Presentation material for a Meeting of Solvency & Actuarial Issues Subcommittee of
International Association of Insurance Supervisors on 3-5 September 2003
Financial Services Agency, Japan

Capital Requirements for Insurance Companies in Japan

Framework

• Common framework, the solvency margin standard, is introduced for both life and general insurance companies in FY1996. It has been improved since then.

  

• Other capital requirements
  • Net asset requirement: Liquidation value 0
  • Initial capital 1 billion yen

Usage of the solvency margin ratio

• Filtering: The FSA continuously monitors and regularly inspects all insurance companies, since the number of them is relatively small (44 for life and 55 for general). It is not very necessary to narrow them down to those which need attention, using the solvency margin ratio.
• Early warning system: The FSA monitors following indicators of insurance companies. It requests further reports and issues orders as necessary, even if a solvency margin ratio of the company is well above regulatory minimum, 200%.
  • Profitability: Profit breakdowns and their projections
  • Credit risk management: Concentration of major credit exposures, etc.
  • Market risk management: Impact of price fluctuation of securities, etc.
  • Liquidity risk management: Asset portfolio and trend of policies, etc.
• Prompt corrective action: If the solvency margin ratio is less than 200%, it triggers for various prompt corrective actions.
• Disclosure: Not only a solvency margin ratio itself but its components of every insurance company is disclosed to public. (Attachment)

Solvency margin (Numerator of solvency margin ratio)

• Capital
  • Revaluation differentials on securities are deducted to avoid double counting.
• Capital like provisions
  • Price fluctuation provisions
    • Certain percent of assets is set aside for price fluctuation risks.
  • Contingency provisions
    • Certain percent of premium or net amount at risk is set aside for insurance risks and major catastrophe risks.
  • General loan losses provisions
• Unrealised gains/losses on securities and real estates
  • Some of unrealised gains/losses are on B/S.
  • Net unrealised gains/losses on real estate (x 85% if gains; x 100% if losses)
• Subordinated debts
• Deduction: Stocks and subordinated debts invested in insurance companies or any subsidiaries, etc.
• Margins for prudence contained in statutory provision

Risk amount (Denominator of solvency margin ratio)

Risk category		Case assumed	Amount measured
Insurance risks		Insurance claims payment is higher than normal expectations.	Certain level of insurance claims payment minus normally expected level
Assumed interest risks		Investment income earned is lower than originally assumed income.	Expected amount of the gap
Asset management risks
	Price fluctuation risks	Capital loss is higher than normal expectations.	Amount at risk with a 90% probability
	Credit risks	Counterparty defaults.	Expected amount of loss (including that from credit derivatives)
	Other risks for subsidiaries, derivative transaction, reinsurance and reinsurance recoverable
Major catastrophe risks  (general insurance only)		A natural disaster strikes.	Amount of damage caused by the largest earthquake or typhoon
Operational risks		Something not in the above categories happens.	2 or 3% of the total of the other risks

• Correlation of risks is taken account to some extent.

Components of Solvency Margin Ratios of Insurance Companies in Japan (March 2003) (PDF:15KB)

More information about general insurance companies is available at the website of The General Insurance Association of Japan, Inc.