2 (1) (iii) (c), Article 59-2 (1) (iii) (d), and Article 59-2 (1) (iv) (c) of the OEIBA and Supervisory Guidelines II-2-1-4 (1). - ICPs 20.6, 20.7, 20.8, 20.10, 20.12: Met through a combination of OEIBA articles, appendix tables, and Supervisory Guidelines (references include Article 59-2 (1) (iii) (c), Article 59-2 (1) (iv) (a), Section III-2-15-2 (2) f, and appendix table to Article 59-2 (1) (v) (d) of the OEIBA). - Assessment note: Disclosure standards are assessed in detail mainly for large insurance companies; these firms often make voluntary disclosures beyond supervisory requirements. ### Supervision of Disclosure (recommendation) - Finding: Some checking of compliance for small-to-medium companies occurs via Early Warning System (EWS) analysis, but compliance checking should be more systematic across all insurers. - Recommendation: Supervisory assessment of insurers’ disclosures should be addressed more systematically in relation to all individual insurers. This would be enabled by introducing ICP 9–related recommendations and developing supervisory plans for each insurer. ### ICP 21 Countering Fraud in Insurance - Legal framework: - Article 246(1) of the Penal Code: person who defrauds another of property punished by imprisonment for not more than 10 years. Insurance not specifically mentioned but provision used in insurance fraud cases. - Supervisory practice and understanding: - FSA assesses fraud risks and controls in supervisory work, focusing on insurers’ control environment for claims payments (Guidelines II-4-4-2). - Long-standing fraud types: natural catastrophe–related fraud; recent increases in COVID-19-related fraud and “money fraud” by sales staff (FSA’s Insurance Monitoring Report, June 2023). - Reports of claims fraud by a motor dealer acting as agent of a large non-life insurer; continuing risk from organized crime groups. - Resources and specialist capability: - No dedicated staff or specialist expertise within the FSA on insurance fraud; no regular sector-wide fraud risk assessment. FSA regards fraud risk as low relative to other risks. - Supervisory work and market systems: - FSA’s approach largely reactive, responding to insurer reports of “deplorable events” and specific cases (e.g., major life insurer investigation followed by reporting order and on-site work). - FSA meets regularly with internal audit departments of larger insurers; fraud may be discussed. - Industry data-sharing systems promoted by GIAJ include claims history and fraudulent claims information exchange systems; 29 of 55 non-life insurers are GIAJ members but account for 97 percent of the market; others (mostly branches of foreign insurers) participate in information exchange systems. - Cooperation: FSA shares information and takes measures with National Police Agency and industry associations. - Assessment: Largely Observed. - Comments: Fraud is becoming a larger concern; FSA’s approach is mainly reactive and would require significantly increased resources to move to systematic, proactive supervision. - Recommendations: - FSA establish risk-based tools and procedures for regular in-depth assessment of insurers’ fraud risks and controls (potentially as part of wider supervision reform recommended in ICP 9 assessments). - FSA develop specialist expertise in insurance fraud (context: increase in staff resources recommended in ICP 2 assessment). - FSA, in cooperation with law enforcement and industry bodies, develop a strategy and action plan for addressing fraud risk which may imperil confidence in insurance. ### ICP 22 Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - Legal and supervisory framework: - Act on the Prevention of Transfer of Criminal Proceeds 2007 (Anti-Criminal Proceeds Act) and related Cabinet Order and Ministerial Ordinance form the general AML/CFT legislation. - Since 2018 FSA has a dedicated AML/CFT Policy Office (40 total staff; estimated three engaged in insurance work). - Risk understanding and guidance: - FSA assesses sector AML/CFT risks and publishes findings in annual AML/CFT Report and Insurance Monitoring Report (vulnerabilities in savings-related life insurance and CFT risks in maritime insurance highlighted). - LIAJ and GIAJ publish sector guidance (e.g., LIAJ Code of Conduct inclusion of AML/CFT policies). - Guidelines and implementation: - FSA published Guidelines for Anti-Money Laundering and Combating the Financing of Terrorism (latest version dated November 2021). All financial institutions asked to satisfy all requirements by March 2024. FATF noted guidelines qualify as enforceable means. - FAQs published most recently in March 2022. - Supervisory practices: - FSA’s Comprehensive Supervisory Guidelines (II-4-8) set expectations including risk-based