Japanese Regulator Seeks Reduction in Life Payouts

In a controversial move Hideyuki Aizawa, the head of Japan’s Financial Reconstruction Commission, which is trying to straighten out the country’s financial problems, highlighted by the recent failure of two large life insurers, asked the Financial Services Agency, which regulates the insurance industry, to allow insurers to reduce guaranteed payments.

If granted, the request would allow the beleaguered life insurance industry to pay less on annuity and life policies, which were taken out prior to the downturn in the Japanese economy, that has drastically reduced insurers’ earnings. Current legislation prohibits any reduction in the amount of the guaranteed payouts.

Any move to do so will be strongly opposed by consumer groups, but as Aizawa told the Financial Times in an interview, “It will also be better for policy holders for the guaranteed yield to be cut before the company goes under.”

The move may not solve the problem of the gap between company earnings and payment obligations, as a major cause for the failures of Chiyoda Life and Kyoei Life was the withdrawal of funds by policy holders anxious about their financial stability. Thus any reduction in payouts could become a self fulfilling prophecy by casting doubts on the company’s solvency.