Foreign Insurers Take Lead with Cancer and Medical Products

   Japanese life insurance companies have that sinking feeling. Even as their markets evolve away from their core activities, foreign life insurance companies are posting rapid growth centered on sales of cancer and medical policies, the so-called "third sector."

   Thanks to latent (paper) gains on securities holdings as a result of rising stock prices, Japan's life insurers are now over the worst of their woes for the moment. Except for Taiyo Life Insurance Co. and Daido Life Insurance Co., the total value of business (policies) in-force (individual clients) fell at the nine major Japanese life insurance companies in the first half of fiscal 2005 (April-September) compared with the end of March 2005. Annualized premium income, an indicator of earnings growth, also shrank at six of the companies, including industry leader by share, Nippon Life Insurance Co.

Revenue Problems Started Around 1998

   The total of business in-force of major Japanese life insurance companies has progressively declined since around 1998, due mainly to people's increasing reluctance to buy policies after a number of leading names collapsed. This trend continued during the first half of fiscal 2005. Business in-force at Nippon Life Insurance decreased 2.5% compared with the end of March, and by 1.7% at Dai-ichi Mutual Life Co., the No. 2 in market share in Japan. Meiji Yasuda Life Insurance Co., the No. 3 company, also shed 3.7%.
   This decline is tantamount to erosion of the client base. If the trend continues, industry insiders worry that "insurance companies that do not somehow raise premiums will gradually lose premium revenue, hurting their earnings and balance sheet fundamentals," as one put it.
   The sense of apprehension in Japan's insurance industry evident from the decline in the new indicator companies have begun using recently, premium income. Annualized premium income at Nippon Life Insurance during the current fiscal year (2005) totals 3,301,400 million yen, down 1.6% year on year. For Dai-Ichi and Meiji Yasuda, the slide is 1.5% and 5.3%, respectively. Only three of the major life insurance companies - Sumitomo Life Insurance Co., Daido, and Fukoku Mutual Life Insurance Co. - registered increases.

Alico Posts Double-Digit Growth

Foreign insurance companies, strong in cancer insurance, are significantly increasing policy contracts.

   Major Japanese life insurance companies have built their business around what is known as death coverage. This entitles beneficiaries to large insurance payouts at the demise of the policyholder, but premiums are high and must be paid over a long period. More than 90% of Japanese already hold this type of insurance, and the market is now more than saturated. The "graying" of society, with more people reaching very advanced ages, however, has driven a dramatic shift to "before death" policies such as annuity and health insurance, for which premiums are relatively low and policyholders can receive insurance payouts while still alive.
   The difficulties Japanese life insurers now face highlights their inability to cope with changing customer needs. This weakness has created a niche opening for foreign rivals like American Family Life Assurance Company of Columbus (AFLAC) Japan and American International Group, Inc. (AIG), which have long prided themselves on products such as cancer coverage. During the first half of the year, AFLAC Japan's business in-force rose 5.1%, while Alico Japan, a unit of AIG, saw its new premium income rise by more than 13%.
   Some people in the financial business point out that Japanese life insurance companies' dependence on death coverage, using armies of salespeople for face-to-face selling, means they risk destroying traditional management structures if they try to shift their focus to medical and care coverage, and that they must proceed with caution in managing change. Foreign insurers seem likely to continue to set the pace in the Japanese life insurance market for some time to come.