International Trade: Implementation and Monitoring of the U.S.-Japan
Insurance Agreements (Letter Report, 09/24/1999, GAO/NSIAD-99-209).
Pursuant to a congressional request, GAO provided information on the
implementation and monitoring of the U.S.-Japan insurance agreements,
focusing on: (1) the views of U.S. insurance companies operating in
Japan regarding the agreements' implementation and impact on their
ability to compete in the Japanese market; (2) the roles and efforts of
the Office of the U.S. Trade Representative (USTR) and the Departments
of Commerce, State, and the Treasury in monitoring and enforcing the
agreements, and U.S. government views on whether Japan has met its
commitments under the agreements; and (3) U.S. insurance industry views
on U.S. government monitoring and enforcement efforts.
GAO noted that: (1) GAO's 1999 survey of the 13 U.S. insurance companies
and 3 brokers in Japan revealed that all but 2 think that Japan has made
moderate or better progress overall in implementing the 1994 and 1996
insurance agreements; (2) GAO's analysis of survey results shows that
Japan has met most of its transparency (openness), procedural
protection, and deregulation commitments; (3) overall, most U.S.
companies reported that the agreements have had a positive effect on
their ability to compete in Japan; (4) nevertheless, almost half the
companies expressed concerns over Japan's implementation of key
commitments such as expediting approval of insurance products and rates
and limiting the activities of large Japanese companies in the
specialized third sector; (5) USTR is the principal agency responsible
for monitoring and enforcing the insurance agreements, with assistance
primarily from the U.S. embassy in Tokyo; (6) USTR also receives
assistance from Commerce and State, with a lesser level of assistance by
the Departments of the Treasury and Justice; (7) USTR and U.S. embassy
monitoring efforts include obtaining information on the agreements'
implementation from industry groups and individual U.S. insurance
companies, as well as consulting with the Japanese government; (8) in
conducting their monitoring and enforcement work, U.S. government
officials have noted Japanese progress in implementing the agreements;
(9) however, they have also identified a few issues, which are similar
to those cited by some U.S. companies, where they believe Japan has not
fully met its commitments; (10) Japan, on the other hand, believes that
it has fully implemented both agreements; (11) more U.S. insurance
companies expressed favorable views of U.S. government actions to
monitor the insurance agreements than reported favorable views of
enforcement efforts; (12) about half (7 of 13) of all U.S. insurers and
2 of the 3 brokers GAO surveyed reported that U.S. government efforts to
monitor agreements have been effective; (13) with regard to enforcement,
about one-third of the companies and no brokers reported that U.S.
government efforts have been effective; (14) around one-third of the
companies reported that U.S. government monitoring and enforcement
efforts have been as effective as ineffective; and (15) three major U.S.
insurers expressed concerns over U.S. government monitoring and
enforcement efforts concerning the protection of various U.S. company
interests in the third sector.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-99-209
TITLE: International Trade: Implementation and Monitoring of the
U.S.-Japan Insurance Agreements
DATE: 09/24/1999
SUBJECT: Foreign governments
Foreign trade agreements
International trade restriction
Insurance premiums
Insurance companies
Insurance regulation
Competition
International relations
Surveys
IDENTIFIER: Japan
United States-Japan Framework for a New Economic
Partnership
Measures by the United States and Japan Regarding
Insurance
Supplementary Measures by the United States and Japan
Regarding Insurance
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Rev-LG logo.eps GAO United States General Accounting Office
Report to the Chairman, Subcommittee on Trade, Committee on Ways
and Means, House of Representatives
September 1999 INTERNATIONAL TRADE
Implementation and Monitoring of the U. S.- Japan Insurance
Agreements
GAO/NSIAD-99-209
GAO/NSIAD-99-209
Page 1 GAO/NSIAD-99-209 International Trade
Contents Letter 3 Appendixes Appendix I Questionnaire on the
Status of Implementation of the U. S.- Japan Insurance Agreements
22
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements 61
Appendix III U. S. Trade Representative's Key Monitoring and
Enforcement Decisions 79 Appendix IV U. S. Government Actions
Regarding One U. S.
Insurer 90 Appendix V Objectives, Scope, and Methodology 110
Appendix VI GAO Contacts and Staff Acknowledgments 113
Related GAO Products 114 Tables Table 1: Selected Key Commitments
of the 1994 U. S.- Japan
Insurance Agreement 63 Table 2: Selected Key Commitments of the
1996 U. S.- Japan
Insurance Agreement 68 Figures Figure 1: U. S. Company Views on U.
S. Government Monitoring and
Enforcement Efforts 18 Figure 2: Results of Approved Applications
Submitted by U. S.
Companies in Japan Since the 1996 Agreement Was Signed 71 Figure
3: Results of Approved Applications by Type, Submitted by U. S.
Companies in Japan Since the 1996 Agreement Was Signed 72 Figure
4: U. S. Companies' Views on Future Effects of Insurance
Agreements 75
Figure 5: Primary Sector Sales and Market Share Since the 1994
Agreement Was Signed 77 Figure 6: Third Sector Sales and Market
Share Since the 1994
Agreement Was Signed 78 Figure 7: Time Line of Events Related to
Minute and Yasuda- INA
Deal, 1993- 96 92 Figure 8: Text of the December 21, 1996, Minute
96 Figure 9: Time Line of Events Related to Minute and Yasuda- INA
Deal, 1996- 97 99
Contents Page 2 GAO/NSIAD-99-209 International Trade
Figure 10: Time Line of Events Related to Minute and Yasuda- INA
Deal, 1997- Present 104
Abbreviations
ACCJ American Chamber of Commerce in Japan ACLI American Council
of Life Insurance AFLAC American Family Life Assurance Company AIG
American International Group FSA Financial Supervisory Agency JFTC
Japan Fair Trade Commission MOF Ministry of Finance MOFA Ministry
of Foreign Affairs NEC National Economic Council USTR U. S. Trade
Representative WTO World Trade Organization
Page 3 GAO/NSIAD-99-209 International Trade United States General
Accounting Office
Washington, D. C. 20548 National Security and International
Affairs Division
B-283294 Lett er
September 24, 1999 The Honorable Philip M. Crane Chairman,
Subcommittee on Trade Committee on Ways and Means House of
Representatives
Dear Mr. Chairman: The Japanese insurance market is the world's
second largest after the United States, with $334 billion in
annual premiums in Japanese fiscal year 1997. The foreign share of
this market in Japan is 3.7 percent, compared to
a foreign share of the U. S. insurance market of 10. 7 percent in
1996. 1 In order to improve foreign access to the Japanese
insurance market, the United States and Japan have signed two
bilateral insurance agreements, in 1994 and 1996. 2 The United
States had two key objectives in negotiating
these agreements: (1) to ensure that Japan deregulated its primary
insurance market, comprised of life and non- life (property/
casualty) insurance and (2) to ensure that Japan provides U. S.
companies with a reasonable period of time to compete in a
deregulated primary sector before opening the third sector to
increased Japanese competition where
U. S. firms have a substantial presence. The third sector is
comprised of specialized life and non- life products such as
cancer, hospitalization, and personal accident insurance. In light
of concerns that have been raised with your Subcommittee about the
agreements' implementation and the executive branch's actions
related to enforcement of the agreements, you asked us to examine
(1) the views of U. S. insurance companies operating in Japan
regarding the agreements' implementation and impact on their
ability to compete in the Japanese 1 For more information on the
Japanese insurance market, see U. S.- Japan Trade: The Japanese
Insurance Market (GAO/NSIAD-99-108BR, Mar. 15, 1999). This report
provides details on the size of the Japanese insurance market, U.
S. insurance company participation in and concerns regarding that
market, and time lines of recent events affecting the market. 2
These agreements , Measures by the Government of the United
States and the Government of Japan Regarding Insurance, October
11, 1994, and Supplementary Measures by the Government of the
United States and the Government of Japan Regarding Insurance,
December 24, 1996, can be viewed from the following Department of
Commerce World Wide Web site: http:// www. mac. doc. gov/ japan/
source/ menu/ menu. html (cited Sept. 13, 1999).
B-283294 Page 4 GAO/NSIAD-99-209 International Trade
market; (2) the roles and efforts of the Office of the U. S. Trade
Representative and the Departments of Commerce, State, and the
Treasury in monitoring and enforcing the agreements, and U. S.
government views on whether Japan has met its commitments under
the agreements; and (3) U. S. insurance industry views on U. S.
government monitoring and enforcement efforts. As you requested,
we are also providing you with information on U. S. government
actions related to one U. S. insurer and its Japanese partner,
including the creation of a limited exception to the 1996
agreement and our views on certain aspects of this exception. (See
app. IV).
In conducting our work, we prepared a survey that builds upon a
similar survey we created in 1996 for all U. S. insurance
providers operating in Japan. (See app. I). For this report, we
surveyed the 13 U. S. majority- owned insurance companies
operating in Japan. In addition, we surveyed the three U. S.
brokers recently licensed in Japan. 3 Detailed company and broker
survey results are discussed in appendix II. We also met with
senior U. S. and Japanese government and industry officials in
Japan and the United States.
Results in Brief Our 1999 survey of the 13 U. S. insurance
companies and 3 brokers in Japan revealed that all but 2 think
that Japan has made moderate or better progress 4 overall in
implementing the 1994 and 1996 insurance agreements. Our analysis
of survey results shows that Japan has met most of its
transparency (openness), procedural protection, and deregulation
commitments. Overall, most U. S. companies reported that the
agreements have had a positive effect on their ability to compete
in Japan. This view is 3 Five of the 13 U. S. majority- owned
insurers in Japan are life insurers, while 8 are non- life
insurers. Three of these 13 companies are owned by American
International Group (AIG), and 2 were owned by CIGNA Corporation
at the time of our survey. CIGNA's property/ casualty company in
Japan was sold to ACE INA effective July 1999. Two U. S. insurance
providers (American Family Life Assurance Company [AFLAC] and AIG)
accounted for 81 percent of all U. S. insurance premiums generated
in Japan in fiscal year 1997. Of the three brokers included in our
survey, one is a British company whose shareholders have been
primarily other U. S. companies since November 1998. Brokers are
intermediaries between individuals or entities purchasing
insurance products and insurance providers. Brokers provide
another distribution channel for insurance products and promote
competition in the marketplace.
4 Specifically, in our survey these companies reported that Japan
had implemented the provisions of the two agreements to a
moderate, great, or very great extent.
B-283294 Page 5 GAO/NSIAD-99-209 International Trade
more positive than what companies reported in our 1996 survey. 5
Nevertheless, almost half the companies expressed concerns over
Japan's implementation of key commitments such as expediting
approval of insurance products and rates and limiting the
activities of large Japanese companies in the specialized third
sector. The Office of the U. S. Trade Representative is the
principal agency responsible for monitoring and enforcing the
insurance agreements, with assistance primarily from the U. S.
embassy in Tokyo. The U. S. Trade Representative also receives
assistance from the Departments of Commerce and State, with a
lesser level of assistance by the Departments
of the Treasury and Justice. The U. S. Trade Representative and U.
S. embassy monitoring efforts include obtaining information on the
agreements' implementation from industry groups and individual U.
S. insurance companies, as well as consulting with the Japanese
government. In conducting their monitoring and enforcement work,
U. S. government officials have noted Japanese progress in
implementing the agreements. However, they have also identified a
few issues, which are similar to those
cited by some U. S. companies, where they believe Japan has not
fully met its commitments. Japan, on the other hand, believes that
it has fully implemented both agreements.
More U. S. insurance companies expressed favorable views of U. S.
government actions to monitor the insurance agreements than
reported favorable views of enforcement efforts. About half (7 of
13) of all U. S. insurers and 2 of the 3 brokers we surveyed
reported that U. S. government efforts to monitor the agreements
have been effective; with regard to enforcement, about one- third
of the companies and no brokers reported
that U. S. government efforts have been effective. Around one-
third of the companies reported that U. S. government monitoring
and enforcement efforts have been as effective as ineffective.
Three major U. S. insurers expressed concerns over U. S.
government monitoring and enforcement 5 Our 1996 survey of U. S.
insurance companies operating in Japan found that while these
companies reported that many provisions of the 1994 agreement had
been implemented to varying degrees, the agreement had little
effect on their ability to compete in the Japanese market. U. S.
firms noted their continued inability to differentiate the types
of coverage they could offer and to set the rates they could
charge. For more information on the results of this survey, see U.
S.- Japan Trade: U. S. Company Views on the Implementation of the
1994 Insurance Agreement (GAO/ NSIAD/ GGD- 97- 64BR, Dec. 20,
1996). Further, comparisons between the results of our 1996 and
1999 surveys are contained in appendix II.
B-283294 Page 6 GAO/NSIAD-99-209 International Trade
efforts concerning the protection of various U. S. company
interests in the third sector. Background The first U. S.- Japan
insurance agreement was signed on October 11, 1994,
and was concluded under the United States- Japan Framework
Agreement. 6 In negotiating the insurance agreement, the U. S.
government sought to establish that deregulation of the large
primary sector of the Japanese insurance market, where U. S. firms
had experienced only limited success, would be required before
deregulation of the smaller third sector, where foreign companies
have a substantial presence, would occur. According to
the Office of the U. S. Trade Representative (USTR), while the
third sector accounted for roughly 5 percent of the total Japanese
insurance market in Japanese fiscal year 1997, foreign market
share for this sector was over 40 percent much higher than in the
traditional, primary insurance market. U. S. government and
industry officials believed that the lack of U. S. company success
in the larger primary sector was the result of a heavily regulated
environment that did not allow for new market entry, product
innovation, or price competition.
In the 1994 agreement, the United States met its negotiating
objective of establishing that primary sector deregulation would
be required before third sector deregulation would occur. Under
the agreement, Japan agreed to avoid radical change in the third
sector until foreign insurance companies were granted a reasonable
period to compete in a significantly deregulated primary sector
market, although the terms radical change and reasonable period
were not defined in the agreement. The agreement recognized that
Japan was in the process of reforming its insurance sector,
noting that the reform would be based on promoting competition and
enhancing efficiency through deregulation and liberalization.
Consistent with this reform initiative, the agreement included
specific commitments by Japan to deregulate the primary sector.
For example, the agreement
provided that insurance companies would be afforded greater
flexibility in establishing the price (rate) they would charge to
customers for certain product lines. In addition, the agreement
stated that Japan would expedite and simplify the application
review process for the approval of insurance
6 The United States- Japan Framework for a New Economic
Partnership ( Framework Agreement) was signed by the two countries
in 1993. Under the agreement, the United States and Japan agreed
to focus on eliminating sector- specific and structural market
access barriers and addressing macroeconomic issues.
B-283294 Page 7 GAO/NSIAD-99-209 International Trade
products and rates by gradually introducing expedited approval
systems for certain products. Japan also agreed to make its
regulatory process more transparent by, for example, publishing
and making publicly available the standards that insurance
regulators will apply in reviewing applications for approval of
new insurance products. During subsequent negotiations in 1996,
the two governments reached an interim understanding in September,
in which Japan agreed to allow direct sales of automobile
insurance to consumers by mail or telephone and
established restrictions on sales by subsidiaries of large
Japanese insurers of some third sector insurance products. The
commitment to allow direct sales of automobile insurance is
referred to in the final December 1996 agreement (discussed
below), while third sector commitments were largely superseded by
measures contained in the December 1996 agreement.
The second agreement was signed on December 24, 1996. This
agreement was negotiated in response to U. S. insurance company
concerns that the Japanese government was preparing to allow large
Japanese insurers increased access to the third sector through
their subsidiaries in violation
of the 1994 agreement. The 1996 agreement further defined
restrictions on third sector entry by Japanese companies, and it
clarified when these restrictions would be lifted by more
explicitly linking them to substantial deregulation of Japan's
larger, primary sector. Specifically, the agreement listed five
deregulation criteria for the primary sector that would have to be
met by July 1, 1998, in order to start a 2.5- year countdown
toward opening the third sector no later than 2001. These criteria
reflected specific deregulation commitments in the agreement, such
as allowing for greater pricing flexibility for automobile
insurance and applying a system to expedite marketing of
additional products. The two governments
recognized that if, on July 1, 1998, there were disagreement about
whether the criteria had been met, each side would be able to act
in accordance with its own view of whether the criteria had been
met. The U. S. government has stated that, in the case of
disagreement over implementation, it can invoke various trade
remedies.
On July 1, 1998, USTR announced that, in its view, Japan had not
fully implemented key agreement commitments including two of the
five primary sector deregulation criteria. As a result, USTR did
not (and still does not) support initiation of the 2. 5- year
countdown to open the third
sector to increased competition in 2001. The Japanese government
stated that it believed it had fully implemented all commitments,
including the five primary sector deregulation criteria. Thus, in
its view the 2. 5- year clock
B-283294 Page 8 GAO/NSIAD-99-209 International Trade
began on July 1, 1998, and restrictions on the ability of large
Japanese insurance companies to operate in the third sector will
be lifted on January 1, 2001.
