Looming Financial Crisis/ Life insurers, banks may fail together
Yomiuri Shimbun
This is the final installment of a three-part series focusing on the looming financial crisis that threatens the nation's financial institutions amid the continuing stock market slump.
In mid-March, near the end of the fiscal year, an executive of a major life insurance company anxiously watched an electronic board that displayed stock prices.
The 225-issue Nikkei Stock Average had dropped about 600 points in just four days to reach the 7,800 level, successively reaching new lows in the post-bubble economy period. The executive was worried that not only would the benchmark index break the 7,000 level, but also that it might drop below 6,000 points if it continued its downward slide at the same pace.
Falls in stock prices, which reduce the value of the insurers' shareholdings and increase their valuation losses on such holdings, are a serious threat to the insurers' financial health. The executive asked a subordinate to estimate how the stock market slump would affect the company's finances.
"Even if stock prices drop below the 7,000 level, we could hold our ground. But if the index falls below 6,000, our solvency margin ratio will fall below 200 percent."
The subordinate's report reportedly made the executive shudder.
The solvency margin ratio, an indicator of an insurer's financial soundness, measures an insurer's ability to pay out its policy obligations.
Should an insurer's ratio drop below 200 percent, the Financial Services Agency would order the insurer to submit a plan on the improvement of its management, causing a loss of credibility for the insurer and threatening its viability.
As of the end of September, the solvency margin ratios of major life insurance companies stood at 400 percent-800 percent.
However, as the executive learned that his firm's ratio could drop below 200 percent if stock prices continued to fall, he said he could not relax until the March 31 fiscal year-end accounts settlement.
The situation concerning the life insurers' businesses has been getting tougher. An increasing number of policyholders have canceled their policies as part of efforts to reduce household spending.
Given ultralow interest rates and falling stock prices, the burden of negative spread--the loss resulting from insurers' investment returns on policyholder premiums being lower than yields promised policyholders--also has become serious.
In fact, recent falls in stock prices are the biggest threat facing the life insurers.
According to Merrill Lynch Japan Securities Co., four out of 10 major life insurers had appraisal profits of 230.9 billion yen on the value of their shareholdings as of the end of September, when the Nikkei index stood at around 9,300.
However, when the key index dropped to the 7,000 level at the end of March, only Nippon Life Insurance Co. of the 10 major insurers avoided appraisal losses. The securities firm calculated the total unrealized losses at 2.38 trillion yen.
The unbreakable nexus between the ailing insurers and the major commercial banks, with each holding the other's capital, has become a major source of unease in the nation's financial markets.
The 10 life insurers held a total of 2.6 trillion yen worth of bank shares at the end of last September. As a result, sharp falls in such stock prices have dealt a serious blow to the insurers.
The banks, meanwhile, have contributed a total of 828 billion yen in capital to the 10 life insurers.
Should a number of life insurers collapse, the banks would be unable to recover their capital, suffering huge losses.
A senior official of a financial regulator warned that the failure of major life insurers would deal a serious blow to the banks' financial condition.
Some banks may see their capital-adequacy ratios fall below Bank for International Settlements requirements--8 percent for banks operating internationally and 4 percent for banks operating domestically, the official said.
The problem of falling bank share prices for the insurers is now rebounding on the banks.
The interlocking structure supposedly designed for the "coexistence and coprosperity" of the banks and insurers has now turned into a mutual death warrant in the present deflationary economic downturn.
Concerns over the health of the life insurers have increased to an extent that they cannot be dismissed lightly. To prevent a financial crisis occurring due to the collapse of an insurer, the government and the Bank of Japan need to urgently take drastic measures to halt the stock market slump.
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Policy cancellations hit insurers
A life insurance saleswomen recently lamented over a request from one of her longtime customers for a change in his insurance policy.
The customer, who works for a manufacturing firm, asked the insurer to reduce the amount to be paid out in the event of his death from 35 million yen to 10 million yen, she said, adding that this was because the policyholder faced a salary cut due to corporate restructuring.
A number of similar cases have been reported as policyholders are reviewing their insurance policies amid the prolonged deflationary downturn.
Even though insurance salespeople have attempted to make up such losses by finding new customers, they have not been successful as the firms they usually visit to promote their products have not been hiring as many new employees.
The saleswoman said she currently earned about 20 percent less than before.
According to the Life Insurance Association of Japan, which represents 42 firms, the number of new contracts for individual insurance made between April 2002 and February dropped by 1.8 percent compared with the same period a year earlier. In monetary terms, the total amount of new contracts decreased 5.9 percent compared with the prior period.
There also were a large number of cancellations of insurance policies during the period, with signs of a turnaround yet to be seen.
The problem of negative spread also is of major concern for the life insurers.
With interest rates at record lows, insurers can expect little in the way of interest income. Although such firms have earned some profits from their government bond holdings due to rising bond prices, it is like a drop in the ocean in the overall picture.
Securing yields for policyholders of about 5 percent per annum, as promised during the bubble economy period, is currently extremely difficult for the insurers.
Nippon Life Insurance Co., the nation's largest life insurer, had an estimated negative spread of about 340 billion yen at the end of March. The negative spreads of other major insurers range from several tens of billion yen up to 200 billion yen, with the total negative spread for the top 10 insurers expected to reach 1.2 trillion yen.
In such a situation, the life insurers have even clutched at the straw of their "most-cherished treasure"--their contingency and other reserves.
For the accounts-settlement term ending in March 2002, seven of the 10 leading life insurers accessed their contingency reserves and reserves for price fluctuations. The value of such reserves totaled a combined 530 billion yen.
For the settlement term ending in March this year, the same seven life insurers are expected to take similar measures.
The reserves are set aside by the life insurers to cover the possibility of being forced to pay out on insurance policies in the event of major natural disasters or disease outbreaks.
Life insurers are permitted to use the reserves to write off the appraisal losses of their shareholdings due to falling stock prices. However, it is a measure akin to an octopus eating its own legs for survival.
The life insurers also are obliged to set aside liability reserves to cover normal policy claims.
Each time a new insurance contract is written, the life insurer is required to set aside a certain proportion of funds depending on the type of contract.
A leading life insurer reportedly secretly studied whether it could change the method by which such funds are set aside. It tried to find a way to set aside less money in the initial phase, hoping to adopt it for fiscal 2002.
Even under the new formula, an insurer would still be required to set aside the same amount of overall funds, the difference being that an increased amount would be placed in reserve in the latter phase of the contract.
Yet the insurer still tried hard to find ways to ease its financial burden, no matter how marginal their benefit.
The life insurer in question ended up abandoning the idea of adopting the new formula. Yet it vividly illustrates the plight faced by the life insurers and how desperate they have become.
With regard to the present state of the life insurance sector, Keio University Prof. Mitsuhiro Fukao said: "Burdened with declining stock prices and negative spread, the operations (of the life insurers) are in crisis.
In particular, those life insurers whose credit rating is low are seeing an increase in policy cancellations every time there's a report on their deteriorating state of financial health, placing them in a vicious cycle of reducing their asset values."
In the life insurance sector, seven life insurers have disappeared since Nissan Mutual Life Insurance Co. collapsed in 1997, the first failure in the sector in the postwar period.
Now that the whole financial sector, including the banks, are on the brink of a crisis, the possible scenario of a domino effect of one failing financial institution leading to another failure may become reality should yet another life insurer collapse.
The government and the Bank of Japan must take all possible policy measures to prevent such a financial crisis occurring.
yomiuri.co.jp |
