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