Japan is the biggest international market currently in the process of deregulation.
Japan abolished its tariff rate system for auto insurance as part of the financial reform, when the country’s stock market and banking system teetered on the brink of collapse.
Japan’s insurance law was revised and the regulatory authority was transferred from the Ministry of Finance to the new Financial Supervisory Agency.
Japanese auto insurers are saddled with very high expense ratios, a byproduct of high commission rates.
As a result, foreign companies coming in as direct marketers are not hampered by the expense of agent commissions and have been readily competitive.
But it is expensive to start a direct-selling insurance operation, because the new entrant must advertise extensively to build name recognition. In addition, some countries’ phone systems are not suited for telemarketing.
Once insurers clear those hurdles, cultural issues will make it difficult for them to expand their portfolios. It takes a lot of time to be accepted.
The Japanese people are conservative and very loyal.
They are not likely to change auto insurers because of price, but as the economy changes in Japan, price may become more important.
Traditionally, getting cheap car insurance was not the issue in Japan - customer service was the prime consideration in selecting an auto insurer.
To compete on service, Japanese insurers currently offer roadside services and hotel accommodations for stranded motorists at no additional premium, said Teruhisa Amano, an analyst in the international division of A.M. Best Co.
Property damage claims are frequent, because drivers want their cars to be in perfect condition.
The no-deductible auto policy is gaining popularity there.
Japanese motorists are required to have the government-mandated Compulsory Automobile Liability Insurance, which covers up to $200,000 per accident.
Private insurance provides property damage insurance along with unlimited liability cover on top of CALI.
American International Group, through its American Home Direct subsidiary, introduced direct marketing for auto insurance and promised discounts of as much as 30% off standard rates.
When it started offering discounts based on driving record and age, American Home was required to leave the auto insurance rating association that was responsible for enforcing tariff rates among its members. AIG wrote an estimated ¥77.9 billion (about $729 million) in auto premiums in Japan, up from ¥1.3 billion, according to the Foreign Non-Life Insurance Association of Japan. Zurich Insurance Co., which offered a similar product, wrote an estimated ¥10 billion in auto premiums there last year, up from ¥400 million.
Foreign insurers eventually may capture 6% of Japan’s auto market, but the more likely impact is that deregulation will set off a price war among domestic carriers.
Agents’ commissions will be deregulated, and as a result, agents may become more powerful.
Standard & Poor’s, the New York-based credit-risk appraiser, recently released a report indicating that Japan’s general insurers are set to experience a difficult period.
The report said that fiscal results showed a deterioration in the industry’s average loss ratio that was caused primarily by intense competition brought about by the deregulation of prices and products in auto insurance lines.
Smaller insurance companies are considered to be the most vulnerable to the effects of deregulation, according to the report.
When a Japanese motorist applies for auto insurance for the first time, the driver is assigned to grade level 6.
If no accident occurs, the driver moves up the scale each year with the most preferred drivers reaching a maximum of grade level 16.
If, however, the motorist is involved in an accident, that person drops at least one grade level and incurs a surcharge.
While some U.S. insurers are eyeing Japan’s auto market, Allstate Insurance Group decided to exit it, despite a long-standing commitment of people and capital there.
Given the fierce competitive pressures in Japan and marketing expenditures that had risen to unprecedented levels, we believed there was little likelihood of an acceptable financial return in the short-to-medium term, even with a significant capital investment.
Allstate entered Japan’s auto market in 1982 with the establishment of Allstate Automobile & Fire Insurance Co. In 1984, Allstate Automobile & Fire formed a 50/50 joint venture with Saison Group.
That joint venture was dissolved in 1997, with Allstate Automobile & Fire retaining a 5% share in the venture that was renamed Saison Automobile & Fire Insurance Co. in 1998. Allstate Property & Casualty Insurance Japan Co. was established in 1998, but it closed in January 2000.
As competition begins to reshape Japan’s auto market, domestic companies are experimenting with pricing options.
For example, one carrier instituted discounts for sport-utility vehicles.
You see a lot of inertia and reluctance to change, but clearly the Fair Trade Agreement is really changing the lay of the land,. AIG has been very aggressive in trying to cherry-pick the risk.