approach, verification at transaction time, preservation of transaction records, and suspicious transaction reporting. - Corporate Risk Rating (CRR) system assesses AML/CFT risks at individual financial institutions (inherent risks, controls, residual risks assessed at least annually). Separate CRR templates for life and non-life insurers; insurers required to submit annual Risk Assessment Report. SASTIs not required to make these reports at present. - 2022: sample of 12 life and 12 non-life insurers selected for monitoring work; corrective actions required for some; results reported in Insurance Monitoring Report 2022. Larger companies covered in 2021 exercise. - Powers and remediation: - FSA powers to impose reporting orders, business improvement orders, rectification orders and business suspension orders apply to AML/CFT shortcomings; powers used but not to date in relation to insurance companies. FSA may request remediation plans and progress reports. - Cooperation: - FSA member of inter-ministerial Policy Council on AML/CFT & CPF; collaborates with NPA and JAFIC (Financial Intelligence Unit); uses IAIS MoU for international cooperation. - Assessment: Observed. - Comments: Extensive legislative and guideline framework; FSA developed understanding, CRR system, and supervisory program proportionate to risks. Important to ensure compliance with March 2024 deadline through continued risk-based monitoring. Attention could be given to SASTIs (small sample inclusion suggested). ### ICP 23 Group-wide Supervision - FSA responsibilities and scope: - FSA is group-wide supervisor for 15 groups headed by Insurance Holding Companies (IHC), which include the four IAIGs. - IHCs required to seek authorization from FSA (Article 271-18 of the IBA); FSA has wide supervisory powers over IHCs. - SASTIs do not form insurance groups; some insurers part of wider conglomerates led by non-financial companies. - Legal and policy framework: - Group supervision powers and policies set out in IBA and FSA Guidelines (group definition in Guidelines I-2 (2)). Article 106-2 of IBA sets out business management requirements for groups; “management company” typically the IHC. - Restrictions on entities insurers/IHCs may own (Article 106(1), Article 271-22(1)); approvals/notifications required for proposed subsidiaries (Articles 106 (4), (7) and 127 (1)). With limited exceptions, insurers/subsidiaries may not acquire more than 10 percent interest in any other company in Japan (Article 107(1) of IBA). - Layers of group requirements: - Section VII of Guidelines (2020) applies to all groups; economic value–based solvency regulation introduced from FY 2025 on solo and consolidated basis. - IAIGs subject to IAIS’s Insurance Capital Standards from 2025 (group level). - Five largest life insurers and three largest non-life insurers subject to special monitoring via IAIS Holistic Framework. - Mapping and scope: - FSA identifies management company and other group entities, assesses control in practice. Minority interests are not included within scope of group supervision; FSA believes it would be aware of such investments via voluntary notifications or supervisory work. - Concern noted: minority interests risks exemplified by a major group’s major loss at a foreign joint venture due to COVID-19 insurance in 2022, leading to majority ownership. - Strategic holdings (equity interests) monitored for reduction over time. - No standing internal FSA committees to coordinate supervisors of investment firm subsidiaries; supervisors may exchange information but no formal committees. - IAIG designation: - ComFrame criteria applied: internationally active (premiums in three or more jurisdictions and GWPs outside home jurisdiction ≥ 10 percent of group total) and size thresholds (three-year moving averages of total assets ≥ USD 50 billion, or total GWPs ≥ USD 10 billion). - Four designated IAIGs: Tokio Marine Holdings, Inc., MS&AD Insurance Group Holdings, Inc., Sompo Holdings, Inc., and Dai-ichi Life Holdings, Inc. - FSA has discretion on designation but has not exercised discretion to date. - Information collection and on-site work: - FSA does not collect significant information on individual legal entities within IAIGs (CF23.2a); relies on involved supervisors and communications from parent; does not carry out on-site work at such entities but has reviewed governance and controls over overseas operations of major groups (see ICP 7). - Assessment: Largely Observed. - Comments: Well-developed group supervision approach extended to ComFrame, but should include minority interests where necessary. FSA not currently undertaking inspection work at major groups’ overseas insurers nor collecting detailed entity-level information required under ComFrame; addressing