Insurance deregulation is opening the Japanese market in the way Captain Perry sailed into Yokosuka with his black ships in 1854. Anna Klara Schmidder explains what this means to insurance companies and their reinsurers.

When we think about Japan, we think of a well organised and disciplined world, which we view slightly indistinctly as though through silk curtains. We are impressed and envy its "highest quality and professional standards". Precision, organisation, solidarity through the interlocking shareholdings and shared interests known as kiretsu and a regulated market structure allowed Japan to sail smooth waters during the second half of this century.

As far as insurance was concerned, the 23 Japanese non-life insurance companies (29 today, including the new non-life insurers) moved in smooth waters too, thanks to their solidarity. Even rising waves overseas did not disturb them, because internal mechanisms allowed them to circumnavigate difficulties.

Commitment by the Japanese non-life insurers to their membership of the former Fire and Marine Insurance Rating Association of Japan guaranteed underwriting profits. The market wide rating system and tariffs and the careful supervision of underwriting in earthquake business protected them well. Uniformity of contracts ensured equality of conditions, while market arrangements limited the underwriting of industrial earthquake business.

All insurers had the same goals and could look forward serenely to the profits. Free from competition, they delivered good to exceptional results. We, as reinsurers, also profited from this situation. As a result, in those days, the reinsurance industry was also very successful in Japan. Japanese reinsurance treaties were similar and comparable, which made it easy for the reinsurers to check and write. It was easy business to write because although windstorm exposure was high, the rates were good. Earthquake was easy too, because the Japanese companies only accepted it on a reduced indemnity basis. For us, Japan was one of the last profitable bastions in the insurance world because of lack of competition, its good underwriting policies and long term commitments.

Inevitable changes

Smooth waters had made for easy sailing, but Japan received clear signals that the situation had to change. To achieve international presence and become competitive, deregulation of the market was absolutely necessary. Wasn't Japan an equal, responsible member of G7?

Deregulation is bringing Japan's insurance market out of isolation as Captain Perry opened Japan to the world. Today, the tightly controlled insurance market is exposed to free competition. What deregulation means is clear: to become competitive and gain market share, the Japanese would have to:

* Underwrite more earthquake risks.

* Dissolve the co-insurance system and promote higher capacities.

* Underwrite more first-loss policies.

* Increase spending.

* Expand the sales point network.

* Accept underwriting losses.

The question must be raised: What will happen to their results in such choppy waters?

The five largest Japanese non-life insurers are actively prepared to underwrite earthquake risks. This is their largest opportunity to win market share. It is questionable, however, whether or not they will be able to sell earthquake insurance products in the current recession. Before deregulation, earthquake insurance was not a major thought for the Japanese. As a marketing tool, Japanese non-life insurance companies wanted to sell more first loss policies, but the insureds did not respond as strongly as the companies expected.

Reinsurers' response

In harder times, reinsurers will need to examine business connections carefully. As a result of competitive pressures and declining premiums, Japanese non-life insurers will find it more difficult to maintain good results. The motto: "We are in this boat together", has been thrown overboard; it has become every man for himself.

Until now, reinsurers have been quite comfortable to follow the Japanese non-life insurers, but today they find it difficult to see a profit producing future, when red ink threatens to stain the waters and expanding coverage threatens the swamp the ship. For instance, Mitsui Marine and Fire Insurance Company in the future, will give up to a 20% discount off loss-free earthquake policies.

The graphs give an idea of the results of the Japanese insurance market.

The effect of the recession will be seen in 1999 and the following year. Primary companies will not enjoy the profits they have in the past, so must look carefully at their costs. However, the pressure to spend more money to compete may be nearly impossible to resist and as mentioned before, we assume that the costs will rise. There are parallels between what is happening in Japan and in the German market as a result of European Union directives. The Japanese companies are looking carefully at the effect of deregulation and competition in Germany to see if there can be similar solutions to the loss of tariff structure and rising costs.

Presumably, however, the economic situation in Japan will have a greater effect on the life insurance companies, whose past investments were made while interest levels were extremely high. With severely decreasing interest rates, the expected dividends can no longer be guaranteed. As a result, even the big life companies will suffer in the future. It is even possible nowadays that some of them might even close down their business. Times are really changing.

In the age of globalisation, liberalisation and deregulation have sailed, like Captain Perry with his seven black ships, into Japan. The silk curtain has opened. Even in stormy seas, we as reinsurers should and must show the Japanese insurance business that we are also there for them and prepared to make long-term commitment. We need to exhibit now the same solidarity that the Japanese shared among one another in the past. As a large ship can weather a storm better than several small vessels, so will our unity make us stronger.

We are all in one boat. With the opening of our representative offices in Tokyo in January this year, we wanted to send a message that we are there when our clients need us. We want to sail through the bad times together and with strength, and hold fast on to the idea of long-term commitment. Although the Japanese insurance market will not be as profitable as in the past, it can still be profitable in the future, especially for those reinsurers who find solutions for their clients and who are flexible enough to adapt to the new situation.

Anna Klara Schmidder is an assistant manager with Gerling Global Re. She works on Japanese non-life underwriting and supports the company's offices in Singapore, Kuala Lumpur and Seoul. Tel: 49 (0) 221 144 5463. Fax: 49 (0) 221 144-4565. E- mail: