(Japanese) Looming Financial Crisis / Life insurers, banks may fail together
Yomiuri Shimbun
May 5, 2003
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.
===
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 |