this would require additional resources. - Recommendations: - FSA should have policies to include entities not currently captured (such as minority interests) within scope of group-wide supervision where necessary. - FSA should strengthen collection of information on significant individual entities within insurance groups, building on collaboration with involved supervisors. ### ICP 24 Macroprudential Supervision - Data collection and monitoring: - FSA requests macroprudential data: ORSA report (annually); financial and operational reports such as BS/PL report (semiannually); market risk–related information (quarterly). - Voluntary submissions requested for major financial information (quarterly BS/PL), monthly questionnaire on financial flows to major insurers, and management meeting materials. - Holistic Framework (HF) and coverage: - HF assesses the sector annually focusing on the five largest life insurers and three largest non-life insurers (FSA supervised insurers only). Zenkyoren (a large kyosai cooperative insurer) is not included. - 2022 analysis: - Focused analysis of credit risk, interest rate risk, liquidity risk concluded no material concerns in the insurance sector; assessment more focused on current vulnerabilities than systemic risk of individual insurers. - No criteria exist to assess systemic risk of individual insurers; HF monitoring, liquidity monitoring, and insurer stress testing do not constitute systemic risk assessment without defined thresholds. - Tools and dashboards: - Early Warning System (EWS) exists; market risk dashboard prepared quarterly estimating impacts of market risks (e.g., interest rates) on life insurers using valuation basis required for the SMR. Assets at amortized cost backing insurance reserves are excluded from top-down stress testing; interest rate risk assessment impeded by lack of data on bond terms. - Data publication and transparency: - FSA publishes annual Insurance Monitoring Report and major insurers’ results annually and half-yearly. Aggregate industry data in FSA annual report is highly summarized; LIAJ and GIAJ publish additional aggregate data. No single comprehensive public data source for life insurance sector that provides individual insurer data comparable across insurers. - Market engagement and ad hoc monitoring: - FSA meets asset management executives of 4 large life insurers quarterly. Receives annual top-100 counterparties from each insurer. Undertakes ad hoc real-time monitoring for events (e.g., March 2023 US regional banks and Credit Suisse crisis analysis). - IBD receives updates from Macroanalysis Office to identify shocks for insurance sector analysis. - Assessment: Partly Observed. - Comments: - Significant progress made but gaps remain: some large entities conducting insurance activities are outside macroprudential surveillance (e.g., Zenkyoren); no methodical approach to assessing systemic risk of individual insurers (no thresholds/criteria); public data disclosure is less comprehensive compared to other large markets. - Recommendations: - FSA should coordinate with other ministries to ensure all large entities conducting insurance activities are included in macroprudential supervision. - FSA should create a methodical approach to assessing systemic risk of individual insurers, starting with assessment criteria and regular exercises. - FSA should reconsider publication approach to provide data on all insurers and granular aggregate data on life and non-life sectors to encourage research, analysis and market discipline. ### ICP 25 Supervisory Cooperation and Coordination (Cross-border) - Cross-border presence and statistics: - Life insurers: 42 companies; one domestic group designated as an IAIG and three other major groups have foreign operations; 13 are at least 50 percent owned by foreign insurance groups (in USA, Canada, France, Switzerland, Hong Kong SAR), of which 12 are designated as IAIGs by their group-wide supervisors; three foreign companies among top 10 (largest accounts for 3.6 percent of total sector assets); no branches of foreign life companies. - Non-life insurers: 55 companies including branches; all three domestic major groups are designated IAIGs; seven are at least 50 percent owned by foreign groups (USA, Germany, France); largest foreign-owned ranks fifth by GWPs (FY 2022) and accounts for 4.4 percent of sector total; 22 are branches of foreign insurance or reinsurance companies (various jurisdictions listed); six are IAIGs. - SASTIs are domestic only. - Legal and cooperative framework: - LEFSA includes international cooperation (Article 4). Guidelines commit FSA to implement IAIS ComFrame and to cooperate with foreign supervisors; designation based on ComFrame assessed annually and ad hoc. - Supervisory