The agreement also contains a commitment by Japan to take steps to
increase the number of staff responsible for processing insurance
applications. In 1998, Japan enacted legal and regulatory changes
that affected the insurance industry:
Japan reorganized its financial regulatory system and created the
Financial Supervisory Agency (FSA). Responsibility for licensing,
application processing, surveillance, and inspection of the
insurance industry was shifted from the Ministry of Finance (MOF)
to FSA in June. Japan agreed to include most of the commitments
contained in the 1996
agreement as part of its obligations in the World Trade
Organization (WTO) financial services agreement. The WTO can
therefore be a forum for resolving disputes related to these
commitments. The commitments, which were codified in Japanese
legislation that took effect on July 1,
1998, included deregulating the primary sector and restricting
sales of certain third sector products by Japanese insurers.
Companies Reported Most Commitments Met and Believe
Agreements Improve Their Ability to Compete, but Some Concerns
Remain In our January 1999 survey, almost all of the U. S.
companies (12 of 13) and
brokers (2 of 3) operating in Japan reported that overall, the
Japanese government had implemented the 1994 and 1996 agreements
to a moderate or greater extent. Our analysis of company responses
to our survey indicates that the Japanese government has
implemented most of its
commitments to improve transparency and procedural protections and
deregulate the insurance market. Most of the companies (10 of 13)
and brokers (2 of 3) reported that both agreements had enhanced
their ability to compete in Japan, and a few companies attributed
increased sales and market share to actions taken by Japan under
the agreements. Companies, however, reported that a few of the
agreements' commitments in the areas of transparency,
deregulation, and third sector protections had not been fully
implemented.
B-283294 Page 9 GAO/NSIAD-99-209 International Trade
Most Transparency and Procedural Protections Commitments Met
The 1994 agreement included specific commitments by the Japanese
government to provide greater regulatory transparency and improve
application processing procedures. Our analysis of company
responses to our survey indicates that most of these commitments
have been
implemented. For example, most companies (10 of 13) reported that
they have been given meaningful access to insurance regulators.
Further, 10 companies reported that they had received equal
treatment in insurance
industry groups. Ten companies also reported that they were not
required to coordinate their applications with other insurance
providers (which may be potential competitors) and that acceptance
of their applications had not been conditioned or delayed based
upon whether they consulted with other insurance providers, which
had been experienced by some U. S. companies
in the past. Most Deregulation Commitments Met
Our analysis of company responses to our survey indicates that
Japan has implemented most of its deregulation commitments in the
1994 and 1996 agreements. Moreover, companies reported that
several specific
commitments had been fully implemented. 7 As part of the 1996
agreement, the Japanese government agreed to meet five
deregulation criteria: (1) processing applications for
differentiated types of automobile insurance within a 90- day
period, (2) further liberalizing commercial fire insurance, (3)
expanding the notification
system, 8 (4) removing the requirement to use insurance rates
calculated by rating organizations, and (5) processing
applications within a 90- day period for differentiated products
or rates. The first four criteria apply only to non- life
insurers, while the fifth criterion applies to both life and non-
life insurers. According to the agreement, once all of these
criteria are met, the 2.5- year countdown toward opening the third
sector to increased
competition will begin. 7 In these instances, the commitments were
considered met by all companies expressing an opinion. 8 Under
Japan's notification system, a company notifies to the government
its intention to offer a specific product/ rate in categories of
risk that have been designated by Japan as eligible to use the
system. The company then waits 90 days while the notification is
reviewed by the government. If, after 90 days, no disapproval is
received, the company can then consider the product/ rate approved
and begin to offer it.
B-283294 Page 10 GAO/NSIAD-99-209 International Trade
In our January 1999 survey, companies reported that the Japanese
government had largely met the five primary sector deregulatory
criteria. All but one of the U. S. non- life companies expressing
an opinion reported that Japan had met the four criteria that
apply only to non- life products (processing of differentiated
auto insurance within 90 days, further liberalization of
commercial fire insurance, expansion of the notification
system, and removal of the requirement to use rating organization
rates). This one company reported that expansion of the
notification system was incomplete. Regarding the fifth criterion
that requires approval of applications for differentiated products
or rates within a standard 90- day processing period and applies
to all insurance companies, over half of the companies (7 of 13),
representing almost 60 percent of U. S. premiums in Japan,
reported that the Japanese government had met this commitment. 9
This view is consistent with our survey data on application
processing, which showed that of all approved applications
submitted by U. S. insurance companies
since completion of the 1996 agreement, 95 percent were approved
within 90 days of submission, while 5 percent took more than 90
days to receive approval (though this information is insufficient
for determining whether these last cases constitute violations of
the agreement). 10 In addition, the 1994 and 1996 agreements
included commitments by the
Japanese government to improve the distribution of insurance
products through the approval of a direct response system (for
example, marketing over the telephone) for automobile insurance
and the licensing of brokers. We found that the Japanese
government implemented these commitments.
9 Company shares (percentage) of total U. S. premiums generated in
Japan were calculated using premium data for Japanese fiscal year
1997 (Apr. 1997- Mar. 1998). Two surveyed companies did not have
sales in 1997 and were assigned a zero weight for computing the
premium proportions. 10 Under Japanese regulation, the 90- day
period can be suspended if the agency responsible for processing
applications requires a company to revise or supplement
information on an application. For these cases, we have no
information as to whether the 90- day period was suspended.
B-283294 Page 11 GAO/NSIAD-99-209 International Trade
Japan's Deregulatory Actions Promote Opportunities for Some U. S.
Firms
Most companies reported that the overall deregulatory actions
taken by Japan to implement both the 1994 and 1996 agreements had
a generally positive effect on their ability to compete in Japan,
and several cited specific examples of being able to introduce new
products or rates that they viewed as beneficial. For instance,
one non- life insurer reported that obtaining approval to offer a
differentiated type of automobile insurance
had a very positive effect on its ability to compete in Japan.
Also, two companies viewed the increased liberalization of
commercial fire insurance and the expanded notification system as
positive.
Concerning Japan's actions to improve distribution channels for
insurance, of the three non- life insurers who had received
approval to offer automobile insurance through the direct response
system, one reported that this method of distributing insurance
products had a very positive effect on its ability to compete in
Japan. In addition, two of the three brokers reported that the
Japanese government's decision to recognize brokers had a very
positive effect on their ability to compete in Japan, though about
half of the insurance companies reported that this event had
no effect. However, all brokers told us that they continued to
face certain obstacles in Japan, including a lack of price and
product differentiation, restrictions on the types of products
they can offer, and restrictions on the
structure of their business operations. A Few Key Transparency and
Deregulation Commitments Not Fully Met
Several companies reported concerns regarding Japan's
implementation of a few commitments in key areas. Concerning one
transparency commitment, almost half of the companies (6 of 13)
reported that the
Japanese government had done little to publish and/ or make
publicly available licensing, product, and rate approval
standards. Regarding Japan's deregulation commitments, five
companies expressed a belief that Japan had not fully implemented
its commitment to process applications for differentiated products
within 90 days. Three companies reported cases where applications
that were for new- to- market products or that used a
new distribution channel took longer than 90 days to receive
approval. Over half of the companies reported that in general
Japan has done little to expedite and simplify the application
review process. Further, regarding a commitment related to Japan's
ability to meet its application processing requirement, all 13 U.
S. companies indicated that Japan had not increased
B-283294 Page 12 GAO/NSIAD-99-209 International Trade
the number of staff responsible for processing applications.
Company officials attributed problems with timely processing to
this lack of staffing. 11
Concerns Expressed Over Japan's Implementation of Certain Third
Sector Protections
Under the 1994 agreement, the Japanese government committed to
avoid radical change in the third sector until foreign, as well as
small and mid- sized Japanese, insurers had had a reasonable
period of time to compete in a deregulated primary sector. Six
companies, representing over 80 percent of U. S. premiums,
reported that the Japanese government had not taken sufficient
action to avoid radical change in the third sector.
The 1996 agreement included specific commitments by the Japanese
government to prohibit or substantially limit large Japanese
insurers' subsidiaries from marketing certain third sector
products in the life and
non- life areas. In the life insurance area of the third sector,
Japan committed to prohibit Japanese subsidiaries from selling
stand- alone medical and stand- alone cancer insurance. 12 Two U.
S. life insurance companies in Japan reported that the Japanese
government had not met this commitment. One U. S. life insurance
company reported that the
Japanese government had failed to prevent Yasuda Fire and Marine,
a large Japanese company, from selling stand- alone cancer
insurance through its relationship with INA Himawari, a life
insurance subsidiary in Japan of the U. S. company CIGNA
Corporation. (See app. IV for detailed information on certain USTR
actions related to these companies.) Another U. S. life insurance
company reported that a Japanese insurer, Tokyo- Anshin, was
effectively selling stand- alone cancer insurance even though the
company offers it as a rider to a base life insurance policy.
In the non- life insurance area, seven restrictions on sales by
Japanese subsidiaries were put in place by the 1996 agreement,
primarily to protect the existing sales networks of foreign
insurers for personal accident insurance. Among U. S. non- life
companies expressing an opinion, all 11 USTR officials have noted
that the Japanese government has increased its staff responsible
for processing insurance applications since our survey.
12 While sales of stand- alone products in these areas were
prohibited in the 1996 agreement, medical and cancer benefits can
be sold as riders to a base policy, provided that the rider-
tobase policy ratio is within prescribed limits. An insurance
rider is a policy modification or addition to a larger insurance
policy. In this case, the underlying insurance being sold is a
life insurance policy.
B-283294 Page 13 GAO/NSIAD-99-209 International Trade
reported that Japan had met most commitments in this area, though
three companies reported that the Japanese government had not
complied with one commitment restricting sales of personal
accident insurance
endorsed by interindustry associations. USTR Is the Principal
Monitoring Agency; Believes Japan Has
Made Progress, but Has Not Met Certain Key Agreement Commitments
The U. S. government has given the insurance agreements high-
level attention and monitors them on an ongoing basis. USTR is the
principal U. S. government agency responsible for monitoring and
enforcing the insurance agreements. The U. S. embassy in Tokyo
also plays a major role, with the Departments of Commerce and
State providing additional assistance. The Departments of the
Treasury and Justice play much less active roles. USTR officials
reported that they hold interagency meetings at least once every 2
months, and more often as issues arise, to discuss the status of
the insurance agreements. USTR and the U. S. embassy in Tokyo
rely mainly on industry groups and individual companies for
information on the status of the agreements' implementation. USTR
attempts, but is not always able, to thoroughly verify the
accuracy or completeness of industry
data on implementation. In monitoring the agreements, USTR has
determined that Japan has made progress in deregulating its
insurance industry but has identified key commitments that remain
unmet.
USTR Plays Lead Role in Monitoring and Enforcement
USTR's Japan Office, the office with primary responsibility for
monitoring and enforcing the insurance agreements, currently has a
total staff of four permanent employees and one temporary employee
from the State Department, twice the amount of people that it had
4 years ago. However, the lead USTR official for Japan insurance
issues announced his departure in September 1999. This office is
responsible for monitoring approximately 20 trade agreements
negotiated under the current and previous administrations that
cover diverse issues such as telecommunications and
autos and auto parts. USTR's Offices of the General Counsel and
Services, Investment, and Intellectual Property also provide
assistance with the insurance agreements when necessary.
USTR has estimated that its efforts, combined with those of the U.
S. embassy in Japan, constitute about 80 percent of total U. S.
government efforts to monitor and enforce the Japanese insurance
agreements. According to USTR, these two agencies confer on the
agreements almost daily. USTR also estimated that the Commerce
Department contributes about an additional 10 percent of U. S.
government monitoring and
enforcement efforts and reported that the Treasury Department's
role is
B-283294 Page 14 GAO/NSIAD-99-209 International Trade
limited. 13 According to our survey, U. S. insurance companies in
Japan have communicated most frequently with staff from the U. S.
embassy in Tokyo and USTR regarding the agreements.
According to our survey, six U. S. insurers, which account for
over 80 percent of all U. S. premiums generated in Japan, believed
that USTR does not have sufficient resources (personnel, funding,
and so on) to monitor and enforce the insurance agreements. USTR
officials reported that two Japan Office employees have worked
part- time on insurance and
that more people are needed to work on insurance and other U. S.-
Japan trade issues. Moreover, a 1998 USTR document noted that the
U. S. Trade Representative spent more time on Japan insurance
during much of 1998 than on any other single issue.
U. S. Agencies Meet at Least Bimonthly to Discuss Insurance
Agreements
USTR has reported that coordination among U. S. government
agencies to monitor the insurance agreements takes place about
every 2 months and becomes more frequent prior to consultations
with Japan. Meetings are called as needed rather than being
regularly scheduled in advance, a circumstance that USTR officials
view as typical for the agency. According
to a USTR official, there are no minutes or records of decisions
for these meetings. Typically, the Deputy Assistant U. S. Trade
Representative for Japan notifies about a dozen other U. S.
government officials of meetings on
insurance. 14 An exception to the usual working- level nature of
the process occurred in the spring and summer of 1998. Spurred by
congressional interest, the process was elevated to a more senior
level, and more agencies participated during two interagency
reviews of the activities of one U. S. insurance company and its
Japanese partner. One of these reviews reached the Cabinet level.
USTR officials have stated that it is difficult to get all agency
representatives to consistently attend meetings because these
agencies' offices have to focus on too many other issues to spend
much time on the 13 The U. S. and Foreign Commercial Service, the
overseas operations of the Department of Commerce, is not involved
with monitoring and enforcing the insurance agreements in Tokyo.
14 These officials usually include an economic officer at the U.
S. embassy in Tokyo; two other USTR officials; two Commerce
Department officials; two State Department officials in
Washington, D. C.; and one official each from the Treasury
Department, the Justice Department, the International Trade
Commission, and the National Economic Council.
B-283294 Page 15 GAO/NSIAD-99-209 International Trade
U. S.- Japan insurance issue. One USTR official noted that, as a
result of budget pressures and declining staff levels, agencies
choose to focus on issues where they have the lead. In addition, a
lack of personnel with technical insurance industry knowledge and
frequent personnel turnover in certain agencies limit the
understanding of issues among the interagency participants.
(Insurance is not regulated at the federal level in the United
States.) Decisions typically depend on consensus among those
participating, rather than on formal clearance with each official
on the meeting notification list.
U. S. Government Monitoring and Enforcement Efforts Rely Heavily
on Private Sector Information
For monitoring and enforcing the agreements, USTR and the U. S.
embassy in Tokyo rely primarily on information provided by U. S.
insurance companies and industry groups, as well as on information
collected by officials at the U. S. embassy in Tokyo from Japanese
sources. 15 For example, USTR relied heavily on information
provided by the U. S. insurance industry in Japan to make its July
1, 1998, decision that the Japanese government had not met key
primary sector deregulation criteria stipulated in the 1996
agreement. (See app. III for further information on USTR's key
monitoring and enforcement decisions.) USTR officials report that
while neither USTR nor the U. S. government in general possess the
resources or technical capabilities to independently investigate
or verify this type of information, the agency does make an effort
to do so by
consulting with experts and industry analysts. USTR officials and
an economic officer at the U. S. embassy in Tokyo report that one
large U. S. insurance provider is a key source of information on
the Japanese insurance market. This company provides the U. S.
government with information on the insurance industry and
identifies and provides details on problems with the agreements'
implementation. The embassy
official speaks with representatives from this provider several
times a week. According to USTR, without this company's
assistance, much of what the U. S. government has accomplished in
encouraging deregulation of the Japanese insurance market would
not have been possible. USTR and
embassy officials also gather information from several other U. S.
insurance companies; the embassy official speaks with
representatives from these
15 USTR also receives information from the Japanese government
during bilateral consultations. This information includes data on
product approvals and insurance premiums for foreign and Japanese
insurance providers.
B-283294 Page 16 GAO/NSIAD-99-209 International Trade
companies about once a week or once every few weeks in order to
obtain as complete a perspective as possible on various issues. In
addition to using information from individual companies, USTR
relies on several industry groups to identify and explain
insurance issues. These groups include the American Chamber of
Commerce in Japan (ACCJ), 16 the American Council of Life
Insurance (ACLI), the Coalition of Service Industries, the
International Insurance Council, and the Foreign Non- Life
Insurance Association (which is located in Japan). Company
participation
in these groups varies, and no one group has a membership that
includes all U. S. participants in the Japanese insurance market.
Some U. S. insurance companies have noted that even the
associations to which they belong do
not always capture their views on insurance issues. However, USTR
officials maintain that they solicit competing viewpoints in cases
where companies are in disagreement. Further, insurance experts at
the state level from the National Association of Insurance
Commissioners have joined USTR in meetings with Japan on insurance
issues. For example, the association hosted working- level
consultations between the U. S. and Japanese governments in April
1999. The support of these technical experts helped create a
dialogue between U. S. and Japanese regulators on new ways to ease
the product approval process.
