Over the past year, Japan’s insurance regulator, the Financial Services Agency, has turned its attention to business practices in the non-life insurance industry, from creating a healthy environment for non-life insurers by promoting the use of brokers to strengthening systems for sales agents. We speak with experts.
There have been two significant regulatory changes in Japan over the past year, according to Norton Rose Fulbright head of insurance Asia Anna Tipping and Nishimura & Asahi partner Masashi Ueda.
These were the release of the report of the Working Group on Systems for Non-Life Insurance Industry (Working Group), which “discussed issues from the perspective of the customer-oriented business conduct of insurance agents”, and the proposed drafts of regulatory revisions to implement economic value-based solvency regulations in Japan, as published by the Japanese Financial Services Agency (FSA), Ms Tipping and Mr Ueda said when they spoke with Asia Insurance Review.
Regulatory changes
Released in late 2024, the report of the Working Group discussed issues from the perspective of the customer-oriented business conduct of insurance agents, Ms Tipping and Mr Ueda said.
They noted that the report looked at strengthening systems for large-scale insurance agents, ensuring the effectiveness of monitoring agents by insurers and establishing appropriate comparative recommendation sales of insurance products by agents.
Additionally, they indicated the report mentioned how a healthy and competitive environment could be created for non-life insurance companies by promoting the use of insurance brokers, revising regulations regarding in-house agents and prohibiting insurance companies from providing excessive benefits to policyholders.
Ms Tipping and Mr Ueda said, “Based on this report, amendments to the Insurance Business Act of Japan and related regulations will be considered.”
In connection with the development and possible introduction of new standards for solvency assessment by the International Association of Insurance Supervisors (IAIS), the FSA is also considering the adoption of an economic value-based solvency regime, they believe.
They also noted that in October 2024, the regulator published the proposed drafts of regulatory revisions to implement economic value-based solvency regulations in Japan.
Ms Tipping and Mr Ueda said, “According to the FSA, the regulatory revisions are expected to be published around summer 2025 and will be implemented at the end of March 2026.
Possible effect on insurance brokers
“The insurance brokerage system was established in 1995 in Japan from the perspective of promoting competition in sales through the diversification of sales channels.
“However, the number of registered brokers in Japan was small compared to registered insurance agents, and the brokers do not appear to have been used sufficiently,” Ms Tipping and Mr Ueda said, when asked how the Working Group report could affect Japan’s insurance industry.
If brokers are allowed to receive commissions from customers in cases of corporate insurance and minimum deposits are reduced from JPY20m ($129,600) to JPY10m, in accordance with the proposal in the report, numbers may increase and usage may be “more widespread” in the industry, they said.
Under the current law, they said insurance brokers are allowed to receive commissions solely from insurers.
Liability Sharing Scheme
According to Ms Tipping and Mr Ueda, in June 2024, the Advisory Committee on structural issues and competition in the non-life Insurance industry released a report regarding the factors that caused the insurance premium adjustments:
- Due to the business practice of coinsurance, the handling of corporate insurance was concentrated among four major non-life insurance companies, leading to many opportunities for contact between sales representatives
- The insurers lacked sufficient education on the Anti-monopoly Act, and did not establish an appropriate internal management system, resulting in management failing to properly assess the risks
- While in-house agents were agents of insurance companies, they belonged to corporate groups and their positions were structurally unclear, which may have increased the risk of non-compliance with the Anti-monopoly Act
They said, “In response to this report, we understand that the non-life insurance industry is taking steps to ensure that business practices for coinsurance are appropriate, that sales promotion systems of non-life insurance companies are appropriate and that insurance underwriting management systems are properly established.”
Ms Tipping and Mr Ueda also believe consideration may be given to amendments to regulations to create a healthy and competitive environment, which may affect practices in the insurance industry as well.
InsurTechs and digital-only insurers and operators
While Ms Tipping and Mr Ueda noted that they were not aware of any new regulations regarding the innovation and implementation of new technologies, and emerging entities such as InsurTechs and digital-only insurers and operators, they mentioned an amendment.
“In order to enable insurance companies and their subsidiaries to promote InsurTech in operations, the scope of business that [insurers and subsidiaries] can operate under the Insurance Business Act of Japan was expanded in 2019,” they said.
According to Ms Tipping and Mr Ueda, “a regulator’s vocal stance can be as important as the regulation itself, serving as a roadblock or enabler for new insurance models and processes”.
They said, “Sometimes, (the) industry needs reminders that InsurTechs and digital-only insurers can fully operate and be partnered with in Japan.”
Regulating AI
When asked how they thought AI in insurance should be regulated in Japan, Ms Tipping and Mr Ueda were keen to point out that insurance-related information may include sensitive personal information such as medical history. As such, they said, AI services that may use a large amount of sensitive personal information “should be regulated by considering the protection of such personal information”.
For instance, they believe that as insurers routinely delegate authority to other parties, Japan’s regulation would need to address an agent’s use of a chatbot and how that links back to the principal’s regulatory obligations.
They also said, “There is also an interesting question to be addressed around whether an insurer’s use of a third party’s AI system could qualify as outsourcing. Regulation also needs to keep pace with AI-driven claims, ensuring clarity on ultimate responsibility for defective products, despite AI’s mysterious ‘black box’ problem.”
Ms Tipping and Mr Ueda noted that the use of automated decision makers poses risks of bias and discrimination as well. Because of this, they believe regulation should require a level of reasonable care in the design, deployment and use of AI in Japan.
“In terms of form, tech-neutral regulation and cross-sectoral principals are important, but these have inherent limitations when the tech is evolving fast. That is why targeted regulation is equally, if not more, important,” they said. A