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Global Scale by Coletta Kemper Vertical Segregation

Close business ties inside the Japanese market effectively block out competition from foreign brokers and carriers.

By  Coletta Kemper

Out of the rubble of sheer destruction following World War II, Japan emerged as an economic miracle in the second half of the 20th century. Behind Japan’s success is a tradition of close-knit business arrangements that helped create economic powerhouses, such as Mitsubishi. For decades, these powerful alliances controlled Japanese industry from supplier to distributor and threatened U.S. dominance in the steel and auto industries.

No longer the power force they once were, these mega corporations still pose a barrier for foreign and domestic insurance brokers and carriers operating in Japan’s insurance market today.

Prior to World War II, Japan’s industry was controlled by zaibatsu—closely held, family-owned, industrial conglomerates. The zaibatsu helped build Japan’s military industrial complex before the war. The Allies dismantled the zaibatsu after the war, but companies quickly reorganized into alternative business alliances called keiretsu.

Keiretsu is a Japanese term for a type of business arrangement with interlocking companies and shareholdings. A keiretsu is organized either horizontally or vertically.

The major keiretsu are centered on a bank, which lends money to the other members and holds equity positions in the companies. The all-powerful bank exercises considerable control over the keiretsu and bails out members when needed. Through these arrangements the keiretsu is able to dominate the market and ward-off hostile takeovers.

Mitsubishi Corp. is a prime example of a keiretsu. Its group includes the Bank of Tokyo-Mitsubishi UFJ, Kirin Brewery, Mitsubishi Electric, Mitsubishi Fuso, Mitsubishi Motors, Nippon Yusen, Nippon Oil, Tokio Marine and Fire Insurance, Nikon and Hino Motors.

Vital to Japan’s early economic recovery, the keiretsu system is viewed today as a barrier to foreign trade and an obstacle to Japan’s future economic success. The keiretsu structure has been the subject of trade negotiations between the U.S. and Japan since the early 1990s. The U.S. asked the Japanese to dismantle the keiretsu and allow U.S. firms to compete with Japanese companies. As a result of the discussions, the Japanese agreed to make the keiretsu relationships more “open and transparent.”

Progress has been made in eliminating barriers to free trade over the past decade; however, the keiretsu system lives on and significant trade barriers still exist in the areas of non-life insurance and insurance brokerage services. Foreign and even domestic insurance brokers find it difficult to compete for commercial clients that are part of a keiretsu.

There are six major barriers to trade for the insurance industry:

  • Shareholding by insurance companies of large publicly traded corporations. Currently, Japanese law permits non-life, property-casualty insurers to hold no more than 10% of outstanding shares of a public company. On its face, the 10% ownership doesn’t seem that onerous if the corporation’s insurance needs are put out for competitive bid. In reality, because of the cozy keiretsu relationship, the insurer with the ownership stake most often gets the business.
  • Corporate subsidiary insurance agencies. A number of large Japanese corporations have a wholly owned subsidiary that operates as a licensed property-casualty agency. Current regulations limit the percentage of the parent company’s insurance that can be funneled into the agency. The first problem is that the percentage calculation excludes any personal insurance that employees buy—distorting the actual amount of business going to the subsidiary agency. Another issue arises when Japanese non-life insurers assert their influence by assigning the insurer’s current or retired employees to the agency.
  • Cooperative insurance company scheme. Under this scenario, various non-life insurers provide quotes with different terms and conditions for the risk. The business is still awarded to the largest shareholding insurance company, but the insurers who “lost” the bid form a cooperative “coinsurance scheme” and underwrite a proportion of the risk based on the percentage of shares they own in the corporation. This scheme effectively locks out other competitors.
  • Direct foreign insurance placements. Japan requires many lines of coverage to be placed with admitted companies. This isn’t uncommon in developing economies that want to protect their emerging industries, but it limits the coverage available for the complex risks that exist today.
  • Insurance brokerage system. Japan does not allow brokers to negotiate fees for services with commercial clients. The fixed commission rate approach needs to be eliminated, and brokers should be allowed to be compensated by fee for services and/or commission depending on the services provided.
  • Toa Reinsurance Company. Toa was created largely by capital provided by Japanese insurance companies, which are also Toa’s largest shareholders. As a result, Toa often becomes the reinsurer of choice for the insurers and may provide conditions more favorable to its shareholders than the competition.

Japan has progressively opened its insurance market to foreign competition, but to have a truly free market that benefits consumers, it must let competition reign.

Kemper is The Council’s vice president of Industry Affairs. Coletta.Kemper@LeadersEdgeMagazine.com

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