U. S. Government Recognizes Progress in Insurance Deregulation,
but Has Identified Unmet Japanese Commitments
As part of its monitoring efforts, the U. S. government has
reported that Japan has made some progress in deregulating the
primary insurance sector. According to a recent U. S. embassy
document on Japan's insurance reforms, there is evidence that
deregulation has been taking hold, with new entrants into the life
and non- life primary sectors, stronger linkages
between foreign and Japanese firms, and examples of product and
price competition. However, in July 1998 (and again in April 1999)
USTR reviewed the state of implementation and determined that
Japan has not implemented certain deregulation actions called for
in the 1996 agreement. Specifically, USTR stated that the Japanese
government has not fully
implemented its obligations regarding the reform of rating
organizations that have historically established prices for major
non- life insurance products, and regarding the timely processing
of new product and rate applications. As a result, USTR does not
support initiation of the 2.5- year countdown toward opening the
third sector. In addition, USTR said that
16 The ACCJ insurance subcommittee of the financial services
committee is the source of insurance information for USTR.
B-283294 Page 17 GAO/NSIAD-99-209 International Trade
Japan violated third sector protections by licensing a cancer
insurance product to a large Japanese insurance company. (For more
information on how the U. S. government reached these conclusions,
see app. III.)
The Japanese government has stated that it has fully implemented
both agreements, including all deregulation actions. Therefore, on
July 1, 1998, Japan began its countdown of the 2.5- year period
before opening the third sector to increased competition. Further,
Japan reports that the approval of the cancer insurance product
under dispute is not an agreement violation but conforms to
limitations negotiated by Japan and the United States.
U. S. Insurance Industry Views U. S. Government
Monitoring Efforts More Favorably Than Enforcement Actions
More U. S. insurance companies expressed favorable views of U. S.
government actions to monitor the insurance agreements than
reported favorable views of enforcement efforts. As shown in
figure 1, 7 of the 13 U. S. insurance companies operating in
Japan, accounting for about 50
percent of U. S. premiums, reported that, overall, the U. S.
government had been effective or very effective in monitoring the
agreements. Four companies, representing 13 percent of U. S.
premiums in Japan, believed that the U. S. government had been
effective in enforcing the agreements. Four companies reported
that U. S. government monitoring efforts had
been as effective as ineffective. Five companies provided this
neutral response regarding enforcement efforts.
B-283294 Page 18 GAO/NSIAD-99-209 International Trade
Figure 1: U. S. Company Views on U. S. Government Monitoring and
Enforcement Efforts
Note: Data in the graph does not include brokers. Source: GAO
analysis of company survey results.
Most companies expressed satisfaction with U. S. government
efforts concerning the insurance agreements, particularly in
situations involving U. S. government interaction with U. S.
industry. For example, nine companies reported that the U. S.
government had sought input from
industry on the status of agreement implementation to a great or
very great extent. Further, seven companies stated that the U. S.
government had given thorough consideration to implementation
issues identified by industry to a great or very great extent. Ten
companies reported that the U. S. government had represented the
U. S. insurance industry in Japan generally or very adequately.
Companies providing these responses represented
around 40- 50 percent of U. S. premiums in Japan. However, U. S.
insurance companies that account for a large percentage of U. S.
premiums in Japan expressed a lower level of satisfaction with
other
0 1
2 3
4 6
5
Monitoring Enforcement
Number of companies Very effective Effective As effective
as ineffective Ineffective Very ineffective No basis to judge
B-283294 Page 19 GAO/NSIAD-99-209 International Trade
aspects of U. S. government monitoring and enforcement efforts,
specifically in terms of timeliness, accuracy of information, and
consistency of government policy. Six companies, which accounted
for over 80 percent of U. S. premiums in Japan, reported that the
U. S. government had not acted upon agreement implementation
concerns in a
timely manner. Further, seven companies, which also accounted for
over 80 percent of U. S. premiums in Japan, reported that the
information provided to them by the U. S. government on
implementation had not been clear and accurate. Finally, five
companies, accounting for almost 90 percent of U. S. premiums in
Japan, reported that U. S. government policy
actions regarding the agreements had not been consistent over
time. The largest U. S. insurance company in Japan expressed a
strong level of dissatisfaction with a U. S. government decision
that Japan's failure to
prevent certain activities of a competing firm was not violating a
third sector restriction in the 1996 agreement.
Agency Comments We obtained oral comments on a draft of this
report from officials from USTR, including the General Counsel and
staff from the Japan Office.
USTR declined the opportunity to provide an overall assessment of
the report. USTR and an official at the U. S. embassy in Tokyo
provided several technical comments, which we incorporated into
the report as appropriate. As arranged with your office, unless
you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days after the date of this
letter. At that time, we will send copies of this report to
interested congressional committees and to Ambassador Charlene
Barshefsky, the U. S. Trade Representative; the Honorable William
M. Daley,
Secretary of Commerce; the Honorable Madeleine K. Albright,
Secretary of State; the Honorable Lawrence H. Summers, Secretary
of the Treasury; the Honorable Janet Reno, Attorney General; the
Honorable Lynn Bragg, Chairman of the International Trade
Commission; the Honorable Jacob Lew, Director, Office of
Management and Budget; and to the firms we
contacted in preparing this report. Copies will also be made
available to others upon request.
B-283294 Page 20 GAO/NSIAD-99-209 International Trade
If you or your staff have any questions about this report, please
contact me at (202) 512- 4128. Other GAO contacts and staff
acknowledgments are listed in appendix VI.
Sincerely yours, Benjamin F. Nelson, Director International
Relations and Trade Issues
Page 21 GAO/NSIAD-99-209 International Trade
Page 22 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance Agreements Appendi x I
We distributed a questionnaire to 13 insurance companies (5 life
and 8 non- life companies) and three insurance brokers operating
in Japan that are either wholly or majority U. S. owned. 1 We
obtained a 100- percent response rate to the questionnaire. The
questionnaire contains four sections: (1) implementation/ impact
of the 1994 U. S.- Japan insurance
agreement, (2) implementation/ impact of the 1996 U. S.- Japan
insurance agreement, (3) the combined implementation/ impact of
the 1994 and 1996 agreements, and (4) monitoring and enforcement
of the agreements. We also administered a supplemental
questionnaire that was only distributed
to the 13 companies. The supplemental questionnaire asked for
detailed information concerning applications companies had
submitted. 2
Some of the questions in the questionnaire only applied to non-
life companies, while others only applied to life companies, and
these questions are noted in the attached questionnaire. Also,
brokers were asked fewer questions than the companies because some
of the
commitments in the agreements did not pertain to them. For each
question in the following questionnaire and supplemental
questionnaire, we have displayed the company responses. The broker
responses are displayed in parenthesis next to company responses.
1 The companies are (1) American Family Life Assurance Company of
Columbus (AFLAC); (2) American Life Insurance Company (owned by
American International Group [AIG]); (3) Prudential Life Insurance
Company, Ltd.; (4) INA Himawari Life Insurance Company, Ltd. (90
percent owned by CIGNA at the time of our survey, but now 61
percent owned by CIGNA and 39 percent owned by Yasuda Fire and
Marine); (5) GE Edison Life (90 percent owned by GE Capital); (6)
AIU Insurance Company (owned by AIG); (7) CIGNA Accident and Fire
Insurance Company, Ltd. (now owned by ACE INA); (8) American Home
Assurance Company (owned by AIG); (9) Lumbermens Mutual Casualty
Company (Kemper); (10) Liberty Mutual Insurance Company (Liberty
International); (11) Unum Japan Accident Insurance Company; (12)
Federal Insurance Company (Chubb); and (13) Allstate Property and
Casualty Insurance Japan Company, Ltd. The three brokers are J& H
Marsh & McLennan, Japan; Ltd.; AON Risk Services, Japan, Ltd.; and
Willis Corroon Japan, Ltd. Willis Corroon is a British- registered
company, with majority U. S. shareholders. 2 The supplemental
questionnaire was not provided to brokers because they do not
submit insurance applications.
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 23 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 24 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 25 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 26 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 27 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 28 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 29 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 30 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 31 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 32 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 33 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 34 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 35 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 36 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 37 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 38 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 39 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 40 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 41 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 42 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 43 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 44 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 45 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 46 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 47 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 48 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 49 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 50 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 51 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 52 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 53 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 54 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 55 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 56 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
Agreements Page 57 GAO/NSIAD-99-209 International Trade
Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
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Appendix I Questionnaire on the Status of Implementation of the U.
S.- Japan Insurance
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Appendix I Questionnaire on the Status of Implementation of the U.
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Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements Appendi x
II
This appendix presents a discussion of the results of the company
questionnaires (see app. I) on the 1994 and 1996 U. S.- Japan
insurance agreements. The following discussion is structured
differently from our discussion of this topic in the main body of
the report. The discussion in the main body of the report is
structured around issues, such as implementation, impact, and
concerns related to the agreements. This
discussion is structured to follow the order of the questionnaire.
We first discuss company responses to questions on implementation
and impact of the 1994 agreement, then follow with a discussion of
company responses to the 1996 agreement. We end the discussion
with company views on the
future impact of the agreements as well as company experiences in
sales and market share over the last few years.
In our discussion of company responses to questions on the 1994
agreement, where appropriate, we compare responses in our current
survey to those responses to a 1996 survey we conducted on the
1994 agreement. Eleven of the 13 companies and two of the three
brokers included in our current survey also responded to our 1996
survey. While our current survey section on the 1994 agreement
covers the same major issues we covered in our 1996 survey, we did
not ask as many detailed questions
about the agreement as we did in our prior survey nor did we ask
about certain commitments that had clearly been implemented prior
to the creation of our 1999 survey. Finally, our discussion of
survey results is supplemented with information obtained during
interviews with U. S. insurance companies in Japan.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 62 GAO/NSIAD-99-209 International Trade
1994 Agreement Largely Implemented and Provides Positive Impact,
but Concerns Exist Over Implementation of Key Commitments
In our 1999 survey, 8 of the 13 companies, representing about 90
percent of the premiums generated by U. S. companies in Japan, and
two of the three brokers reported that the 1994 agreement had
enhanced their ability to compete in Japan. 1 This represents a
positive change from our 1996 survey, when most companies reported
that Japan had implemented the 1994 agreement to varying degrees,
but the agreement had no effect on their ability to compete. 2
However, companies reported concerns over Japan's
implementation of specific commitments under the agreement.
Company Views on Implementation and Impact of Selected Key
Commitments Under the 1994 Agreement
The 1994 agreement included commitments by Japan to increase
transparency, deregulation, competition, and access to insurance
programs of government corporations, while protecting foreign
companies' shares in the third sector. Table 1 lists selected key
commitments by the Japanese government under the 1994 agreement.
Company views on the extent to
which Japan has implemented these commitments and their impact
follow the table.
1 Company shares (percentage) of total U. S. premiums generated in
Japan were calculated using premium data for Japanese fiscal year
1997 (Apr. 1997- Mar. 1998). Two surveyed companies, GE Edison and
Allstate, did not have sales in 1997 and were assigned a zero
weight for computing the premium proportions. The three brokers we
surveyed were also excluded from the calculation of premium
proportions. 2 In 1996, we surveyed 11 U. S. companies and four U.
S. brokers operating in Japan. In 1999, we surveyed these 11
companies and 2 additional U. S. companies. One of these two
companies, GE Edison, entered the life insurance market through
the acquisition of a Japanese life insurer in April 1998. The
other U. S. company, Allstate, was established in 1998 to sell
automobile insurance. This company once had a 50- percent
ownership in two other insurance companies in Japan but divested
itself of these two companies in November 1997. Also, since our
prior survey, one of the U. S. brokers acquired another of the
brokers, thus leaving us with three brokers in our 1999 survey.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 63 GAO/NSIAD-99-209 International Trade
Table 1: Selected Key Commitments of the 1994 U. S.- Japan
Insurance Agreement
a Mutual entry was defined in the 1994 agreement as the ability of
life insurance companies to introduce existing, new or modified
rates, products, or riders in the third sector currently allowed
to non- life insurance companies, and the ability of non- life
insurance companies to introduce existing, new or modified rates,
products, or riders in the third sector currently allowed to life
insurance companies. b Keiretsu are groups of Japanese firms that
maintain close ties through the cross- holding of shares
and exchange of personnel. They are important in the Japanese
insurance market. With close corporate links, many Japanese
businesses and their employees buy insurance from firms within
their keiretsu limiting the ability of foreign insurance providers
to distribute their products.
Source: Measures by the Government of the United States and the
Government of Japan Regarding Insurance, October 11, 1994.
Transparency and Procedural Protections
Our analysis of questionnaire responses indicates that most of the
commitments to improve transparency and procedural protections
have been met. Most companies (10 of 13) reported that they had
been given meaningful and fair opportunities to share their views
with Japanese officials regarding insurance laws, ordinances, and/
or regulations. One 1994 Agreement Measures Selected key
commitments by the Japanese government
Transparency and procedural protections Publish and make publicly
available licensing, product, and rate approval standards
Encourage Japanese advisory groups to allow foreign providers to
attend their meetings and submit statements when these groups are
asked to provide recommendations to Japanese government related to
the provision of insurance
Encourage Japanese industry associations to accord foreign
insurers rights, privileges, and opportunities equal to those
accorded to domestic firms Provide meaningful and fair
opportunities for foreign firms to be informed of, comment on,
and/ or exchange views with Japanese officials regarding insurance
laws, ordinances, and/ or regulations
Safeguard information considered secret in connection with a
company's application, accept multiple applications for license or
product approval at the same time, not require companies to
coordinate their applications with other insurance providers, and
not condition/ delay acceptance of applications based on whether
the company has consulted with other insurance providers
Deregulation Institute, in stages, expedited and simplified
systems for the approval of applications for certain insurance
products and rates Allow insurance companies to apply flexible
rates for certain non- life products Allow applications to use
data collected outside of Japan Establish a brokerage system
Entry into the third sector by subsidiaries Do not allow mutual
entry a until a substantial portion of life and non- life areas
are deregulated, and avoid radical change in the third sector
until foreign insurance providers have the opportunity to compete
on equal terms in major product categories in the life and non-
life sectors
Government corporations Encourage public corporations to permit
foreign insurers access to their insurance programs and to ensure
that allocation of premium shares among insurance providers is
done according to fair, transparent, nondiscriminatory, and
competitive criteria
Competition Strictly enforce antitrust laws in the insurance
sector Require the private sector to complete a study of keiretsu
relationships b
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 64 GAO/NSIAD-99-209 International Trade
company official indicated that the Financial Supervisory Agency
(FSA), which assumed regulatory authority over product approval
from the Ministry of Finance (MOF), encouraged greater dialogue
with companies and appeared to value and respect diverse opinions.
Further, 10 companies reported that they had received equal
treatment in insurance industry groups. Also, 10 companies
reported that the Japanese government had not
required their company to coordinate its applications with other
insurance providers (which may be potential competitors) and had
not conditioned or delayed acceptance of their applications based
on whether they had
consulted with other insurance providers. Several companies,
however, expressed concern over the Japanese government's
commitment to publish and/ or make publicly available licensing,
product, and rate approval standards. Almost half of the
companies (6 of 13) reported that the Japanese government had done
little or nothing to meet this commitment. This result is very
similar to what companies reported to us during our 1996 survey.
Officials from two companies told us that the MOF and FSA were
reluctant to put anything in writing with respect to approval
standards. An official from another company told us that it was
difficult to develop products because the rules of the product
approval process were unclear. With respect to Japan's commitment
to encourage Japanese advisory groups to allow foreign companies
to attend group meetings when these groups are asked to provide
recommendations related to insurance, four U. S. companies
reported that they had attended only a few of these meetings,
while another two U. S. companies reported that they had not
attended any meetings. Officials from two other companies told us
that the most effective way to communicate with the Japanese
government was through industry associations, such as the Life
Insurance Association of Japan and the Foreign Non- Life Insurance
Association of Japan, rather than individually.
Overall, 7 of the 13 companies, representing about 90 percent of
the premiums of U. S. companies in Japan, reported that the
Japanese government's actions to improve transparency and
procedural protections had no effect on their ability to compete
in Japan. Three companies reported that these actions had a
generally positive effect.
Deregulation Our analysis of questionnaire responses indicates
that the Japanese government has implemented many of the specific
deregulatory commitments in the 1994 agreement. Four of six non-
life companies reported that the Japanese government had, to a
moderate or great extent,
expanded the types of non- life products to which flexible rates
could be
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 65 GAO/NSIAD-99-209 International Trade
applied. 3 Eight companies submitted applications using data
collected outside of Japan and were allowed to use this data. This
represents twice the number of companies that reported using
outside data in our 1996
survey. However, over half of the companies (7 of 13),
representing about 45 percent of the premiums, reported that
generally the government had done little to expedite and simplify
the application review process. This result is very similar to
what companies reported to us during our 1996 survey.
Concerning Japan's implementation of its commitment to establish a
brokerage system, two of the three brokers reported that the
Japanese government's decision to recognize and license brokers
had enhanced their ability to compete in Japan. 4 However, all
brokers told us that they continued to face obstacles in Japan,
including a lack of price and product
differentiation, restrictions on the types of products they can
offer, and restrictions on the structure of their business
operations. In terms of the impact of brokers on insurance
companies, two companies reported that the establishment of a
brokerage system had a generally positive effect on
their ability to compete in Japan, while seven companies reported
that this system had no effect. 5 Overall, 9 of the 13 companies,
representing about 45 percent of premiums, reported that the
Japanese government's implementation of its 1994 deregulatory
commitments had a positive effect on their ability to compete in
Japan. Eight companies reported that the Japanese government's
implementation of its deregulatory commitments had enhanced their
abilities to differentiate product rates and forms. 6 Also, five
companies reported that the implementation of deregulation
commitments had increased companies' abilities to distribute
insurance products. These results represent a positive change over
our prior survey, when most companies reported that Japan's
actions had done little to enhance their abilities to
differentiate product rates and forms and distribute insurance
products.
