Foreign Insurance Companies in Japan – Possible Reforms?

Japan is one of the world's largest insurance markets but foreign insurers' market share in Japan is relatively small.  For example, foreign insurers' share of Japan's non-life insurance market is estimated at only around 6%.  In contrast, foreign insurers' approximate share of: the UK insurance market (excluding Lloyd's) stands at 57%; and of the French insurance market stands at 26% Arguably, part of the reason for this disparity is that the methods by which foreign insurers can do business in Japan are restrictive and inflexible and consequently, there have been increasing calls for reform.

Methods for expansion into the Japanese insurance market

An unlicensed foreign insurer can do business in Japan without or by: establishing a presence, and obtaining an insurance business licence, in Japan.   

Method 1 - without establishing a presence and without obtaining an insurance business licence.

If an unlicensed foreign insurer chooses not to establish a presence or obtain an insurance business licence in Japan, it can only directly underwrite certain limited types of insurance contracts that are exempted from the general prohibition on engaging in insurance business without a licence in Japan.  The main benefit of this model is that it avoids the expenditure of time and money required to establish a presence in, and obtain an insurance business licence, in Japan.

The exempted insurance contracts include: reinsurance; marine insurance; satellite insurance; and international cargo insurance.  These exemptions are not only generally quite limited, but the foreign insurer will also have to rely on independent third parties for promotion of their products.  This is because any unlicensed insurer is prohibited from soliciting customers in Japan and will have to engage a registered and independent insurance broker to carry out such activities.  Furthermore, if the unlicensed foreign insurer has entered into reinsurance fronting agreements with licensed companies to offer a wider-range of products to the Japanese market, there is a risk that those licensed companies will terminate such agreements once it has acquired sufficient know-how from the unlicensed foreign insurer.  

Consequently, this method does not generally allow a foreign insurer to expand effectively into the wider Japanese insurance market. 

Method 2 - establishing a presence and obtaining an insurance business licence

Therefore, the most effective way to expand into the Japanese insurance market is to establish a presence, and obtain an insurance business licence, in Japan.  Such a process will usually take at least a year and will incur substantial legal costs.  As a result and in relation to establishing a presence in Japan, foreign insurers have typically chosen the quicker route.  Of the two ways to establish a presence in Japan: by establishing a branch; or incorporating a subsidiary, the former will generally require less procedural burden than incorporating a subsidiary.  This is because the incorporation of an insurance company subsidiary requires, inter alia, the submission of principal shareholder application(s) to the Japan Financial Services Agency.  Indeed, of the 27 foreign non-life insurance companies currently operating in Japan, 22 are licensed on a branch or agent basis.

Specific issues

However, there are significant disadvantages to the branch model.  In particular, the options to exit, restructure and/or procure outside investment, are extremely limited for any licensed foreign insurer who has established a branch in Japan.  Unlike a subsidiary, a branch is not permitted to merge with a Japanese company, cannot be subject to any type of corporate split and cannot itself raise equity finance.  In addition, simply changing the corporate form of the branch to a subsidiary is not permitted under Japanese law. 

Currently the only viable strategy whereby the business of a foreign insurer's branch can be placed in a more flexible entity (such as a stock company) is to carry out a business transfer.  Such a business transfer will include a portfolio transfer of insurance contracts.  Under a portfolio transfer, all of the branch's existing insurance contracts that are with respect to the same line of products must be transferred to an entity that already possesses an insurance business licence in Japan.  Furthermore, a business transfer will require individual consent from each creditor (who is not an insurance policy holder) and may require the inspection by a court-appointed inspector (to protect creditor's interests).  Such a process is both time-consuming and costly.

Possible reforms

Possible reforms include applying the corporate split procedure under Japanese law to a transfer of business from a branch to a stock company.  Under this procedure the transferor is not required to obtain the individual consent of each creditor, but must typically instead: publish public notice in the official gazette; notify each known creditor through electronic public notice or publishing an announcement in daily newspapers; and implement certain creditor protection procedures.  Furthermore, the obligation to implement the creditor protection procedures should replace any need for the appointment of an inspector to protect creditor's interests.  In addition, the branch's insurance licence will pass to the stock company with such transfer and the stock company will not have to apply for a new insurance licence.  Such reforms will mean that it will be easier for a foreign insurer to convert its branch in Japan into a stock company which would substantially improve the ability of such insurer to restructure its Japanese insurance business. 

As a result of lobbying by the likes of the American Chamber of Commerce in Japan, it is likely that the Japanese government will, at some point, consider these proposals in detail.  However substantial changes to company law in Japan will have to be made to effect such proposals.

Tomoki Debari is a partner of Anderson Mori & Tomotsune (AM&T) (www.amt-law.com), one of Japan's largest and most eminent law firms.  As a member of AM&T's Insurance Practice Group, he has extensive experience in advising numerous insurance companies on various matters including: joint ventures, M&A transactions, reinsurance arrangements and regulatory issues.  Tomoki Debari can be contacted by telephone at +81 (3) 6888 1106 or by email at tomoki.debari@amt-law.com.  Daniel Tan is a foreign legal associate at AM&T.  He can be contacted by telephone at +81 (3) 6888 1209 or by email at daniel.tan@amt-law.com.