U.S.-Japan Trade: U.S. Company Views on the Implementation of the 1994
Insurance Agreement (Briefing Report, 12/20/96, GAO/NSIAD/GGD-97-64BR).

Pursuant to a congressional request, GAO provided the results of its
survey of U.S. company views on the 1994 insurance agreement between the
United States and Japan, focusing on the: (1) Japanese government's
actions to implement key provisions of the 1994 agreement; and (2)
impact of these actions on U.S. insurance providers' ability to compete
in the Japanese market.

GAO found that: (1) U.S. company responses to GAO's questionnaire and
discussions with their representatives operating in the Japanese
insurance market indicated that the Japanese government has implemented,
to varying degrees, many of the transparency, deregulation, and
competition provisions contained in the 1994 agreement; (2) however,
most United States insurance providers reported that these actions did
not result in significant liberalization and have had no effect on their
ability to compete in the Japanese insurance market; (3) as the United
States and Japan continued to negotiate the implementation of the mutual
entry provision, 9 of the 11 U.S. insurance companies reported that
there would be a negative impact on their ability to compete in the
third sector if subsidiaries of Japanese firms were allowed full access
to sell products in that sector; (4) six of the eight U.S. insurance
companies who participate in the insurance programs of Japanese public
corporations reported that despite the terms of the agreement, fair,
transparent, nondiscriminatory, and competitive criteria were not being
used to allocate premium shares; (5) according to U.S. companies, only
one of the five public corporations has disclosed its allocation
formula; (6) since the signing of the 1994 agreement, foreign companies
have not significantly increased their small share of this large market
(over $1.2 billion in annual premiums); and (7) the foreign share of the
insurance premiums generated from these five public corporations ranged
from 0.02 percent to 1.3 percent in fiscal year 1995, according to
Foreign Non-Life Insurance Association statistics.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD/GGD-97-64BR
     TITLE:  U.S.-Japan Trade: U.S. Company Views on the Implementation 
             of the 1994 Insurance Agreement
      DATE:  12/20/96
   SUBJECT:  Foreign trade agreements
             Foreign governments
             International trade restriction
             Insurance premiums
             Insurance companies
             Insurance regulation
             Competition
             International relations
IDENTIFIER:  Japan
             
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Cover
================================================================ COVER


Briefing Report to the Chairman, Subcommittee on International
Finance, Committee on Banking, Housing, and Urban Affairs, U.S. 
Senate

December 1996

U.S.-JAPAN TRADE - U.S.  COMPANY
VIEWS ON THE IMPLEMENTATION OF THE
1994 INSURANCE AGREEMENT

GAO/NSIAD/GGD-97-64BR

U.S.-Japan Trade

(711177)


Abbreviations
=============================================================== ABBREV

  AMA - Anti-Monopoly Act
  FNLIA - Foreign Non-Life Insurance Association
  GOJ - Government of Japan
  MOF - Japanese Ministry of Finance
  USTR - Office of the U.S.  Trade Representative

Letter
=============================================================== LETTER


B-275741

December 20, 1996

The Honorable Christopher S.  Bond
Chairman, Subcommittee on International Finance
Committee on Banking, Housing, and Urban Affairs
United States Senate

Dear Mr.  Chairman: 

Japan is the second largest insurance market in the world, and in
fiscal year 1995 Japanese firms received 96.4 percent of the $400
billion in annual risk insurance premiums.\1 On October 11, 1994, the
United States and Japan signed an agreement designed to reduce
barriers that impede market access for competitive foreign insurance
providers in the Japanese market.  The Office of the U.S.  Trade
Representative (USTR) has primary responsibility for negotiating and
monitoring the implementation of the 1994 agreement.  In response to
your request, we are currently reviewing the implementation of this
agreement. 

This interim report responds to your specific request for the results
of our survey of U.S.  company views on the 1994 insurance agreement. 
You asked for this report to be issued as soon as possible after
December 15, 1996--a deadline set by the United States and Japan to
resolve their dispute on how to carry out a key "mutual entry"
provision in the 1994 agreement that deals with the scope and timing
of insurance deregulation.  On December 15, 1996, the two countries
reached an agreement on the implementation of this provision,
specifying time frames for deregulating specific insurance product
lines. 

Our questionnaire was designed to elicit the views of U.S.  insurance
providers on (1) actions taken by the government of Japan to
implement key provisions of the 1994 agreement and (2) the impact of
these actions on the company's ability to compete in the Japanese
market.  These provisions included commitments to increase
transparency (openness), deregulation, and competition.  There were
15 U.S.  insurance providers operating in Japan in 1996 that were
either wholly or majority U.S.  owned, consisting of four life
insurance companies, seven non-life insurance companies, and four
insurance brokers.  All 15 insurance providers completed their
questionnaires before the United States and Japan reached an
agreement in December 1996 on how to implement the provision on
mutual entry. 

On December 2, 1996, we briefed your staff on the results of our
questionnaire survey.  This report summarizes information presented
in that briefing and does not include information on the new
commitments made by the government of Japan in December 1996.  As
agreed with your office, a more comprehensive report on the
implementation of the 1994 agreement will be issued at a later date. 


--------------------
\1 Fiscal year 1995 refers to a Japanese fiscal year, beginning April
1, 1995, and ending March 31, 1996.  Japanese market data are from
the Foreign Non-life Insurance Association, a foreign trade
association in Japan. 