3 Two non- life companies reported that this commitment did not
apply to them. 4 All three brokers had received their brokers'
licenses. 5 The remaining four companies reported that they had no
basis to judge or that it was too soon to determine the impact of
the brokerage system. 6 These results reflect the Japanese
government's implementation of both the 1994 and 1996 deregulatory
commitments.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 66 GAO/NSIAD-99-209 International Trade
Entry Into the Third Sector by Subsidiaries Six companies,
representing about 80 percent of U. S. premiums, reported
that the Japanese government had not taken sufficient action to
avoid radical change in the third sector (that is, had not
prevented large Japanese companies from entering into the third
sector). Two U. S. insurers believed that radical change had
occurred because two Japanese companies, Yasuda and Tokyo- Anshin,
were operating in the third sector in a manner the U. S. insurers
believed violated both agreements. Two
companies, representing about 45 percent of U. S. premiums,
reported that Japan had not taken sufficient action to avoid
radical change in the third sector and that this inaction had a
generally negative effect on their ability to compete in Japan.
One company stated that Japan had taken sufficient action to avoid
radical change and that this action had a very negative impact on
its ability to compete. Five companies, representing about 40
percent of premiums, reported that Japan's efforts to avoid
radical change had a generally positive effect.
Government Corporations The insurance programs of government
corporations are large and profitable, according to officials from
two U. S. insurance companies. 7 However, most companies reported
that the insurance programs of these
corporations are not fully available to them. Seven companies
reported that for the most part, these corporations had not
allocated shares of premiums using fair, transparent,
nondiscriminatory, and competitive criteria, as required by the
1994 agreement. 8 This result is very similar to our last survey.
In our current survey, one company official stated that the
formula used by the Housing Loan Corporation (the only government
corporation that has disclosed its formula for allocating shares
to insurance companies) to allocate premiums gave less than 5
percent of the shares to foreign
companies. Furthermore, according to this company official, this
government corporation gave the entire foreign share to one large
U. S. company, with the expectation that the company would share
the premiums with other foreign companies through reinsurance
agreements. 7 Government corporations are established by special
law in Japan to serve as instruments for state activities when it
is recognized that such a corporation could operate more
efficiently than if managed directly by a government agency, or
that its financial and
personnel management could proceed more smoothly than if subject
to the laws and regulations of a government organization. 8 Five
public corporations were encouraged by the Japanese government to
permit foreign insurers access to their insurance programs: the
Government Housing Loan Corporation, the Pension Welfare Service
Public Corporation, the Housing and Urban Development
Corporation, the Okinawa Development Corporation, and the
Employment Promotion Corporation.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 67 GAO/NSIAD-99-209 International Trade
Competition Many companies reported that Japan had not taken
sufficient action to promote competition in the insurance market.
Five of the 13 companies, representing about 70 percent of U. S.
premiums, reported that the Japanese government had not vigorously
enforced the Anti- Monopoly Act in the insurance sector. 9 Eight
companies and all three brokers reported that keiretsu practices
and case agents still adversely affected them to a moderate or
greater extent. 10 Officials from two companies indicated that
Japanese companies would usually not buy insurance outside of
their keiretsu. However, officials from two companies and one
broker believed
that keiretsu groups would weaken over time. Overall, 9 of the 13
companies, representing about 90 percent of the premiums, reported
that Japan's efforts to improve competition by taking antitrust
actions had no effect on their ability to compete in Japan. This
result is very similar to what companies reported to us in our
1996 survey.
1996 Agreement Also Largely Implemented and Provides Positive
Impact, but Some Key Commitments Not
Fully Met In our 1999 survey, 9 of the 13 companies, representing
around 50 percent
of U. S. premiums, and two of the three brokers reported that the
1996 agreement had a positive effect on their ability to compete
in Japan. Companies reported that while Japan had implemented many
of the commitments, some had not been fully met.
Company Views on Implementation and Impact of Selected Key
Commitments Under the 1996 Agreement
The 1996 agreement listed several deregulation commitments for the
primary sector. In addition, the agreement listed other
commitments that restrict entry into the third sector by
subsidiaries of large Japanese
companies. The agreement clarified when these restrictions could
be lifted by explicitly linking them to the implementation of five
primary sector deregulation commitments. The agreement states that
these restrictions
will be lifted 2.5 years after the five primary sector commitments
have been 9 In addition, the private sector keiretsu study
mandated by the 1994 agreement was never completed. 10 Case agents
are in- house insurance companies for Japanese firms. Case agents
handle the insurance needs of the firm and are supposed to lower a
firm's insurance cost. Case agents can also handle individual
employee insurance needs, including auto, travel, and personal
accident insurance.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 68 GAO/NSIAD-99-209 International Trade
implemented. Under the 1996 agreement, the Japanese government
also made a commitment to take steps to increase the number of
staff who process insurance applications. Table 2 lists selected
key commitments by
the Japanese government under the 1996 agreement. Company views on
the extent to which Japan has implemented these commitments and
their impact follow the table.
Table 2: Selected Key Commitments of the 1996 U. S.- Japan
Insurance Agreement
a The implementation of the first five deregulation commitments
serves as the five criteria that must be met before the
restrictions on entry into the third sector by large Japanese
subsidiaries can be lifted. b The Japanese government committed to
allow companies to offer flexible rates on their commercial
fire policies if the amount insured was 7 billion yen the
threshold or higher. c Under Japan's notification system, a
company notifies to the government its intention to offer a
specific product/ rate in categories of risk that have been
designated by Japan as eligible to use the system. The company
then waits 90 days while the notification is reviewed by the
government. If, after 90 days, no disapproval is received, the
company can then consider the product/ rate approved and begin to
offer it. d This allows for automobile insurance to be marketed
directly. For example, automobile insurance may be marketed over
the telephone. The U. S. government acknowledged that the Japanese
government had met this commitment in September 1996.
Source: Supplementary Measures by the Government of the United
States and the Government of Japan Regarding Insurance, December
24, 1996.
1996 Agreement Measures Selected key commitments by the Japanese
government
Deregulation in the primary sectors a Approval of applications
for differentiated automobile insurance (different rates, forms,
and methods of distributing insurance products based on risk
factors) within the standard 90- day period Authorization for
companies to offer commercial fire insurance at different rates by
further lowering of the minimum insured amount per contract
required for the application of the advisory rate system b
Expansion of the notification system for 19 products and their
marketing within 90 days c Implementation of the necessary legal
changes to eliminate obligations for members of a rating
organization to use rates calculated by the rating organization
Approval of applications for differentiated products or rates
within the standard 90- day period Approval of direct response
system for automobile insurance d
Entry into the third sector by subsidiaries Non- life
subsidiaries of life insurance providers permitted to sell
personal accident insurance subject to restrictions Life
insurance subsidiaries of non- life insurance companies not
allowed to sell stand- alone cancer or medical insurance
For life insurance subsidiaries, limit the ratio of cancer or
medical rider benefits to base life insurance policies to what was
in existence before the implementation of the new Insurance
Business Law on April 1, 1996
Other issues Take steps to increase the number of staff who
process insurance applications
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 69 GAO/NSIAD-99-209 International Trade
Deregulation in the Primary Sectors
Our analysis of questionnaire responses indicates that for the
most part Japan has implemented its deregulatory commitments and
these commitments are having a positive effect. For example, the
three non- life companies who submitted applications to offer
automobile insurance
through the direct response system (for example, marketing over
the telephone) reported that these applications have been
approved. One of these three companies reported that this method
of offering insurance had
a very positive effect on its ability to compete in Japan, while
the other two companies reported no effect. An official from
another company noted that the approval of direct marketing of
automobile insurance should help toward gaining the approval of
direct marketing for other insurance
products. 11 Of the five primary sector deregulatory commitments
that serve as criteria for lifting restrictions on the entry into
the third sector by subsidiaries of large Japanese companies, four
of these apply only to non- life companies. All of the non- life
companies expressing an opinion reported that Japan
had implemented three of these four commitments (that is, approval
of differentiated automobile insurance applications, further
liberalization of commercial fire insurance, and elimination of
the obligation to use rating organization rates). One non- life
insurer reported that Japan's commitment to expand the
notification system had not been implemented, while all
other non- life insurers reported that this commitment had been
met. These eight non- life companies had mixed views on the extent
to which these deregulatory actions affected their ability to
compete in Japan. One of the three non- life insurers that had
obtained approval to offer
differentiated automobile insurance reported that this had a very
positive effect on its ability to compete in Japan. Two non- life
companies viewed the liberalization of commercial fire rates as
generally positive, with one company official indicating that the
liberalization was producing discounts of up to 30 percent.
However, four of the six non- life companies that offered
commercial fire insurance reported that this liberalization had no
effect on their
company's ability to compete in Japan. Officials from two
companies stated that the threshold the minimum insured amount
above which flexible rates could be applied was still too high. An
official from one
11 According to U. S. government officials, other types of
insurance products, such as personal accident insurance, are
already being sold via direct marketing.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 70 GAO/NSIAD-99-209 International Trade
of these companies stated that the keiretsu ties controlled which
insurer provided commercial fire insurance for large corporations.
Four of the six non- life companies that offered products under
the notification system viewed the system as having no effect on
their
ability to compete in Japan, while two companies viewed the system
as having a positive effect. Three companies reported that
Japan's reform of rating organizations had a generally positive
effect on their ability to compete, while four
reported that Japan's effort had no effect or a generally negative
effect. One company reported that the elimination of the
obligation to use rating organization rates gave it greater
discretion over setting premium rates. Another official indicated
that his company left the rating organization because it was no
longer required to be a member.
The fifth commitment that serves as a criterion for lifting
restrictions in the third sector applies to all insurers. This
commitment requires that applications for differentiated products
or rates be approved within the standard 90- day processing
period. Seven of the 13 companies, representing about 60 percent
of U. S. premiums, reported that Japan had implemented this
commitment. However, five companies, representing about one- third
of U. S. premiums, reported that Japan had not met this
commitment. 12 About half the companies (6 of 13) reported Japan's
approval of applications for differentiated products or rates
within the standard 90- day processing period had a positive
effect on their ability to compete in Japan.
We asked companies to provide us with information on the number of
applications they had submitted since the 1996 agreement was
signed. Companies reported that 422 of the 466 applications they
had submitted since the 1996 agreement was signed had been
approved and 44 were still pending. No companies reported that any
applications had been rejected.
Companies also reported that 21 of the 422 approved applications,
or 5 percent, were approved more than 90 days after submission, as
shown in figure 2. This does not necessarily mean that the
Japanese government was
not in compliance with the standard 90- day processing period.
This is because the FSA may suspend the 90- day period under some
circumstances. The 21 applications that took longer than 90 days
to approve were submitted by three companies. Fifteen of the 21
applications were for applications to sell new- to- market
products or to sell through a
12 One U. S. insurer reported Do not know in this area.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 71 GAO/NSIAD-99-209 International Trade
new distribution channel, as shown in figure 3. The remaining 6 of
21 applications were for revising company- exclusive product forms
or rates. The applications that have been approved to sell
standard products or to revise standard products or rates were all
approved within 90 days.
Figure 2: Results of Approved Applications Submitted by U. S.
Companies in Japan Since the 1996 Agreement Was Signed
Source: GAO analysis of company survey results.
Approved within 90 days Approved in more than 90 days
401 (95%) 21 (5%)
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 72 GAO/NSIAD-99-209 International Trade
Figure 3: Results of Approved Applications by Type, Submitted by
U. S. Companies in Japan Since the 1996 Agreement Was Signed
Note: Numbers next to bars represent those applications approved
in more than 90 days. a Includes applications to sell a new- to-
market product and to sell through a new distribution channel.
b Includes applications to revise a company- exclusive product
form or rate. c Includes applications to sell an industry standard
product or revise an industry standard product form or rate.
Source: GAO analysis of company survey results.
In summary, regarding the five commitments that serve as criteria
for lifting third sector restrictions, five companies,
representing about one- third of U. S. premiums, reported that
Japan had not complied with the commitment
to approve applications for differentiated products within a 90-
day period.
0 50
100 150
200 250
300 350
Approved within 90 days Approved in more than 90 days
New a Exclusive b Standard c Number of applications
15 6
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 73 GAO/NSIAD-99-209 International Trade
One of these companies also reported that Japan had not complied
with its commitment to expand the notification system. In addition
to asking companies to report on the effect of the individual
deregulatory commitments, we also asked companies to report on the
overall effect of deregulatory actions taken by Japan on their
ability to compete. Seven of the 13 companies, representing about
45 percent of U. S. premiums, and two of the three brokers
reported that the Japanese government's implementation of its
deregulatory commitments under the 1996 agreement had enhanced
their ability to compete in Japan. Four of the
companies and one broker reported that the Japanese government's
implementation of its deregulatory commitments had no effect,
while one company reported that the Japanese government's
implementation of these commitments had a generally negative
effect.
Entry Into the Third Sector by Subsidiaries In the non- life area
of the third sector, restrictions on sales by Japanese
subsidiaries were set forth in the agreements primarily to protect
the existing sales networks of foreign insurers for personal
accident insurance.
For five of the eight non- life companies expressing an opinion,
all reported that Japan had met most of the these commitments.
However, not one company (of those expressing an opinion) reported
that Japan had prohibited the sales of personal accident insurance
to association members. Overall, three of the non- life companies,
representing a majority of the non- life premiums, reported that
Japan's implementation of restrictions on sales by Japanese
subsidiaries had a generally positive
effect. In the life area of the third sector, Japan committed to
prevent Japanese subsidiaries from selling stand- alone medical
and stand- alone cancer insurance, but allowed for the sale of
these products as riders to an underlying base policy if the
rider- to- base- policy ratio was within prescribed limits. 13 Two
U. S. life insurance companies reported that Japan
had not prevented Japanese subsidiaries from selling stand- alone
medical and stand- alone cancer insurance. One of these companies
reported that the Japanese government had failed to prevent
Yasuda, a large Japanese company, from selling stand- alone cancer
insurance through its relationship with INA Himawari. The other
company reported that another 13 An insurance rider is a policy
modification or addition to a larger insurance policy. In this
case, the underlying insurance being sold is a life insurance
policy. Cancer, medical, and
other benefits are sold as riders in addition to the standard life
insurance policy.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 74 GAO/NSIAD-99-209 International Trade
Japanese insurer, Tokyo- Anshin, was effectively selling stand-
alone cancer insurance even though the company offers it as a
rider to a base life insurance policy. These two companies
reported that the Japanese government's inability to prevent
Japanese companies from selling
stand- alone cancer insurance had a negative effect on their
ability to compete in Japan.
Other Issues: Increasing the Number of Regulatory Staff to Process
Applications
The Japanese government committed under the 1996 agreement to take
steps to increase the number of staff who process insurance
applications. Ten of the 13 companies reported that Japan had
decreased the level of staff responsible for insurance product
approval, while the remaining three companies reported that Japan
had maintained the same level of staffing.
An FSA official told us that the agency had nine individuals
responsible for processing insurance applications. 14 Officials
from seven companies told us that this staffing level was too
small to handle the volume of insurance applications. Five company
officials told us that they had difficulty in arranging a meeting
with the FSA, and two of these officials indicated that once they
had secured a meeting, they were given little time to discuss
their
applications with agency officials. One company official believed
his company could only submit applications twice a year because of
the FSA's staffing level. Two company officials expressed concern
over the ability of the FSA to meet the standard 90- day period
for product approval, given the expected increases in the volume
of applications.
U. S. Companies' Views on the Future Effects of the Agreements
In soliciting company views on the future effects of the
agreements, we chose a 2- and 5- year time period to obtain
company views both before and after Japan intends to lift the
third sector restrictions in January 2001. Eleven of the 13
companies, representing about 50 percent of U. S. premiums, and
one of the three brokers reported that over the next 2 years, the
agreements would have a very or generally positive effect on their
ability to compete in Japan, as shown in figure 4. Two companies
told us that they reported positively because of Japan's
commitment to restrict the entry by large Japanese companies into
the third sector over the next 2 years. However, over the next 5
years, a smaller number of companies reported a positive outcome,
as 7 of the 13 companies, representing about 25 percent of U. S.
premiums, reported that the agreements would have a 14 According
to U. S. Trade Representative (USTR) officials, FSA has increased
the number of staff responsible for application processing since
our survey was completed.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 75 GAO/NSIAD-99-209 International Trade
positive effect. Brokers were more positive over the next 5 years,
as all three reported that the agreements would have a positive
effect over this time period. Two companies told us that once the
third sector was opened to large Japanese companies, the third
sector business of these U. S. companies would suffer.
Figure 4: U. S. Companies' Views on Future Effects of Insurance
Agreements
Note: Does not include brokers. Source: GAO analysis of company
survey results.
