LDP ready to aid life insurers
Move would be first 'state-backed breach of contract'


The ruling coalition is ready to endorse a controversial draft bill that would allow 
troubled life insurance companies to reduce payouts promised to policyholders, the Liberal Democratic Party said Thursday.

Lawmakers of the Liberal Democratic Party discuss plans to bail out Japanese life insurers at a financial panel meeting.
Opposition politicians are calling the new legislation "the world's first state-backed breach of contract."

The approval paves the way for the bill to pass through the Diet as early as June. The government plans to submit an 
amendment to the Insurance Business Law to the Diet by the end of this month.

The LDP granted its approval on the condition that the Financial Services Agency include clauses 
in the bill stipulating that management and investors take responsibility should insurers resort to the new legislation.

The plan would allow companies to apply to the FSA to lower the guaranteed rates of
 return on policies to a minimum of roughly 3 percent and to freeze policy cancellations for a specified period.

The plan is most tempting for major domestic life insurers, which promised yields averaging 5 percent during the late 1980s.

But applying for yield cuts could be considered an effective declaration of insolvency, 
and insurers' executives have said -- at least publicly -- that they would not apply.

Despite the plan to effectively legalize breach of contract, few people in the world's second-largest life insurance market are 
openly denouncing politicians or life insurers. Around 90 percent of Japan's citizens are policyholders.

"Policyholders should be up in arms, considering these cuts are being considered while insurance companies continue 
to splurge on offices, employee and executive salaries and television commercials," said Koichi Nonaka, chairman and 
executive officer of the nonprofit organization Life Insurance Ranking Society.

The group independently ranks life insurance companies and their products and helps customers file complaints.

"But they're used to having little say about their insurance contracts," Nonaka said. "What is happening, however, is a gradual erosion of consumer trust."

Currently, life insurers can only alter policies after applying for court protection from creditors under fast-track rehabilitation laws.
Politicians have argued that this has resulted in returns cut to as low as 1 percent, a situation that could be avoided if insurers were allowed to cut promised yields sooner.

"I don't believe there has been enough work explaining to customers that this is an
 advantage," said Hideyuki Aizawa, head of the LDP anti-deflation panel. "If companies are going to break with their contracts and 
impose losses on customers, then of course management should take responsibility. And banks that have invested funds 
into life insurers' foundation funds should of course shoulder some losses."

The move underlines policymakers' fears about the possibility of a large failure in the insurance sector,
which could trigger a severe crisis throughout the financial system.

The health of the 181 trillion yen-asset industry will be compromised if current stock market prices and low bond 
yields continue over the long-term. The financial health of banks, which are major stakeholders and investors in the industry, is of particular concern.

Life insurers are struggling to earn enough on their domestic investments to cover the returns promised to policyholders.

"Life insurance companies promised unrealistic rates of return, banking on continued unrealized gains in 
stockholdings," said Hajime Yamazaki, chief consultant of UFJ Institute Ltd.'s Investment 
Consulting Department. "They should take responsibility and withdraw from the market. If insurers decide to cut payouts, that's nothing other than a default."

U.S. credit agency Standard & Poor's said in a report that a reduction in guaranteed payouts
 would have only "limited effectiveness in relieving troubled insurers," and would likely accelerate policyholder flight.

The Japan Times: May 16, 2003