colleges and cooperation: - FSA has supervisory colleges for four IAIGs and participates in 13 colleges as an involved supervisor for foreign-owned groups. Colleges include market conduct supervisors, use confidentiality agreements, and meet at least annually (virtual in recent years). College meetings are chaired by senior FSA management (typically Deputy Director General of Supervision Bureau). - Typical college meeting content: FSA detailed update on group (including impacts of economic value–based solvency regulation and ICS); involved supervisors’ questions and discussion; group senior management participation and responses. Meetings are relatively short (~three hours) due to time zones; FSA holds ad hoc meetings as needed. - FSA does not currently develop specific college outputs such as group-wide risk assessment or coordinated supervisory plan; colleges primarily used to share information. - Crisis management: - Crisis Management Groups (CMGs) established for all IAIGs where FSA is group-wide supervisor; CMGs meet with same membership as colleges and focus on recovery planning and crisis preparedness. FSA decided not to develop resolution plans for IAIGs as they are not regarded as systemically important. - No specific cross-border crisis management protocol developed yet; FSA plans to develop one. No practical experience of cross-border crisis management via colleges/CMGs to date. - On-site and inspection cooperation: - FSA could conduct joint on-site inspections with foreign authorities or facilitate foreign inspections in Japan; resource commitments for joint/overseas inspections would be significant. - Assessment: Observed. - Comments: - FSA has well-developed cross-border cooperation via supervisory colleges; cross-border crisis management framework less developed but planned for future enhancement. Further development (group risk assessments, cross-border inspections, return to in-person colleges) may be constrained by FSA supervisory resources and supervisory model limitations. *Source: 1jpnea2024002.* ### Annex I. Progress on the 2017 FSAP Recommendations ### Annex I. Progress on the 2017 FSAP Recommendations ### Economic-value-based solvency regime - Recommendation: FSA should take further steps to implement an economic-value-based solvency regime as soon as practicable; develop a communication strategy to help the public understand the potentially large variance from the current, published statutory solvency ratio. - Timeframe: Near Term - Authorities’ update (June 2023): - The FSA is taking actions toward introducing new Economic value-based solvency regulation in fiscal year 2025. - Actions and milestones: - May 2019: "Advisory Council on the Economic value-based Solvency Framework" established by external experts. - June 2020: FSA published a report by external experts recommending development of the basic structure of the standardized model for an ESR based on and consistent with the ICS; annual field testing of all insurers conducted in line with the report’s recommendation. - June 2022: FSA published "Tentative decisions on the fundamental elements of the economic value-based solvency regulation" as a tentative conclusion and basic direction. - FSA will continue to study and prepare for domestic regulations aiming to start application from fiscal year 2025, holding dialogues with insurance companies and other stakeholders. - International context: - The ICS will be introduced as regulatory capital for internationally Active insurance groups (IAIGs) beginning in fiscal year 2025, following a five-year monitoring period starting in 2020. - Communication and disclosure: - Information on the purpose of the new regulations, including differences from current regulations, is posted on the FSA's website for dissemination. - FSA is considering measures to promote understanding of the new regulatory framework as disclosure for consumers. - Documents and publications referenced by authorities (as provided in source): - Advisory Council summary and related documents: https://www.fsa.go.jp/singi/keizaikachi/index.html - Final Report: https://www.fsa.go.jp/en/refer/councils/economic_value-based_solvency/report/01.pdf - Press release (June 30, 2022) (Japanese only): https://www.fsa.go.jp/news/r3/hoken/20220630_2.html - Summary: https://www.fsa.go.jp/en/laws_regulations/20220630_solvency.pdf - Full report (Japanese): https://www.fsa.go.jp/policy/economic_value-based_solvency/05_1.pdf - Summary (Japanese): https://www.fsa.go.jp/policy/economic_value-based_solvency/05_2.pdf - Timely information on solvency regulations: https://www.fsa.go.jp/policy/economic_value-based_solvency/index.html - ACCESS FSA (monthly magazine): https://www.fsa.go.jp/access/r4/229.html ### Risk-based supervisory