0 2
4 6
8 12
10 Number of companies
Very positive effect
Generally positive effect
No effect Very negative effect
No basis to judge Generally
negative effect
Next 2 years Next 5 years
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 76 GAO/NSIAD-99-209 International Trade
U. S. Company Sales and Market Shares Increase; Some Companies
Attribute Agreements
Most of the U. S. insurance companies with sales in Japan in
fiscal year 1997 or earlier reported that their sales and market
shares in the primary and third sectors had increased since the
1994 agreement was signed. Specifically, eight companies realized
increases in their primary sector sales, and six realized
increases in primary sector market share, as shown in figure 5. 15
Two of the eight companies that reported increases in primary
sector sales attributed the increases to actions taken by Japan
under the agreements. In the third sector, eight companies
realized increases in third sector sales, and six realized
increases in market share, as shown in figure 6. 16 Five of the
eight companies that reported increases in third sector sales
attributed the increases to actions taken by Japan under the
agreements.
15 Three companies responded, Not applicable. 16 Four companies
responded, Not applicable.
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 77 GAO/NSIAD-99-209 International Trade
Figure 5: Primary Sector Sales and Market Share Since the 1994
Agreement Was Signed
Note: Does not include brokers. Source: GAO analysis of company
survey results.
0 1
2 3
4 5
6 7
8 9 Number of companies
Increased Remained the same
Decreased Not applicable
Annual direct premium sales Market Shares
Appendix II Analysis of Company Questionnaires on the Status of
Implementation of the U. S.- Japan Insurance Agreements
Page 78 GAO/NSIAD-99-209 International Trade
Figure 6: Third Sector Sales and Market Share Since the 1994
Agreement Was Signed
Note: Does not include brokers. Source: GAO analysis of company
survey results.
0 1
2 3
4 5
6 7 9
8 Number of companies
Annual direct premium sales Market Share
Increased Remained the same Decreased Not applicable
Page 79 GAO/NSIAD-99-209 International Trade
Appendix III U. S. Trade Representative's Key Monitoring and
Enforcement Decisions Appendi x I II
USTR is the lead U. S. trade agency, with primary responsibility
for monitoring and enforcing the U. S.- Japan insurance
agreements. This appendix reports on the process and information
USTR used in reaching key decisions regarding Japan's
implementation of the agreements, as well as current U. S.
government and industry positions on outstanding issues.
Two of these decisions were reached on July 1, 1998, and decisions
to drop or raise certain issues in the third sector have since
been made. In some instances, Japanese, foreign, and U. S.
industry groups and U. S. companies have expressed opinions that
run counter to USTR's current position on specific implementation
issues.
After consulting with industry sources, USTR released an
assessment on July 1, 1998, of Japan's implementation of five key
primary sector deregulation measures contained in the 1996
agreement. 1 USTR stated that
while Japan had met three of these measures, it had failed to
fully implement the two remaining commitments. USTR had identified
problems in two areas: (1) unjustified delays in approving
applications for differentiated products and rates within the
standard processing period of 90 days and (2) inadequate reform of
rating organizations. Therefore, USTR
announced that it did not support initiating a 2.5- year countdown
to open the third sector in 2001. In contrast, Japanese officials
have stated that Japan has fully implemented the five deregulation
measures, and on July 1,
1998, Japan initiated the 2.5- year countdown. Also, on July 1,
1998, USTR notified Japan that by allowing a Japanese insurance
company (Tokyo- Anshin) to sell a cancer insurance product, Japan
had circumvented the 1994 and 1996 agreements' terms that
effectively reserved the third sector market for foreign and small
and medium- sized Japanese firms. Japan responded that the
agreement permits this particular cancer insurance product to be
sold since it conforms to limitations negotiated by Japan and the
United States. USTR has also reviewed other possible third sector
violations, in one case determining
1 These measures are (1) approving applications for differentiated
types of automobile insurance within the standard 90- day
processing period, (2) further liberalizing commercial fire
insurance pricing, (3) expanding a notification system, (4)
removing the requirement for members to use insurance rates
calculated by rating organizations, and (5) approving applications
for differentiated products or rates within the standard
processing period of 90 days. According to the 1996 agreement,
these measures are to serve as criteria that, upon being met,
initiate a 2.5- year countdown toward opening the third sector to
increased competition.
Appendix III U. S. Trade Representative's Key Monitoring and
Enforcement Decisions
Page 80 GAO/NSIAD-99-209 International Trade
that there was no violation, and in another, choosing to raise the
issue with Japan. USTR has not revised its July 1998 assessment of
Japan's compliance with the insurance agreements. In an April 1999
meeting with Japanese officials, USTR repeated its position that
Japan has not complied with two outstanding deregulatory
requirements (90- day product approval and rating
organization reform). Additionally, USTR said that Japan continues
to allow the ongoing violation of the third sector provisions of
the agreements. USTR has not undertaken any formal legal actions
concerning the agreements, but the U. S. Trade Representative has
noted that the United States can take action against Japan through
World Trade Organization (WTO) dispute settlement procedures, if
necessary, to secure U. S. rights under the insurance agreements.
These actions are possible now
that Japan has included many of its insurance commitments in the
recently implemented WTO financial services agreement. USTR
Solicited Information on Japan's Implementation of Five
Deregulation Criteria To reach its July 1998 decision that Japan
had not fully complied with all
the five deregulation criteria, USTR relied on information it
solicited from industry, both in the United States and in Japan,
as well as information gathered by the U. S. embassy in Tokyo. The
embassy works closely with some U. S. companies in its data
collection. However, some firms are not in contact with the U. S.
embassy. In addition, USTR consulted with other agencies. The
decision was preceded by a series of bilateral consultations
between the governments to review Japan's implementation of the
five commitments. One large U. S. firm in Japan provided key
information to USTR about Japan's implementation of the primary
sector deregulation
criteria and possible third sector violations. In addition to
soliciting the concerns of individual U. S. insurance companies,
USTR also received information from two industry groups: the
American Chamber of Commerce in Japan (ACCJ) and the American
Council of Life Insurance (ACLI). In May 1998, the ACCJ insurance
subcommittee informed USTR that it believed Japan was not in
compliance with the two primary sector deregulation criteria
previously mentioned, a position supported by eight members of the
subcommittee and opposed by one. (Four U. S. firms were not
participants in the May 1998 ACCJ decision.)
In April 1998, ACLI provided an analysis of Japan's
implementation, which voiced positions similar to those of the
ACCJ and expressed additional concerns that Yasuda, a Japanese
insurer, and INA, its U. S. partner, were causing radical change
in the third sector.
Appendix III U. S. Trade Representative's Key Monitoring and
Enforcement Decisions
Page 81 GAO/NSIAD-99-209 International Trade
USTR feels that such industry information is critical for purposes
of identifying private sector concerns. However, USTR recognizes
that there are certain limitations associated with relying on
information from industry associations. No one trade association
represents all U. S. insurance companies, and for those
represented, association positions may not capture all company
views on agreement implementation. Groups such as ACCJ do not
encompass all company views, as some companies do not
belong or do not actively participate. Participating companies
reported that there are divisions among ACCJ insurance
subcommittee members and cited instances where ACCJ position
papers have not reflected their company's views.
USTR Determines Status of Implementation of Deregulatory
Commitments on
July 1, 1998 Of five primary sector deregulation criteria in the
1996 agreement, USTR
concluded on July 1, 1998, that Japan has implemented three of
them. USTR found that Japan has not complied with the criterion to
approve differentiated products within 90 days and that
fundamental reform of rating organizations was incomplete. Our
fieldwork conducted in Tokyo in March 1999 found that U. S.
insurance companies had mixed views regarding Japan's
implementation of the five criteria.
USTR Noted Three of Five 1996 Primary Sector Deregulation Criteria
Met
Four of the five primary sector deregulation criteria apply only
to products of non- life insurers. USTR has stated that Japan has
implemented three of these four insurance deregulation criteria.
These were requirements to (1) approve applications within 90 days
for differentiated auto insurance, which allows the insurer the
flexibility to develop, price, and market automobile insurance
based on risk factors, such as the age, gender, and driving
history of the driver and the use and type of vehicle; (2) further
liberalize commercial fire insurance by decreasing limits for
using an advisory rate system, which gives insurers the freedom to
set rates outside the rates established by the Property Casualty
Insurance Rating Organization; 2 and (3) expand the application of
Japan's notification
system, whereby an insurance company, after filing its product
plan with the regulatory authority, can begin to market an
insurance product after 90 days, unless disapproved by the
government, to a list of additional
2 Since July 1, 1998, companies have been free to calculate their
own rates and not use those computed by a rating organization.
Appendix III U. S. Trade Representative's Key Monitoring and
Enforcement Decisions
Page 82 GAO/NSIAD-99-209 International Trade
products and allow marketing of those products within 90 days. 3
According to U. S. government officials, USTR's assessment of
compliance was based on the insurance industry's views. 4
USTR Decided 90- Day Product Approval Commitment Unmet
The 1996 agreement requires that Japan approve applications for
differentiated life and non- life products or rates within a
standard processing period of 90 days. In 1998, one U. S. company
raised concerns with USTR that Japan was not in compliance with
this requirement. On July 1, 1998, USTR determined that Japan had
not fully implemented its obligations in this area and noted that
in a number of specific cases, Japan had unjustifiably exceeded
the standard 90- day processing period. According to USTR, the
criterion's reference to a standard 90- day processing period
recognizes that the period can be exceeded in specific
circumstances.
In reaching its July 1998 decision, USTR sought examples from
industry on numerous occasions of applications whose processing
exceeded 90 days so it could raise this issue with Japan. One U.
S. firm provided USTR with time lines for four applications whose
processing time exceeded 90 days; USTR
told us that it had never examined the actual applications. Based
on the information provided by this provider, USTR believed that
these applications were unacceptably delayed by the Japanese
government. Following June 1998 consultations with USTR, Japan
responded that, per the terms of the 1996 agreement, no
applications for differentiated products (other than
differentiated automobile insurance) had been received 90 days
prior to the July 1, 1998, deadline and thus the commitment was
considered met. 5 USTR rejected this reasoning as a
misinterpretation of the agreement. In addition, Japan
consistently 3 Under Japan's notification system, the government
has a 90- day period to review the
notification. If, after 90 days, no disapproval is received, the
company can then consider the product or rate approved and begin
to offer it.
4 U. S. non- life providers are almost unanimous in reporting that
Japan has implemented these three commitments. In response to our
1999 survey, all U. S. non- life firms expressing a view said that
the government of Japan has implemented the criteria on
differentiated auto insurance and liberalized commercial fire
insurance; all but one small U. S. non- life firm
reported that Japan had met the criterion regarding the
notification system. 5 During June 1998 consultations, Japan told
USTR that two differentiated product applications had been
approved within 90 days.
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maintained that it processed applications within the standard
period of 90 days. According to Japan, under its regulations, the
standard 90- day period could be suspended if the agency
responsible for processing applications requires a company to
revise or supplement information on an application and that the
four USTR examples had experienced delays due to such
inadequacies. 6 USTR officials acknowledged that the 90- day
period
can be effectively extended for this purpose but found that they
were unable to respond to Japan's claims that the delays were
justified, since USTR did not have permission from the insurance
provider to discuss application details. USTR officials told us
that they do not possess the technical ability to evaluate the
applications' content.
Before the April 1999 consultations with Japan, about four
companies reported to USTR that they had had recent good
experiences with Japanese product approval; among those companies
were two that had previously complained about the application
process. USTR officials were not convinced that these experiences
represented a systemic improvement.
In April 1999, USTR again cited Japan for continued failure to
fully implement the 90- day processing period requirement,
offering several new examples from the company that had provided
cases to USTR for the July 1998 decision of applications whose
processing exceeded 90 days. As before, USTR reviewed the time
lines with the company but not the actual applications. Japan
responded that the approval of applications in excess of 90 days
is permitted under Japanese regulations. For these cases, Japan
maintained that the applications were delayed due to sloppiness
and errors. According to USTR officials, USTR was not given
permission by the company to reveal its identity to the Japanese,
and thus USTR was unable to engage in detailed discussions with
Japan regarding suspension of the 90- day period and whether the
suspensions were justified in these cases. 7
Also related to the product approval process, several industry
participants that we interviewed in March 1999 reported that the
transfer of product 6 The Ministry of Finance processed insurance
applications until June 1998 when the FSA began operations and
took over this responsibility. 7 With respect to the 90- day
application processing period the only criterion of the five that
applies to both life and non- life insurers one life and four non-
life U. S. insurance companies reported in our survey that Japan
was not in compliance. Seven companies reported that Japan was in
compliance, and one company responded that it did not know the
state of implementation for this commitment.
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approval authority from MOF to the newly created FSA resulted in a
reduction in the number of insurance product examiners. This, in
turn, resulted in a more understaffed office, with overworked
employees, who, according to U. S. insurers, may be unable to
process applications in a timely fashion. The Foreign Non- Life
Insurance Association reported that while its members have not
complained about Japan's failure to meet the 90- day commitment,
they have faced difficulties in meeting with FSA officials to
submit applications. The FSA agreed that it has few insurance
staff but notes that this staff would increase from 9 to 11 in the
new fiscal year 1999 government budget.
USTR Decided Fundamental Rating Organization Reform Incomplete
One of the primary sector deregulation criteria in the 1996
insurance agreement that applies only to non- life products
required Japan to implement the necessary legal changes to
eliminate obligations for members of rating organizations to use
rates calculated by rating organizations. There are two rating
organizations in Japan that non- life insurance companies may
belong to one for auto insurance, the other for additional types
of property/ casualty insurance. Historically, rating
organizations collected claims and expense data from member firms
and computed premium rates that were approved by the government.
Rating organization members were required to use the approved
rate, unless the Minister of Finance approved a deviation based on
the firm's circumstance.
The result was considerable uniformity in insurance policies and
rates for major non- life insurance products. At the time of U.
S.- Japan consultations in June 1998, the necessary legal changes
to meet the deregulation criterion were pending. While all
necessary legal reforms were made by July 1, and the U. S.
government was aware that rating organization members were no
longer required to use rating organization rates, USTR concluded
in its July 1, 1998, statement that fundamental reform of rating
organizations was incomplete.
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USTR stated that certain aspects of rating organization reform,
such as the continued collection of expense data 8 and the
collection of data for additional insurance products, promote
anticompetitive activities among companies and therefore the
rating organization criterion has not been met. The two specific
issues raised by USTR are not mentioned in the bilateral
agreements. USTR most recently raised its concerns about Japan's
incomplete compliance in April 1999 meetings with Japanese
officials. Japanese officials responded that the 1996 agreement
only required that the
use of rating organization rates not be mandatory, a commitment
that has been met. 9 One of USTR's outstanding concerns about
Japanese rating organizations involves the scope of cost data that
such organizations can collect from member firms. Specifically,
USTR opposes the continued collection of expense data from member
firms, believing it limits competition and promotes price
uniformity. As part of rating organization reform that took effect
in July 1998, the Japan Fair Trade Commission imposed restrictions
on what kind of expense data the rating organizations could
collect from
member firms on a voluntary basis. This restriction was to ensure
that the full rate, which member firms had previously been
required to use in establishing company rates, could no longer be
computed by these firms.
However, according to USTR, the collection of partial expense data
on a voluntary basis would still enable firms to set prices in a
way that would lead to cartel- like, or uniform, practices.
Several U. S. insurance providers that we interviewed in March
1999 agreed with USTR's overall position that fundamental reform
has not yet occurred.
However, both Japanese rating organizations, as well as the
Japanese government and the Foreign Non- Life Insurance
Association, reported to us that now, after the reforms, the
rating organizations can only collect partial expense data on a
voluntary basis and, therefore, the data held by
8 Before July 1, 1998, Japanese rating organization members were
required to set their rates taking into account total premium
rates calculated by the rating organizations. The total premium
included the actual cost of claims (losses), expenses (operating
expenses, claim
investment fees, and general administrative expenses), and
profits. Since July 1, 1998, the rating organizations collect
partial expense data on a voluntary basis and no longer collect
general administrative expense data. Therefore, rating
organizations are no longer computing total premium rates.
9 In response to our 1999 survey, all U. S. non- life insurance
providers reported that Japan had complied with the specific
criterion on rating organization reform contained in the 1996
agreement.
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these organizations is incomplete and does not provide a basis to
establish an industry rate. One rating organization reported that
since the July 1998 reforms, it now collects one- tenth of the
data it formerly collected, while the other organization said it
is unsure of the accuracy or value of the expense data, since the
data is incomplete in scope. Further, since all companies choose
whether or not to participate in the system, the completeness of
the data cannot be assumed. 10 The Foreign Non- Life Insurance
Association questioned the statistical validity of the data
because not all firms participate and less data is collected. One
large U. S. non- life company characterized the collected data as
useless. Further, Japanese officials have stated that rating
organizations in the United States collect and publish complete
expense data from companies and do so for more product lines.
