BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
INTERNATIONAL BUSINESS Commentary: Let Japan's Faltering Insurers Take the Fall Two years ago, Tokyo officialdom gave Japanese taxpayers a soaking during the bailout of debt-besotted banks. Now, the wealth-destroyers within the ruling Liberal Democratic Party are at it again. To save Japan's reeling $250 billion insurance industry, some politicos want to let insurers effectively rip up policies issued in the late 1980s that promise 5% returns to policyholders and replace them with ones that yield about 1%. Although regulators all over the developed world have allowed bankrupt insurance firms to renege on promised returns from time to time, a bailout on this scale would be a ''first in the history of the insurance industry,'' says Runa Ichihari, associate director of Standard & Poor's in Tokyo. Even so, Financial Reconstruction Commission chief Hideyuki Aizawa and Finance Minister Kiichi Miyazawa argue such radical measures are needed to avert another teeth-rattling financial crisis in Tokyo. Not so fast. What's proposed is a misguided bailout with no strings attached that might reverse the healthy, cathartic shakeout now under way in Japan's overcrowded insurance industry. There is no denying Prime Minister Yoshiro Mori's government has a big problem on its hands. The triple-whammy of bad loans from the 1980s, a depressed stock market, and ultralow interest rates has triggered a series of insurance failures. October alone claimed Chiyoda Mutual Life Insurance Co. and Kyoei Life Insurance Co. And, yes, Japanese life insurers are monsters whose collapse can be traumatic. They manage about $1.8 trillion of the nation's savings and collectively own some 10% of Japan's $3.4 trillion bond market. They are large-scale global investors in the U.S. Treasury and European bond markets. If some big players went under, there would be trouble all around. It's also true that the insurers, big and small, are suffering greatly from the dreaded negative yield spread. That's jargon for the gap between the 5% return they guaranteed on policies issued in the late 1980s and the 2% or so return they have been getting over the past five years on their stock and bond investments. Japan's top five insurers reported $10 billion in such valuation losses on invested premiums last fiscal year. But are things really so dire as to require a massive wealth transfer from policyholders to insurers? Japan's banking crisis certainly justified a $70 billion bailout. The failure of big players such as Long Term Credit Bank of Japan and Nippon Credit Bank Ltd., and the weakened condition of other major lenders, threatened to clog the banking sector--the circulatory system of any economy--and possibly roil global markets. In contrast, such big insurers as Nippon, Dai-Ichi, and Sumitomo have strong capital ratios and are enjoying gains in premium income by diversifying into health and nursing care coverage--big markets in Japan. And though their half-year results released on Nov. 27 were lackluster, the biggies are not in serious peril. JUNGLE LAW. It is the smaller insurers that are in the biggest trouble. Which raises another point: Does Japan need 40-odd life insurers? The answer is no, and consolidation is on the way. Foreign insurers like Prudential and Aetna--with their cleaner balance sheets, better portfolio management, and lower costs--are snapping up insolvent Japanese firms, deepening their reach into the world's No. 2 insurance market. The politicians may scream crisis, but the reality is that a government handout would only help a bunch of coddled insurance bosses running second-rate firms. Better to let them fend for themselves and, if they go under, compensate policyholders by drawing on an existing $10 billion industry-run fund that was partially state-funded. That may entail using some taxpayer money, but that's better than making policyholders shoulder $15 billion a year in lost returns --which is what will happen if the industry is allowed to cut policy returns from 5% to 2%. Letting the losers go under could be messy. But at least the insurance industry would continue to downsize and open itself up to more global competition, capital, and managerial expertise. Hitting up Japanese policyholders, who didn't create this mess, is not only a travesty but is sure to make the recovery longer and all the more painful. By Brian Bremner _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					INTERACT E-Mail to Business Week Online

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