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The New Era of Three Mega Casualty Insurers: Their Aims and Benefits for Policyholders

Masahiko Ezawa
Professor, Faculty of Commerce, Waseda University

(1) The casualty insurance industry faces a second reorganization

By the spring of 2010, two new large insurance groups will be established through management integration: one comprises Mitsui Sumitomo Insurance Group Holdings, Aioi Insurance, and Nissay Dowa General Insurance; the other comprises Sompo Japan Insurance and Nippon Koa Insurance. These two new groups along with the current industry leader Tokio Marine Holdings will shape a new era of three mega insurers in the Japanese casualty insurance industry. The net premium income -- the equivalent of sales for ordinary businesses -- for each of those mega groups exceeds two trillion yen. In the 1990s, there were more than ten listed companies in the casualty insurance industry. However, the premium liberalization in 1998, where the requirement to comply with bureau rates was abolished, triggered the reorganization of the insurers into six major companies from 2001 to 2002. Less than a decade after that, the industry will experience management integrations again. Details of the past integrations and the size of the three new major groups in terms of net premium income and total assets are shown below.

Future casualty insurance industry (data for the term ending March 2008 appear in bold)

[First Group]
Sumitomo Marine + Mitsui Marine  Mitsui Sumitomo Insurance (Oct. 2001)
Dai-Tokyo Fire + Chiyoda Fire  Aioi Insurance (Apr. 2001)
Dowa Fire + Nissay Sompo  Nissay Dowa General (Apr. 2001)
The upcoming integration of the three companies above will result in net premium income of 2,730.7 billion yen and total assets of 12,599 billion yen.

[Second Group]
Tokio Marine + Nichido Fire  present Tokio Marine HD
Net premium income: 2,245.1 billion yen, total assets: 17,283.2 billion yen

[Third Group]
Yasuda Fire + Nissan Fire (Jul. 2002)
 Yasuda Fire+ Taisei Fire (Dec. 2002)   Sompo Japan Koa Fire + Nippon Fire  Nippon Koa Insurance (Apr. 2001) The upcoming integration of the two insurers above will result in net premium income of 2,067.3 billion yen and total assets of 9,773.8 billion yen

One factor behind this reorganization is the harsh business environment. Slumping car sales and weak imports and exports amid the ongoing recession have seriously hurt sales of related insurance products. Five among the six major insurers suffered a decrease in income based on the preliminary 2008 figure, and the financial crisis that began in the U.S. also negatively impacted their performance. Sompo Japan, for example, expects a deficit in its net profit and loss for the term ending March 2009 due to losses from "financial guarantee insurance," which guarantees principal and interest payments for securitization products.

(2) Aims of the reorganization

The management integrations mentioned above seem to have been decided in order to overcome this situation from the following two perspectives.

The first perspective is "defense": cost-cutting through improved business efficiency. The insurers are being forced to prevent a recurrence of the socially criticized "unpaid insurance," and the attendant inflation of system costs that puts pressure on their profits. Therefore, they decided to seek cost-cutting through management integration which consolidates their agency systems and claim adjustment systems -- systems for sharing policy information among the head office and agencies connected online -- within the group. In addition, they will make efforts to further cut costs by jointly conducting part of claims adjustment, an important operation for the casualty insurance industry also known as "the exit business."

Through the management integration of Sompo Japan and Nippon Koa Insurance, these two companies will integrate under a holding company in parallel without merging. While some point out that this arrangement could weaken the effect of the reorganization, Sompo Japan president Masatoshi Sato said that a "shared back-office including desk work and systems will be more effective." He also expressed his intention to standardize application forms for insurance products -- as many independent agencies have complained about the complexity of different insurers using different forms -- and to streamline the redundant desk work between branches and agencies. According to him, these measures seek to cut the system costs, which currently total 63 billion yen for both companies, by approximately 15 billion yen and also to hold down the claim adjustment costs, which currently amount to 100 billion yen annually.

The second perspective is "offence": sales expansion by sharing enterprise customers among insurers. In the case of the management integration among Mitsui Sumitomo Insurance, Aioi Insurance and Nissay Dowa, each of them has its own affiliated or friendly companies, such as Mitsui Sumitomo Financial Group, Toyota Motor, and Nippon Life, respectively. Effectively combining and utilizing them would lead to the creation of a new market. However, when a life insurer is regarded as a distribution channel for its friendly casualty insurer, such as Sumitomo Life for Mitsui Sumitomo Insurance and Nippon Life for Nissay Dowa, there are concerns about whether conflicting interests within the group can be smoothly reconciled by means of, for example, "supplying a single product to a single company in the future" (Mitsui Sumitomo Insurance president Toshiaki Eto).

As for the management integration between Sompo Japan and Nippon Koa, each of them is considered to have a strong sales base for the casualty insurance business. However, they have different areas of specialization. Sompo Japan's strong point is in sales of auto and fire insurance through its strong agency network, while Nippon Koa sells insurance via regional banks and other financial institutions. These separate areas of specialization would generate a synergy with each company effectively complementing the other.

(3) What are the benefits for policyholders?

As mentioned earlier, the premium liberalization in 1998 triggered the first industry reorganization. However, the competitive responses of the insurers involved the diversification and complication of insurance products -- specifically, attaching various riders to them -- rather than the reduction of premium rates. This made insurance products difficult to understand, for consumers as well as distributing agencies, eventually leading to intentional or accidental defaults on premium payments.

I hope that the upcoming reorganization will achieve genuine consumer benefits. That is, I look forward to the establishment of a system offering insurance products that meet customer needs and have reasonable premiums provided through fair competition among the three major groups, in terms of pricing and product quality, learning from past experiences.

Masahiko Ezawa
Professor, Faculty of Commerce, Waseda University


Prof. Ezawa was born in Tokyo in 1960. He graduated from School of Commerce at Waseda University in 1983. He withdrew from the Doctoral Program in the Graduate School of Commerce at Waseda University after finishing the required course work in 1991. He received a Ph.D. in commerce from Waseda University in 2001. He has been at his present post since 2004. Prof. Ezawa teaches about life insurance and other kinds of insurance. He served at the Institute of Insurance Science at University of Cologne in Germany as Visiting Professor for two years from April 2005. He is also a board member of the Japanese Society of Insurance Science.

[Recent publications]

- Co-authored book: Insurance Studies, Second Edition [Hoken-ron, Dai 2 Han], Seibundo (written and edited by Koichi Oya), October 2008.
- Article: "Rating of Insurance Companies in Germany [Doitsu no Hoken-Gaisha Kakuzuke ni tsuite]," Seimei Hoken Ronshu, No. 163 (June 2008).
- Article: "Transparency of Dividends to Policyholders in Germany [Doitsu ni okeru Keiyakusha Haito no Tomeisei]," Seimei Hoken Keiei, Vol. 76, No. 1 (January 2008).