Finally, one U. S. firm told us that it welcomed the potential for
its competitors to price uniformly, since it could price beneath
the uniform price and gain market share. Also, the Foreign Non-
Life Insurance Association noted that small firms need data,
including expense
data, to function, since their sales volume is not large enough to
be a statistically sound sample from which to forecast costs and
derive rates. Another issue raised by USTR about rating
organization reform concerned the scope of business the rating
organizations covered. Specifically, USTR opposes the expansion of
rating organization authority to collect data for additional
products such as nursing care and medical insurance. USTR views
such expansion as being inconsistent with Japan's objective of
achieving fundamental reform. ACCJ and the Foreign Non- Life
Insurance Association had expressed concern over this expansion
prior to the July 1, 1998, announcement. However, the Foreign Non-
Life Insurance Association reversed its position before July 1,
1998, and now supports this expansion of data collection. One U.
S. insurance company we interviewed said that it would like rating
organizations to expand the number of product lines for which they
collect data. According to one Japanese rating organization, the
collection of data serves to encourage new entrants and promote
competition, a position agreed to by the Insurance Services
Office, a U. S. supplier of insurance
10 Additionally, rating organizations are not allowed to identify
which firms voluntarily submit expense data.
Appendix III U. S. Trade Representative's Key Monitoring and
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information. The Japanese rating organization further suggested
that data for more product lines are available in the United
States. 11
U. S. Insurance Industry Expresses Mixed Views on USTR's Position
on Primary Sector Deregulation
In response to our January 1999 survey and March 1999 fieldwork,
U. S. companies offered mixed views regarding implementation of
the five primary sector deregulation criteria. 12 In interviews
with our staff in Tokyo during March 1999, representatives of four
insurance providers voiced their support for USTR's position on
primary sector deregulation. One company attributed recent
Japanese progress in deregulating the insurance market to USTR's
aggressively pushing insurance issues. Representatives of five
other providers volunteered in interviews that Japan had complied
with the agreements' deregulation commitments. One company said
that U. S. criticism of Japan's insurance reform efforts can
undermine the efforts of
Japanese officials pushing for broad financial sector
deregulation. USTR Also Identified Third Sector Violation
USTR has contended that Japan is violating the third sector
protections of the 1996 insurance agreement. On July 1, 1998, USTR
stated its concerns with Japan's licensing of a cancer
hospitalization insurance rider to TokyoAnshin, the life
subsidiary of a large Japanese non- life insurance company. The
1996 agreement stated that life subsidiaries of non- life
insurance providers will not be allowed to sell stand- alone
cancer insurance. Japanese subsidiaries may sell cancer insurance
as a rider to a life insurance policy provided that cancer benefit
payments are limited to a specific percentage of life insurance
benefit payments, as set forth in a September 1996 memorandum
between the two governments. 13 USTR's 11 For example, the
Insurance Services Office provides data and information on 14
product
lines, while currently Japanese rating organizations provide data
on 4 categories of insurance. The Insurance Services Office
recently opened a Japan office to collect and publish data on
insurance products not covered by the two Japanese rating
organizations.
12 Five companies, representing about one- third of U. S.
premiums, reported in our January 1999 survey that Japan had not
complied with one of the five commitments (90- day product
approval). One of these companies also reported that Japan had not
complied with a second commitment (notification system). The
remaining eight companies cited no area of noncompliance by Japan.
Of these eight companies, three have changed their position since
May 1998 when the ACCJ recorded them as finding Japan not in
compliance.
13 On September 30, 1996, the two governments agreed that life
subsidiaries of non- life insurance providers would face
restrictions on the benefits they could offer. After January 1,
1997, the ratio of cancer hospitalization benefit payments to life
insurance benefit payments would be limited to a maximum 3 to
1,000 ratio.
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analysis concluded that, based on the Tokyo- Anshin insurance
policy's design and marketing, the rider was clearly intended to
circumvent third sector protections. According to USTR, the rider
was essentially a stand- alone product, equivalent to cancer
policies prohibited for sale by Japanese life subsidiaries under
the 1996 agreement.
USTR first raised the issue beginning in January 1998 after two U.
S. companies raised concerns about the rider. The government of
Japan responded that the rider conformed exactly to the
limitations established in the September 1996 memorandum with USTR
that defined permitted cancer riders. According to Japan, because
this cancer rider is only sold in conjunction with a life
insurance policy, it cannot be considered a standalone product.
USTR took its July 1998 position on the basis of information
provided by one U. S. life insurance company and the ACCJ
insurance subcommittee. However, according to the two other U. S.
life firms selling cancer insurance
interviewed by us in March 1999, the Tokyo- Anshin rider is in
compliance with the agreement and is not a third sector violation.
Of these two companies, the one that is an ACCJ member chose not
to oppose the position taken by the ACCJ insurance subcommittee
expressing concern
on this issue but thinks USTR lacks a basis to pursue the issue
with Japan. USTR continues to raise this issue with Japan. While
USTR has not undertaken any formal legal action it has underscored
its position that Japan not approve similar riders for other
Japanese insurers.
USTR Reviews Other Possible Third Sector Violations
In 1997 and 1998, USTR reviewed the activities of one U. S. life
insurance company, INA, and its Japanese partner, Yasuda Fire and
Marine. These activities had been identified by competing U. S.
insurers as a violation of the third sector provisions of the 1994
and 1996 agreements. USTR, in consultation with other U. S.
agencies, determined in August 1998 that the
activities were not a violation of the agreement. (See app. IV for
further details.)
USTR continues to review allegations of another third sector
violation that was brought to its attention by industry.
Specifically, during 1998, one U. S. insurance company lobbied the
U. S. government to stop plans by a Japanese company to discount
personal accident insurance offered to members of an association
of small- and medium- sized businesses. According to the U. S.
firm and the ACCJ, the discount deviated from past practice and
constituted radical change. USTR asked the government of
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Japan not to allow the introduction of the discounting prior to
consultations with U. S. government officials. Japan did not agree
to this approach. The U. S. government conducted a review of the
U. S. company's concerns and found that only this company
supported the ACCJ finding.
USTR continues to raise this issue with Japan but has not
determined that the sales represent a third sector violation.
Page 90 GAO/NSIAD-99-209 International Trade
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Appendi x I V
The U. S. government negotiated the 1994 and 1996 insurance
agreements with the knowledge that a U. S. insurer, CIGNA
Corporation, was considering selling a majority interest in its
life insurance subsidiary in Japan (INA) to a large Japanese
insurer, Yasuda Fire and Marine. Following completion of
negotiation of the 1996 U. S.- Japan insurance agreement but
before the agreement was signed, USTR and the Japanese government
created a separate document, referred to as a minute, that was
intended to provide a limited exception to the agreement.
According to USTR negotiators, this exception, which proved
difficult to negotiate, was meant to allow CIGNA, per a business
agreement reached in 1993, to sell a majority interest in INA
(which has third sector business) to Yasuda and then allow the
Japanese- owned INA to continue to have a limited level of third
sector life sales. Sales of third sector life niche products, such
as
cancer and medical insurance, by subsidiaries of large Japanese
insurance companies, were expressly prohibited in the 1996
agreement. According to USTR officials, the minute would also
prevent other large Japanese nonlife insurers from similarly
entering the third sector. During subsequent discussions, the two
governments never reached agreement concerning the
precise meaning of the minute and how it could be implemented.
Further, views differ between USTR and two U. S. insurance
companies regarding the extent to which USTR provided details of
this exception to industry at the time it was negotiated. The
document's actual impact on the third sector sales of a Yasuda-
owned INA has never been tested, since the majority sale has not
taken place. 1 Our observations on certain aspects of the minute
are included at the end of this appendix.
Concerns of large U. S. insurers regarding U. S. government
actions related to this sale continued beyond creation of the
minute and involved (1) U. S. government discussions with the
Japanese government during the fall of 1997 that, while not
opposing Japan's approval of the sale, expressed
concern over whether the ongoing third sector activities of Yasuda
and INA met the terms of the agreements and the minute; (2) USTR
discussions with Japanese officials regarding Japan's December
1997 decision to include the 1996 U. S.- Japan insurance agreement
in the WTO financial services agreement and what this development
meant for the proposed
majority sale of INA and its subsequent third sector sales; and
(3) two 1998 U. S. government interagency reviews of the third
sector activities of Yasuda and INA that determined that no
agreement violations had
1 While the majority sale has not been completed, Yasuda did
purchase an additional 29 percent of INA in April 1999, bringing
its total holdings in the company to 39 percent.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 91 GAO/NSIAD-99-209 International Trade
occurred. The most active parties during these events have been
the largest U. S. insurance companies operating in Japan (AIG,
AFLAC, and CIGNA) and the Office of the U. S. Trade
Representative. In response to your request for details regarding
the extent and nature of U. S. government actions
related to the proposed sale of INA to Yasuda and subsequent
related events, we are providing the following information.
U. S. Government Negotiated the 1994 and 1996 Agreements With
Knowledge of Possible Majority Sale of INA to Yasuda
In 1993, Yasuda Fire and Marine, a large Japanese non- life
insurance company, purchased a 10- percent interest in INA Life
Insurance Company, a subsidiary of CIGNA Corporation, a U. S.
company. This deal also
provided for the possibility of the future sale of an additional
50 percent of INA to Yasuda. In 1996, Yasuda announced its
intention to acquire a majority interest in INA from CIGNA. 2 (See
fig. 7 for a time line of events from 1993 to 1996 regarding the
Yasuda- INA deal.) USTR was aware of this possible majority sale
of INA to Yasuda before the 1994 agreement was negotiated. The
language of the 1994 agreement that committed Japan to avoiding
radical change in the third sector by large Japanese insurers was
negotiated by U. S. officials because INA had sales in the third
sector. This language was agreed to by CIGNA and AIG, the company
expressing concern over the possible sale at the time. USTR
officials believed that this language would provide flexibility
for CIGNA to pursue a profitable business strategy while still
protecting the U. S. presence in the third sector from increased
competition from large Japanese insurers. The U. S. and Japanese
negotiators never defined the term radical change in the 1994
agreement. 2 Yasuda and CIGNA have had a formal business
relationship since 1972. The companies have helped each other in
obtaining licenses, through reinsurance agreements, and through
training and product development. In January 1997, INA Life
changed its name to INA Himawari Life Insurance Company, Ltd.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
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Figure 7: Time Line of Events Related to Minute and Yasuda- INA
Deal, 1993- 96
Source: USTR and U. S. embassy in Tokyo documents.
By late 1995, the U. S. insurance industry was expressing strong
concerns over implementation of Japan's Insurance Business Law.
Revisions to this law, the first major changes in 50 years, would
for the first time allow life insurance companies to enter the
non- life insurance business through a non- life subsidiary, and,
similarly, for non- life insurance companies to enter the life
insurance business through a life subsidiary. Although the 1994
agreement restricted the entry of Japanese companies into the
third sector, U. S. officials were concerned that Japan would
allow these subsidiaries to move rapidly into the third sector. As
a result of these concerns, bilateral negotiations on insurance
began and would continue for a year-until December 1996.
In August 1996, Yasuda formally announced its intention to
purchase a majority interest in INA from CIGNA. According to
Yasuda, this strengthened relationship was intended to improve INA
Life's distribution network and serve as Yasuda's means for
achieving entry into the life insurance market (through the
acquisition, rather than the establishment, of a life insurance
subsidiary). Press reports noted that this sale could
provide Yasuda entry into Japan's third sector life insurance
market. CIGNA came to USTR in May 1996 to discuss its intention to
sell a majority interest in INA to Yasuda and projected sales in
the third sector for the resulting company. CIGNA requested that
this transaction and the business
of the Yasuda- owned company not be compromised during the ongoing
Yasuda purchases 10% interest in INA Life, with an option to
purchase an additional 50%
1993 1994 1995 May
1996 August
1996 December
15, 1996 December
17, 1996
U.S. considers the possible majority INA sale in
negotiating no radical change language in 1994 insurance agreement
Yasuda announces intent to purchase a majority interest in INA
Concerns emerge
over implementation of 1994 agreement with regard to Japanese
entry into the third sector
Negotiations on new insurance agreement
concluded CIGNA tells USTR
about plans to sell majority interest in INA to Yasuda; expresses
concern that current negotiations
might affect the sale
CIGNA tells USTR about concerns over agreement's impact on
proposed INA sale to Yasuda
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 93 GAO/NSIAD-99-209 International Trade
negotiations or through any resulting new bilateral agreement. In
an effort to maintain a united industry position, USTR asked CIGNA
not to press the issue at that point and noted that the situation
should be handled close to the completion of the negotiations.
According to a former USTR official, CIGNA did not contact USTR
again on this issue during the negotiations, even though USTR was
in frequent contact with the company regarding the content of the
agreement and had shared drafts of the agreement with CIGNA (as
well as other U. S. companies). This negotiator noted that USTR
assumed that CIGNA had worked out an arrangement with the Japanese
Ministry of Finance (MOF) on its own. Therefore, the U. S.
government did not include any text to address CIGNA's specific
interests in the agreement. This former USTR official noted that
as negotiations were concluding, USTR was focused on primary
sector deregulation and other (third sector) commitments in the
draft agreement. A USTR official stated that the
Japanese government never raised the issue of the sale of INA to
Yasuda during the negotiations. CIGNA's failure to pursue the
issue with USTR as negotiations neared completion, as well as
USTR's failure to address the
Yasuda/ INA situation during the negotiations, were oversights by
both parties, in the view of former negotiators. Negotiations on a
new insurance agreement were concluded on December 15, 1996,
though the agreement was not signed until December 24, 1996.
Creation of Exception to the 1996 Agreement for Yasuda/ INA Proved
Difficult
USTR officials stated that it was completely unexpected when, on
December 17, 1996, 2 days after negotiations ended, CIGNA
approached USTR to express serious concerns over the recently
concluded insurance agreement and its impact on the planned
majority sale of INA to Yasuda. According to CIGNA, the company
had previously made USTR aware of its goals in the Japanese
insurance market and has received USTR's assurance that a CIGNA/
Yasuda joint venture of INA Life which would continue to sell INA
Life's full product range would not violate the spirit or the
letter of the
1994 Insurance Framework Agreement regardless of Yasuda's
potential majority interest. In raising its concerns on December
17, 1996, CIGNA noted that agreement language contained in a
Japanese agreement outline could be interpreted by Japan as
prohibiting the CIGNA- Yasuda transaction. Specifically, CIGNA was
concerned about one provision of the agreement that, according to
the outline, stated that in order to avoid radical change, life
subsidiaries of non- life insurance providers will not be allowed
to sell stand- alone cancer and stand- alone medical insurance.
CIGNA noted that
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
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[ I] f the Japanese were to interpret INA Life as a life
subsidiary of a non- life insurance company' when Yasuda acquired
a majority interest, then it would prohibit INA Life from selling
medical or cancer insurance until the year 2001. This would have a
severe adverse impact on INA Life given its current product and
marketing mix and its long- term strategic direction. At that
point, CIGNA proposed that technical language be inserted into the
1996 agreement that would exclude INA, even if majority Japanese
owned, from coming under the definition of a life subsidiary of a
non- life insurance company. CIGNA compared this approach to the
exemption requested and received by UNUM (another U. S. insurance
company operating in Japan) with respect to group long- term
disability insurance and income indemnity insurance in the 1996
agreement. USTR also received letters from Members of Congress
expressing support for the exemption for INA from the life third
sector restraints of the 1996 agreement.
USTR took action to address CIGNA's concerns, given that the
majority sale had been planned prior to the 1994 agreement and the
agency needed to maintain unified U. S. industry support for the
as yet unsigned 1996 agreement. 3 USTR officials were reluctant to
go back to the Japanese government, which was being criticized in
the Japanese press as a victim of U. S. pressure in agreeing to
the terms of the 1996 agreement, and asking for additional
commitments. Further, one of these officials stated that USTR
did not want to reopen the agreement out of concern that the
Japanese government would then also want to reopen other issues,
thus possibly leading to the unraveling of the agreement. USTR
negotiators believed that a separate document was necessary. USTR
immediately contacted the Japanese Ministry of Foreign Affairs
(MOFA) and initiated new
discussions. 3 According to USTR and CIGNA officials, USTR
officials did not request or review the 1993 contract between
Yasuda and CIGNA that provided for the majority sale of INA.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 95 GAO/NSIAD-99-209 International Trade
USTR negotiated with the Japanese government from December 18 to
21, 1996. 4 USTR requested a grandfather clause to allow the sale
of INA to go through but also proposed restricting INA's
activities in the third sector, once the company was owned by
Yasuda, to avoid radical change. USTR was the only U. S. agency
involved in these discussions. MOFA was the lead Japanese agency
and consulted Ministry of Finance officials as necessary.
Negotiations over the minute proved difficult. The Japanese
government was reluctant to make any accommodation for the United
States beyond those embodied in the then- pending 1996 agreement.
Moreover, there was a concern that a specific commitment regarding
the CIGNA- Yasuda transaction could be viewed as singling out one
large Japanese insurer for special, favorable treatment in the
third sector.
Under these circumstances, the Japanese government sought to keep
any understanding reached regarding the transaction and subsequent
third sector activities by a Yasuda- controlled INA as informal as
possible. For their part, USTR negotiators reported that they
would have preferred, and attempted to obtain, a more formal
document than the minute, but that their paramount concern was the
substance, not the form, of the
understanding. At the same time, USTR negotiators understood the
sensitivity of the matter for the Japanese government.