framework - Recommendation: FSA should continue to develop its risk-based supervisory framework including a risk and impact assessment based on objective criteria, resultant supervisory intensity, and a holistic supervisory plan for offsite and onsite supervision. - Timeframe: Immediate - Authorities’ update (June 2023): - Since March 2019, FSA expanded data collection and revised its early warning system. - After revising the early warning system, FSA established a risk-based monitoring framework. - FSA selects insurers with financial soundness or profitability problems as early warning destinations and conducts onsite inspections for those with a high degree of urgency. - In accordance with the IAIS' Holistic framework, FSA has been monitoring large insurers for systemic-risk-relevant risk management since fiscal year 2020. ### Onsite inspections and holistic supervisory plan - Recommendation: Frequency and scope of onsite inspections should be part of the holistic supervisory plan; onsite verification provides the feedback loop to risk-based supervision. - Timeframe: Near Term - Authorities’ update (June 2023): - FSA flexibly uses various monitoring methods, including onsite inspections, based on each insurer’s characteristics and issues. - Onsite inspections are conducted when detailed verification of current soundness and appropriateness is necessary. - To support risk-based supervision, FSA expanded financial reporting data collection, enhanced its early warning system, and conducted analysis and profiling of conduct risk data. - FSA selects targets for onsite inspections from a comprehensive and risk-based perspective using quantitative and qualitative information related to internal controls. - Findings from onsite inspections are used for offsite monitoring to enhance holistic supervision effectiveness. ### Corporate governance - Recommendation: FSA should consider extending key elements of good governance practice, including those in the Corporate Governance Code (CGC), to all insurers in a legally enforceable manner (examples: minimum of two independent directors, disclosure of governance information). - Timeframe: Near Term - Authorities’ update (June 2023): - Since 2016, Supervisory Guidelines require appointment of at least two outside directors; adequacy of corporate governance systems is a supervisory focus. - Listed stock companies are subject to the Corporate Governance Code (CGC); listed insurers disclose CGC compliance status; mutual companies voluntarily disclose CGC compliance status. - FSA notes, per the OECD Principle of Corporate Governance, it is not appropriate to apply a single corporate governance model uniformly to all companies. - FSA monitors governance effectiveness of each insurer, taking into account size, organizational structure, and business characteristics. - Group supervision: - As groups expand, including overseas operations, the need for more sophisticated group-level risk management has grown. - December 2020: supervisory guidelines revised to reflect international standards for group supervision (ComFrame, etc.). - 2020: FSA published the Monitoring Report for IAIGs, etc. - Since 2021: FSA has published the Insurance Monitoring Report annually, presenting monitoring results for IAIGs, group supervision, and administrative policy for the year. - When good governance practices are identified through monitoring, FSA publishes them in this report to encourage improvements. - FSA will continue in-depth dialogues with insurers on governance initiatives, considering size, structure, and business characteristics. ### Foreign-exchange exposure and foreign-currency policies data - Recommendation: FSA should collect more granular data to monitor insurers’ foreign exchange exposure more precisely, as well as statistics on foreign currency denominated policies. - Timeframe: Immediate - Authorities’ update (June 2023): - Since March 2019, FSA has started collecting data on exposures by currency and annualized premiums and uses that data for stress tests and other analyses. ### Supervisory colleges and IAIG designation - Recommendation: In light of increased cross-border M&A activities, FSA should periodically review membership of supervisory colleges for insurers with material overseas operations and establish new supervisory colleges when necessary. - Timeframe: Near Term - Authorities’ update (June 2023): - FSA continues to review membership of supervisory colleges. - FSA reviews IAIG designation annually. - If FSA designates a new group as an IAIG, it will hold a supervisory college for the group at least once a year. *Annex I. Progress on the 2017 FSAP Recommendations (source content provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1jpnea2024002.pdf_