No explicit agreement was reached between the two sides during the
negotiations regarding precisely how, or to what extent, the
Japanese government would restrict INA's activities in the third
sector following consummation of the sale. In particular, the two
sides did not agree on the question of whether the Japanese
government had legal authority through
the use of its licensing powers to restrict INA's post-
transaction activities in the third sector. However, USTR
negotiators felt that the references in the minute recommitting
Japan to avoid radical change in the third sector and to making
necessary modifications to INA's post- transaction licenses, 4 A
final version of the minute was not completed until May 1997. When
minute negotiations were concluded and the 1996 bilateral
insurance agreement was signed on December 24, 1996, there was one
unresolved factual issue in the minute. In the second paragraph,
there was a question as to when Yasuda's intention to purchase a
majority interest in INA had been publicly disclosed. USTR wanted
as strong a case as possible for creating a limited exception to
the 1996 agreement for CIGNA/ Yasuda, and so asked CIGNA to
determine whether the planned purchase had been publicly announced
prior to the 1994 agreement. In May 1997, CIGNA informed USTR that
the possible majority sale had not been publicly announced prior
to conclusion of the 1994 agreement. The two governments then
finalized the minute by including language to that effect.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
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meant that Japan had committed to keeping INA's third sector
business activities very limited. Further, based on past
experience, USTR officials felt that Japan could use both formal
and informal means to limit INA's third sector activities.
While no other U. S. government agencies were involved in
negotiating the document, a copy of the draft minute was faxed to
the U. S. embassy in Tokyo, and the National Economic Council
(NEC) was reportedly aware of its existence. Two Members of
Congress who had requested that USTR
facilitate the transaction also received copies of the documented
exception, according to one of the negotiators. This former USTR
official does not know if key congressional committees ever
received the
document, which, if they did not, he described as an oversight on
the part of USTR. The exact text of the document is reproduced in
figure 8.
Figure 8: Text of the December 21, 1996, Minute
Note: The document, on a blank sheet of paper, is unsigned,
undated, and untitled. Source: Office of the U. S. Trade
Representative.
Disagreement on Meaning of the Exception for Yasuda/ INA
Current and former USTR officials stated that the final document,
the socalled minute, was intended to ensure that (1) the 1996 U.
S.- Japan insurance agreement would not prevent CIGNA from
carrying out its preexisting business plan to sell a majority
interest in INA to Yasuda,
(2) INA would continue to have only a very limited presence in the
third
1. Both governments noted that Yasuda Fire and Marine purchased 10
percent of the INA life insurance company on July 7, 1993, which
was before the negotiation and conclusion of the 1994 Measures and
before the passage and implementation of the new Insurance
Business Law. The transaction was publicly announced on July 7,
1993.
2. The contract provided for Yasuda to acquire an additional 50
percent of INA after April 1, 1996, the anticipated implementation
date for the new Insurance Business Law, subject to the necessary
approvals by the relevant authorities. This aspect of the contract
was not publicly announced.
3. It is confirmed that the life insurance business license and
product approvals held by INA will be maintained with necessary
modifications after Yasuda acquires majority ownership of INA
stock. 4. The Government of Japan reconfirmed its commitment to
faithfully implement the 1994 Measures and the 1996 Supplementary
Measures, inclusive of measures to avoid radical change in the
third sector as specified in those sets of measures.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 97 GAO/NSIAD-99-209 International Trade
sector if the transaction went forward, and (3) other large
Japanese nonlife insurers would be prevented from similarly
entering the third sector. There was no attempt during the minute
negotiations to specify what might constitute a limited presence
or radical change. Further, USTR
officials have noted that there have never been discussions
between the U. S. and Japanese governments to define limited
presence or radical change regarding INA's post- sale, third
sector activities.
U. S. and Japanese officials have disagreed over how the minute
could be implemented. Based on experience with the Japanese
government and the knowledge that Japan could use formal or
informal means to affect company behavior, USTR officials felt
confident that Japan could exert a level of control over INA's
third sector activities by modifying INA's licenses or other
means, once it is majority owned by Yasuda. From the time of the
minute negotiations in December 1996 until July 1998, Japanese
officials emphasized that they had no legal authority to impose
restrictions on acquired subsidiaries lawfully operating in the
third sector.
However, after July 1998, Japanese officials said that as a result
of legislative changes that went into effect at that time
(discussed later), a Yasuda- owned INA would not be allowed to
operate in the third sector at all. USTR does not accept this
position and has stated that it expects Japan to abide by the
terms of the minute.
In addition, the enforceability of the minute is perceived
differently by the two governments. 5 USTR officials stated that
the minute is a fully negotiated and enforceable document and
characterized it as a mutual understanding between governments.
They have also noted that implementation of the minute is integral
to Japan's compliance with the insurance agreements. In contrast,
a MOFA official told us that the minute is in no way part of the
1996 agreement. Instead, this official
characterized the document as a non- paper memorandum for
negotiators. One MOFA official told a U. S. embassy representative
that the minute does not have the same status as the bilateral
agreement and that Japan does not want to be held by it.
5 In discussions with former USTR officials (who did not work on
Japan insurance issues), we were told that the creation of
documents such as the minute is not unusual and is within USTR's
authority. These officials also stated that it is unusual to
provide such a document to one member of an industry and not to
others (as discussed later), but they could understand USTR's
decision not to share the document widely since it dealt with a
company- specific situation.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 98 GAO/NSIAD-99-209 International Trade
Views Differ Regarding the Extent to Which USTR Disclosed the
Exception to Key U. S. Insurance Companies
According to a former negotiator, USTR was in frequent contact
with a senior CIGNA official during negotiation of the minute.
This official was shown drafts of the document in order to verify
factual information included in the minute. (See fig. 9 for a time
line of events from 1996 to 1997 regarding the Yasuda- INA deal.)
A former USTR negotiator stated that CIGNA knew what USTR was
trying to accomplish in negotiating the
minute (including allowing the sale but restricting Yasuda's
postacquisition third sector activities in order to avoid radical
change). According to CIGNA's outside counsel, on December 24,
1996, the day the insurance agreement was signed, CIGNA was
informed by USTR that Japan
had agreed to language that stated that INA would be permitted to
maintain its licenses and product approvals after the purchase of
majority ownership by Yasuda. Further, the deal was viewed as
unique by both governments because it predated the 1994 insurance
agreement. CIGNA outside counsel was shown a draft version of the
minute in January 1997. 6 This version of
the minute, like the final version, mentioned necessary license
modifications but did not specifically address the level of third
sector activity permitted by the Yasuda- owned company.
Nevertheless, according to CIGNA's legal counsel, CIGNA was
satisfied that this arrangement would meet its needs. Moreover,
CIGNA was not concerned about the level of formality or the
enforceability of the document.
6 CIGNA's outside counsel has stated that CIGNA was not given a
copy of the minute document until April 1998.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 99 GAO/NSIAD-99-209 International Trade
Figure 9: Time Line of Events Related to Minute and Yasuda- INA
Deal, 1996- 97
Source: USTR and U. S. embassy in Tokyo documents.
Around December 21, 1996, USTR officials contacted AFLAC and AIG,
INA's primary U. S. competitors in the life third sector,
regarding the situation with CIGNA, INA, and Yasuda. U. S.
government and industry
officials characterized these discussions very differently.
According to USTR notes taken during the discussion with AFLAC, a
USTR negotiator told a company official that USTR needed to ensure
that the deal can go forward, and it is not a precedent for other
deals. USTR informed AIG that a problem had arisen with Yasuda/
INA and USTR had to find a way to deal with it. USTR needed to
make an adjustment as this issue threatened the recently concluded
agreement of supplementary measures. Former and current USTR
officials stated that they informed the two companies that an
accommodation was necessary for INA and Yasuda, though no mention
of the existence of a document was made. USTR officials did not
explicitly convey their intention to AIG or AFLAC that the
accommodation would
allow for limited third sector sales by Yasuda once it acquired a
majority interest in INA. However, according to these officials,
AFLAC and AIG understood that the accommodation would allow for
the majority sale and limited third sector activities for the
subsequent company. USTR officials stated that neither company
raised objections during their communications
with USTR (though AIG expressed some unhappiness).
USTR negotiates language on Yasuda-INA deal with Japanese; minute
drafted; agreement signed, 12/ 24
December 18-21, 1996
On or near December 21, 1996
January 1997
September 1997
Sept.-Oct. 1997
October 1997
Nov.-Dec. 1997
USTR informs AIG and AFLAC that accommodation was made for INA and
Yasuda; minute not mentioned; AIG and AFLAC do not object
CIGNA's counsel concerned that USTR may have threatened the sale;
USTR not opposed to the sale but concerned about Yasuda's third
sector
activities; USTR receives congressional letters for and against
the sale INA changes
name to INA Himawari
AFLAC and AIG first shown the minute; USTR meets with Japanese
officials, does not oppose the sale but says Yasuda's third sector
activities through INA should be limited AIG and AFLAC
express concerns to U.S.gov't; U.S. conveys concerns to Japanese
USTR continues to meet with Japanese officials on Yasuda-INA issue
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 100 GAO/NSIAD-99-209 International Trade
In contrast, AFLAC stated that based on prior discussions with
USTR and the Japanese government, and on restrictions in the 1996
agreement, AFLAC did not oppose CIGNA's sale of a controlling
interest in INA to Yasuda. But USTR did not discuss, nor did AFLAC
agree to, a special carveout
[the minute's limited exception] for INA's continued or expanded
operations in the third sector after a takeover by Yasuda. An AIG
official also noted that AIG did not understand at that point that
an
accommodation had been reached with Japan that would allow for
some level of third sector sales once INA was majority owned by
Yasuda.
The minute document itself was not shown to companies other than
CIGNA until October 1997, when AIG and AFLAC were raising concerns
with USTR over Yasuda's and INA's increasing third sector
activities (discussed later). According to USTR officials, no
company representatives ever asked USTR about the existence of
this document until that time.
These officials noted that, when AIG and AFLAC inquired at a
meeting in late October as to whether there was an agreement with
Japan concerning the sale of INA to Yasuda, they did not respond
in the affirmative or negative, but instead, after the meeting,
conferred with a senior USTR official. A few days later, USTR
called both companies to the agency and, at separate meetings,
presented them both with copies of the minute document.
AFLAC's and USTR's portrayals of how the existence of the minute
document was disclosed differ. According to an AFLAC official,
USTR repeatedly denied the existence of this written agreement
before October 1997 when questioned by the company. However,
according to a USTR official, agency officials never denied the
existence of the minute. In addition, a U. S. embassy official
also reported that he was asked about the minute twice before it
was publicly acknowledged by USTR. The
embassy did not provide any information to the companies and later
asked USTR for guidance on how to respond to such inquiries.
According to this official, he was told to refer companies to USTR
on this issue.
Two former USTR officials who were involved in negotiating the
minute have since stated that, in their judgment, the document
should have immediately been fully disclosed to industry. While
AIG and AFLAC did not raise objections in December 1996 when USTR
informed them of the accommodation for the sale of INA to Yasuda,
they reacted negatively upon learning of the existence of the
minute. An AFLAC official has noted that the 1996 agreement states
that no large Japanese insurer will sell stand- alone cancer or
stand- alone medical insurance prior to 2.5 years after
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 101 GAO/NSIAD-99-209 International Trade
primary sector deregulation; in his view, this prohibition should
include INA once it is majority owned by Yasuda, a large Japanese
insurer. Further, an AIG official has written that regrettably,
USTR saw fit in late 1996 to allow an exception [to the 1996
agreement], which has the effect of
allowing a U. S. company to divest itself in Japan, thus reducing
the overall U. S. market penetration while jeopardizing the
integrity of the entire agreement. USTR Expressed Concerns to
Japan in 1997 Over Yasuda's Ongoing Third Sector
Activities While Making Clear That the Majority Sale of INA
Should Be Allowed In late September 1997, as a result of urgent
concerns on the part of AIG
and AFLAC, an official from the U. S. embassy in Tokyo met with
Japanese government officials from the Ministries of Finance and
Foreign Affairs, at USTR's instruction, to discuss a recent
expansion of third sector activities by INA and Yasuda. This U. S.
embassy official emphasized that while the two governments had
reached an understanding (the minute) to allow Yasuda to move
forward with its plans to acquire a controlling interest in INA,
the understanding also contained a commitment to constrain the
growth of INA's third sector business so as to avoid radical
change. The U. S. embassy representative informed Japanese
officials that INA's third sector licenses must be modified in
order to achieve this commitment.
The U. S. government had concerns that Yasuda and INA were acting
in a manner inconsistent with the agreements' restrictions on
avoiding radical change by greatly expanding the marketing of INA
products by Yasuda sales agents before the majority acquisition.
This U. S. embassy official
expressed concerns to Japanese officials that Yasuda had more than
doubled the number of agents selling INA products in a 1- year
period and, as a result, INA was rapidly increasing its third
sector sales. 7 This change was characterized to Japan as
historically unprecedented and resulting in a serious loss of
business for U. S. firms in the third sector. He emphasized the U.
S. belief that the bilateral insurance agreement compelled MOF to
limit the growth of INA's third sector business and
agents to historical trends and roll back the past year's dramatic
increase in INA's force of Yasuda agents. 7 A competing U. S. firm
asserted that INA had increased its pool of Yasuda agents licensed
to sell INA products to over 10, 000. Further, an internal U. S.
government document noted that INA's third sector premiums rose by
82 percent in fiscal year 1996. CIGNA has stated that Yasuda
agents have a long history of selling INA products and the agent
increase was due to a liberalization in Japanese law that allowed
non- life agents to sell the products of multiple insurance
companies. CIGNA has also noted that AIG and AFLAC have used
Yasuda agents to distribute their products.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 102 GAO/NSIAD-99-209 International Trade
Japanese officials responded that INA's activities had nothing to
do with the agreements. They stated that the agreements'
provisions apply to Japanese, not U. S., subsidiaries and INA is
majority- owned by a U. S. company. They noted that Yasuda owned
only 10 percent of INA and any market developments reflected the
independent operations of INA. These officials also emphasized
that there was no basis under Japanese law to restrict the license
of a company operating properly under law and
regulation, and, further, an agent rollback would be impossible.
After U. S. embassy meetings with the Japanese government, CIGNA's
outside counsel expressed concern to USTR that the U. S.
government's recent communication with MOF had threatened the
majority sale. CIGNA
believed, as a result of its discussions with MOF, that the U. S.
government would only support MOF approval of the sale if Yasuda
and INA were to be restricted from selling any third sector
products and reduce the number of Yasuda agents at INA to the
number at the end of the previous fiscal year. CIGNA requested
that USTR rectify the situation by sending a letter to MOF
supporting the sale without conditions or modification of
licenses. 8 USTR met with CIGNA's outside counsel and explained
that USTR did not oppose the transaction but had concerns about
Yasuda's third sector activities. Again, USTR noted that, while it
was still looking into the facts, Yasuda's current activities
might violate the terms of the insurance agreement. USTR pointed
out to CIGNA that while what might constitute radical change was
not precisely defined, the threshold was not very
high-particularly when activities by a large Japanese insurance
company might result in a direct loss of business for U. S. firms.
USTR eventually concluded that sending a letter to MOF would be
counterproductive based on concerns that the letter might be
misinterpreted. During this period, while USTR was communicating
frequently with CIGNA regarding the majority sale of INA to Yasuda
and subsequent third sector activities, USTR received
congressional letters of support for the transaction, as well as
letters claiming that Yasuda was violating the agreements and
should not be allowed to sell third sector
products after the sale. 8 A letter expressing this view was sent
to Japan's Minister of Finance from one U. S. Senator, which, from
Japan's perspective, created an inconsistency in the U. S.
government position on this issue. According to one Japanese
official, USTR was telling Japan to restrain INA activities, while
from elsewhere in the U. S. government, Japan was receiving
encouragement for the sale to go forward with no restrictions.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 103 GAO/NSIAD-99-209 International Trade
In October of 1997, a senior USTR official traveled to Japan for 2
days of meetings with Japanese officials and certain U. S.
companies to discuss the activities of INA and Yasuda. This
official emphasized to Japanese officials
that (1) the transaction should be allowed to go forward, (2)
INA's licenses should be modified as necessary, (3) this is the
only exception to the agreement, and (4) Yasuda's actions both
before and after the acquisition should not be permitted to result
in radical change in the third sector. He noted that there was
evidence suggesting that Yasuda was controlling INA and might be
causing radical change.
Japanese officials again responded that Yasuda's and INA's
activities before the acquisition cannot constitute an agreement
violation since INA is a U. S. company. Furthermore, these
officials said that Japan could not impose legally enforceable
restrictions (such as license modifications) upon the activities
of INA just because it is acquired by Yasuda. However, Japanese
officials also suggested that, recognizing the agreement's spirit,
Yasuda was likely to act on its own initiative to keep INA's
activities in the third sector
within a certain limit. CIGNA correspondence with USTR shows that
the company was unhappy with USTR's visit to Japan, believing that
a link had been made with Japanese officials that the transaction
should not be approved unless Yasuda's current activities were
restricted. CIGNA also expressed concern that USTR was discussing
its private business decisions with its
competitors. The U. S. and Japanese governments had additional
discussions in late 1997 regarding the majority sale and
subsequent third sector activities of INA once it was owned by
Yasuda. No agreement was ever reached as to how or whether the
third sector sales of INA could be restricted.
Japan Included the 1996 Agreement in Its 1997 WTO Financial
Services Commitments
During the WTO financial services negotiations, 9 the U. S.
government requested that Japan include the 1996 bilateral
insurance agreement in its WTO commitments. The U. S. government
held this position (1) in order to
seek third country support for full implementation of the
agreement, (2) to have access to WTO dispute settlement
procedures, and (3) to respond to U. S. industry support for this
initiative. 9 These WTO financial services negotiations were
concluded in December 1997 and addressed banking, securities, and
insurance.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 104 GAO/NSIAD-99-209 International Trade
In December 1997, the Japanese government agreed to include most
of the provisions in the 1996 agreement in the WTO financial
services agreement, including third sector provisions. 10 (See
fig. 10 for a time line of events from
1997 to the present regarding the Yasuda- INA deal.) Japan's
legislation that implements its WTO financial services commitments
authorizes MOF to prohibit entry into the third sector by
acquired, as well as newly established, subsidiaries. A MOFA
official confirmed to us that Japan's implementing legislation and
its referral to established as well as acquired subsidiaries
implied that if Yasuda were to acquire INA, INA would be
considered a life insurance subsidiary of a non- life insurance
company subject to the third sector sales prohibition in the 1996
agreement. Therefore, while Japanese officials had said, before
implementation of Japan's WTO financial services commitments, that
they were unable to use
legal means to regulate third sector activities even following
Yasuda's purchase of the company, Japan has now implemented its
WTO insurance commitments and has expressed a view that INA's
sales in the third sector, post transaction, would be completely
prohibited.
Figure 10: Time Line of Events Related to Minute and Yasuda- INA
Deal, 1997- Present
Source: USTR and U. S. embassy in Tokyo documents.
10 According to a USTR financial services negotiator, some
provisions of the 1996 agreement that had already been
implemented, such as expansion of the notification system, were
not included.
Japan agrees to include third sector and most other provisions of
1996 agreement in the WTO financial services pact
December 1997 February
1998 Summer 1998 Present
Japan says inclusion of 1996 agreement in WTO pact would authorize
MOF to prohibit third sector entry by subsidiaries like INA that
may be acquired in the future; Yasuda announces delay of its
majority purchase of INA
Interagency reviews conclude that INA's
and Yasuda's third sector activities have not violated the
agreements; USTR finds no evidence that CIGNA had transferred
ownership or control to Yasuda
AFLAC and AIG disagree with interagency conclusions but one
company notes that
Yasuda/ INA's third sector activities have
had little impact, have slowed, and are no longer a threat
July I, 1998
Japan implements its WTO insurance commitments
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 105 GAO/NSIAD-99-209 International Trade
In February 1998, MOF notified insurers to explain that Japan's
commitments under the WTO financial services agreement prohibit
sales of third sector products by acquired life subsidiaries of
non- life insurance providers. One day later, Yasuda announced
that it would delay its majority purchase of INA until agreement
restrictions are lifted on sales of third sector products by life
subsidiaries of non- life insurance companies. 11 In later
communication with USTR, CIGNA did not preclude the possibility
that the sale still might go through before third sector
restrictions are lifted.
Therefore, in June 1998, the month before Japan's WTO insurance
commitments were implemented on July 1, USTR engaged in
discussions with Japanese officials regarding the consistency of
Japan's implementing legislation with the intent of the minute.
Specifically, USTR sought reassurance that INA could continue
third sector sales if acquired by
Yasuda. USTR officials claim that Japanese officials responded in
a noncommittal fashion and never provided an answer. USTR
officials have emphasized to Japan that it has an obligation to
uphold the minute, which allows for the majority sale of INA to
Yasuda, and to limit third sector activity for the new entity,
regardless of Japan's WTO insurance commitments. 12
U. S. Government Review of Yasuda's and INA's Ongoing Activities
in the Third Sector Determined That No Agreement Violations Have
Occurred
In early 1998, USTR began a review of the ongoing activities of
Yasuda and INA to determine whether they were consistent with the
third sector restrictions in the 1994 and 1996 agreements. Two
companies, AFLAC and AIG, had contended that Yasuda, through its
partnership with INA, had entered the third sector and caused
radical change to that sector in contravention of the agreements.
USTR provided CIGNA, AFLAC, and AIG
with an opportunity to present their views in writing. AFLAC and
AIG argued that Yasuda had effectively entered the third sector
through receipt of financial benefits it had obtained in
connection with its business
relationship with INA. They also argued that because of its
relationship with Yasuda, INA was a de facto Japanese company and
that its third sector activities violated the agreements'
restriction on these activities by 11 According to CIGNA, the
timing of Yasuda's announcement to delay the purchase of INA
was coincidental. 12 USTR has always supported third sector
restrictions for newly established and acquired subsidiaries but
has consistently viewed Yasuda/ INA as a limited exception to
these
restrictions.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 106 GAO/NSIAD-99-209 International Trade
Japanese companies. Finally, the U. S. companies argued that
changes to INA's corporate structure and business operations
constituted radical change and should therefore not have been
permitted. During this review, the U. S. Trade Representative
expressed a reluctance to choose sides among U. S. companies and a
hope that the companies could cooperate to find a mutually
agreeable business solution. 13 However, such a solution never
materialized. Therefore, USTR examined each of the allegations
and, as summarized in a classified memorandum, concluded that the
activities of Yasuda and INA did not constitute a violation of the
agreements. 14 After conducting an analysis of INA's operations,
USTR's fundamental position was that INA is a U. S. company and,
therefore, its activities do not fall within the terms of the 1994
and 1996 agreements. This decision was agreed upon during
interagency meetings that reached the
subcabinet (NEC Deputies) level 15 and included officials from the
Departments of State, Commerce, the Treasury, and Justice; as well
as the NEC and USTR. On July 1, 1998, USTR communicated the
consensus decision to CIGNA, AIG, and AFLAC.
In response to a request by AFLAC and a few Members of Congress,
an additional interagency review was subsequently conducted in
late July and early August 1998. This final review reached the
level of the Cabinet (NEC Principals), whose review had
participation from the Council of Economic Advisers; the Office of
Management and Budget; the National Security Council; NEC; the
Departments of Commerce, Justice, Labor, State, and the
Treasury; and USTR. During this second review, all three companies
presented their arguments orally to the interagency group. The
original conclusion-that information provided to date did not
support a determination that the activities of INA and Yasuda in
the third sector had violated the 1996 agreement-was reaffirmed.
During the second interagency review, which reached a consensus
decision that there was no violation of the radical change
provisions of the 1996 agreement, the Department of Commerce
recommended that additional measures be taken 13 USTR did note
that very strong proof would be required to demonstrate that INA,
a company 90 percent owned by CIGNA, was actually controlled by
Yasuda.
14 Due to the classified nature of the USTR's analysis during this
review, we are unable to disclose more details about the basis for
USTR's final determination. 15 There are four possible levels of
review in making decisions related to trade policy: the Trade
Policy Staff Committee, the Trade Policy Review Group, the NEC
Deputies, and, finally, the NEC Principals.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 107 GAO/NSIAD-99-209 International Trade
to monitor the situation. A Commerce official proposed that an
interagency team conduct further work in Tokyo to verify the facts
presented to the U. S. government. According to USTR, this
suggestion was not adopted based on the general interagency view
that no further information was necessary to resolve the issue.
In discussing how USTR's views evolved from raising serious
concerns regarding a possible violation of the agreements with
Japan in late 1997 to a final determination that no violation of
third sector provisions had
occurred, USTR officials noted that AIG and AFLAC expressed
concerns over Yasuda and INA activities in an extremely urgent
manner in 1997. As the companies emphasized that they were losing
business as a result of these activities, USTR felt compelled to
address the issue with the Japanese government immediately.
However, over the next several months,
as USTR was able to conduct its own analysis of the situation, it
ultimately determined that no violation had occurred. Both AFLAC
and CIGNA raised concerns about the process used by USTR to
conduct the formal review of Yasuda's and INA's activities in the
third sector. AFLAC expressed frustration over USTR's requests for
updated
information on the situation after the agency did not act on
information provided by AFLAC months earlier. CIGNA felt that it
never received a complete explanation from USTR as to what
accusations had been made against the company, but was compelled
to respond to allegations made against it nonetheless in an
attempt to defend itself. AIG and AFLAC disagreed with the
interagency decision. However, officials from one company have
also noted that Yasuda's activities in the third
sector have slowed. Specifically, these officials have stated that
the rapid growth in the Yasuda agent force selling INA products
has ended and their company's existing client base is no longer
being actively threatened. INA's principal U. S. third sector
competitor believes that the government of Japan has been
successful in restraining Yasuda's activities through the use of
soft controls, such as requiring a slowdown in the projected
registration of Yasuda agents with INA in the company's business
plans. This company has also noted that the impact of Yasuda's and
INA's activities on its business has been small to date. Neither
AFLAC nor AIG is currently pressing this issue with the U. S.
government.
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 108 GAO/NSIAD-99-209 International Trade
Our Observations on the Minute
We have observations in the following three areas regarding the
minute: (1) the difficulties USTR faced in creating the minute,
(2) the consequences of USTR's lack of complete communication with
industry regarding the limited exception, and (3) the problems
USTR encountered due to the use of undefined terms in the text of
the minute.
Because the issue of the majority sale of INA to Yasuda and the
resulting company's allowable third life sector activities were
not addressed during the course of the 1996 insurance agreement
negotiations, USTR was put in a difficult position. After the
agreement negotiations were concluded, USTR felt compelled to
preserve CIGNA's support for the agreement by accommodating the
company's business plans that predated negotiation of both
insurance agreements but that would clearly violate the 1996
agreement's terms if not addressed by the two governments. This
situation was made more delicate due to the fact that competing U.
S. companies had opposing and strong views as to whether or how
Yasuda/ INA should be allowed to sell third sector life products.
In deciding to accommodate CIGNA's sale of INA to Yasuda and
subsequent third sector life sales by the company, USTR took a
position that appeared to benefit one U. S. firm at the expense of
others. USTR faced the difficult challenge of determining
the U. S. interest in a case where U. S. companies' interests were
opposed. Moreover, given the sensitive issues the minute raised in
Japan, USTR officials believed that broad dissemination of the
document might lead to its disavowal and possibly to the
unraveling of the 1996 agreement itself. USTR therefore sought to
limit distribution of the minute and thus did not provide copies
to the two other U. S. insurance companies that had an interest in
developments related to Yasuda/ INA. Further, in late December
1996, USTR did not explicitly describe to AIG and AFLAC the extent
to which a Yasuda- owned INA would be allowed access to the third
sector life insurance business. This grandfather document added to
the 1996 agreement, combined with USTR's incomplete description of
the exception and the failure of USTR to provide the actual
document to industry, created frustration with USTR on the part of
U. S. insurers that lasted for months.
Further, the minute used undefined terms that made its meaning and
implementation uncertain. While USTR officials maintained that a
Yasudaowned INA would only be allowed restricted access to the
third sector, it is unclear what language or provision in the
minute requires that the
company maintain only a limited presence. As a result of this
undefined language in the minute, the U. S. and Japanese
governments had
Appendix IV U. S. Government Actions Regarding One U. S. Insurer
Page 109 GAO/NSIAD-99-209 International Trade
numerous consultations during 1997 regarding the meaning of the
document's terms. U. S. and Japanese government officials have
expressed very different understandings of the minute, with
Japan's actions suggesting an unwillingness, even an inability
under Japanese law, to implement the document as intended by USTR.
After several months of discussions, the two governments were
never able to reach an agreement as to how Yasuda might be
restricted in the third life sector, demonstrating the
questionable value of the minute in creating a limited exception
to the
1996 agreement to accommodate CIGNA.
Page 110 GAO/NSIAD-99-209 International Trade
Appendix V Objectives, Scope, and Methodology Appendi x V
The Chairman of the House Subcommittee on Trade, Committee on Ways
and Means, asked us to examine (1) the views of U. S. insurance
companies operating in Japan regarding the agreements'
implementation and impact on their ability to compete in the
Japanese market; (2) the roles and efforts of the Office of the U.
S. Trade Representative and the Departments of Commerce, State,
and the Treasury in monitoring and enforcing the agreements, and
U. S. government views on whether Japan has met its commitments
under the agreements; and (3) U. S. insurance industry views on U.
S. government monitoring and enforcement efforts. We also
collected
information addressing U. S. government actions related to one U.
S. insurer and its Japanese partner. To obtain the views of U. S.
insurance companies regarding the agreements' implementation and
impact on their ability to compete in Japan, we distributed a
questionnaire to all 13 U. S. insurers and three brokers in Japan
that are either wholly or majority U. S. owned. Surveys for life
and non- life insurers differed somewhat depending on whether a
particular commitment applied to them, and the survey included far
fewer questions for brokers as several of the commitments in the
agreements do not directly pertain to them. The survey was
distributed in January 1999, and we obtained a 100- percent
response rate to our questionnaire. We then traveled to Japan and
met with representatives from all the insurers and brokers in
March to obtain detailed explanations of and clarifications to
their questionnaire responses. In some cases, responses were
revised
during discussions at our meetings. The questionnaire asked U. S.
insurers and brokers for their views on the implementation and the
impact of those provisions of the agreements for which the
companies would have firsthand experience. All of the questions
were referenced back to their related provisions in the
agreements. For the questions related to the 1994 agreement, we
developed, where possible, similar or identical questions to those
we used in a 1996 survey on the implementation and impact of the
1994 agreement. This allowed us in some cases to compare how
company responses had changed over time. Eleven of the 13
companies and two of the three brokers included in our current
survey also responded to our 1996 survey. In analyzing
questionnaire results, we examined response frequencies. We also
computed the percentage of U. S. insurance sales in
Appendix V Objectives, Scope, and Methodology
Page 111 GAO/NSIAD-99-209 International Trade
Japan represented by company responses. 1 In requesting company
participation in our survey, we pledged that company responses
would be reported in aggregate form and that we would not identify
specific responses with the individual companies. In certain
cases, the reporting of responses in conjunction with the
percentage of U. S. insurance premiums in Japan associated with
that response limits this confidentiality. In those cases, the
firms that could be identified, due to their large size, gave us
permission to report the market premium data. We also interviewed
and
collected information from industry groups and insurance companies
in the United States. To identify the roles and efforts of USTR
and the Departments of Commerce, State, and the Treasury in
monitoring and enforcing the insurance agreements, as well as U.
S. government views on implementation, we conducted interviews
with officials from each agency, including the U. S. embassy in
Tokyo. We reviewed available information from USTR and the U. S.
embassy in Tokyo to establish the nature and frequency of
interagency interaction. We also assessed extensive documentation
from USTR and the U. S. embassy in Tokyo to review USTR's
determination regarding the status of agreement implementation and
discussed USTR's determination with U. S. companies and Japanese
government agencies and industry groups. Information on Japanese
law in this report does not reflect our independent legal analysis
but is based on
interviews and secondary sources. We also used the 1999
questionnaire to obtain the views of U. S. insurance companies
regarding U. S. government monitoring and enforcement of the
agreements. All 13 insurance companies and three brokers were
asked
questions regarding overall U. S. government monitoring and
enforcement efforts, as well as questions related to their
specific experiences with various government agencies. As with
implementation and impact questionnaire responses, we conducted
follow- up interviews in Japan with U. S. participants in the
Japanese market. We also held interviews with industry groups and
insurance companies in the United States. We examined extensive
documentation regarding monitoring and enforcement
1 Company shares (percentage) of total U. S. premiums generated in
Japan were calculated using premium data for Japanese fiscal year
1997 (Apr. 1997- Mar. 1998). Two surveyed companies did not have
sales in 1997 and were assigned a zero weight for computing the
premium proportions.
Appendix V Objectives, Scope, and Methodology
Page 112 GAO/NSIAD-99-209 International Trade
actions by USTR and the U. S. embassy in Tokyo that have proven
controversial with some U. S. insurers operating in Japan.
We performed our review from July 1998 to June 1999 in accordance
with generally accepted government auditing standards.
Page 113 GAO/NSIAD-99-209 International Trade
Appendix VI GAO Contacts and Staff Acknowledgments Appendi x VI
GAO Contacts Elizabeth Sirois (202) 512- 8989 Leslie Holen (415)
904- 2277
Staff Acknowledgments
In addition to those named above, Emil Friberg, Jos Pea, Kay
Halpern, Kim Frankena, Richard Burkard, Kathleen Joyce, and Rona
H. Mendelsohn made key contributions to this report.
Page 114 GAO/NSIAD-99-209 International Trade
Related GAO Products U. S.- Japan Trade: U. S. Company Views on
the Implementation of the 1994 Insurance Agreement (GAO/ NSIAD/
GGD- 97- 64BR, Dec. 20, 1996).
U. S.- Japan Trade: The Japanese Insurance Market (GAO/NSIAD-99-
108BR, Mar. 15, 1999).
(711367) Lett er
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