   BACKGROUND
------------------------------------------------------------ Letter :1

In fiscal year 1995, foreign firms, primarily U.S.  insurance
providers, received about 3.6 percent of total risk premium value of
Japan's insurance market, according to statistics provided by the
Foreign Non-life Insurance Association (FNLIA).  This foreign share
is small compared to the foreign share of the U.S.  insurance market. 
While comparable data are not available for the United States for
1995, the U.S.  Department of Commerce reported that foreign firms in
1994 had a 10.2 percent share of the direct U.S.  insurance market. 
In 1994, FNLIA reported that the foreign share of the Japanese market
was 3.3 percent.  The U.S.  data are for the calendar year and the
Japanese data are for a fiscal year.  However, these data are the
best available comparisons and are closely comparable. 


      THE JAPANESE INSURANCE
      MARKET
---------------------------------------------------------- Letter :1.1

The Japanese insurance market has been strictly regulated by the
Ministry of Finance (MOF).  For example, MOF oversees the rating
bureaus that set the rates and the type of coverage for many types of
insurance products--giving insurance providers little opportunity to
differentiate their products, according to USTR officials.  Further,
"keiretsu"--groups of Japanese firms that maintain close ties through
the cross-holding of shares and exchange of personnel--are active
players in the Japanese insurance market.  With these close corporate
links, Japanese businesses buy insurance from firms within their
keiretsu--limiting the ability of foreign insurance providers to
distribute their products.  In addition, insurance brokers in Japan
operate as insurance agents who sell insurance policies for insurance
companies, whereas brokers in the United States work for buyers of
insurance policies and can create unique policies tailored to the
buyer's needs by combining coverage from several insurance companies
that are able to offer a variety of rates and types of coverage. 

The insurance market in Japan is divided into three sectors.  The
first sector consists of standard life insurance products, and the
second sector consists of standard non-life insurance products
(mostly auto and fire policies).  These two sectors combined are
called the "primary" sectors; they represented about 95.2 percent of
total insurance risk premiums collected in fiscal year 1995.  Foreign
firms captured only 1.8 percent of the primary sectors in fiscal year
1995, according to FNLIA data. 

In addition to the primary sectors, a "third" sector of the Japanese
insurance market includes niche products such as cancer insurance and
personal accident insurance.  The third sector represented 4.8
percent of total Japanese insurance risk premiums in fiscal year
1995.  Foreign companies have been more successful in the third
sector than in the primary sectors, underwriting approximately 39.6
percent of the third sector risk premium value. 


      THE 1994 INSURANCE AGREEMENT
---------------------------------------------------------- Letter :1.2

As the Japanese government prepared for the first major reform of its
insurance law in 50 years, the United States and Japan reached an
agreement in 1994 on market access in the insurance sector, entitled
"Measures by the Government of the United States and the Government
of Japan Regarding Insurance." A principal U.S.  goal of the
agreement was to ensure that Japanese insurance reform was not
carried out in a way that would discriminate against the interests of
foreign insurance providers in Japan.  The agreement includes
measures to provide greater regulatory transparency and foster and
protect product innovation and price competition in Japan.  The
agreement also commits the Japanese government to encourage five
public corporations\2 to permit foreign insurance providers access to
their insurance programs and ensure the allocation of premium shares
according to fair, transparent, nondiscriminatory, and competitive
criteria.  In addition, the Japanese government also committed to
address issues of competition policy and market structure that may
give rise to anticompetitive business practices. 

An important provision in the 1994 agreement, often referred to as
the mutual entry provision,\3 addresses the scope and timing of
deregulating the primary and third sectors.  Since the agreement was
signed, the United States and Japan have differed in their views on
how this provision should be implemented, resulting in numerous
consultations between U.S.  and Japanese leaders and negotiators.  In
December 1996, the two governments agreed on when and how the
Japanese government would deregulate specific products in the primary
sectors.  According to USTR, very limited entry into the third sector
is permitted, but deregulation of the third sector is dependent upon
the deregulation of the primary sectors.  Once that objective is
achieved through legislative and regulatory action, then foreign and
smaller insurers will have a 2-1/2 year period to gain a competitive
foothold before the third sector is further opened. 


--------------------
\2 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. 

\3 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."


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

U.S.  company responses to our questionnaire and discussions with
their representatives operating in the Japanese insurance market
indicated that the Japanese government has implemented, to varying
degrees, many of the transparency, deregulation, and competition
provisions contained in the 1994 agreement.  However, most U.S. 
insurance providers reported that these actions did not result in
significant liberalization and have had no effect on their ability to
compete in the Japanese insurance market.  For example, most
companies reported that their ability to compete in the major product
categories of the primary sectors was limited because of (1) their
continued inability to differentiate the types of coverage they can
offer and the rates they can charge and (2) distribution systems in
Japan that impede their ability to distribute their products. 

As the United States and Japan continued to negotiate the
implementation of the mutual entry provision, 9 of the 11 U.S. 
insurance companies reported that there would be a negative impact on
their ability to compete in the third sector if subsidiaries of
Japanese firms were allowed full access to sell products in that
sector.  Only one insurance company reported that allowing these
subsidiaries full access to sell third sector products would have a
very positive impact, and another insurance company reported no
effect. 

Six of the eight U.S.  insurance companies who participate in the
insurance programs of Japanese public corporations reported that
despite the terms of the agreement, fair, transparent,
nondiscriminatory, and competitive criteria were not being used to
allocate premium shares.  According to U.S.  companies, only one of
the five public corporations has disclosed its allocation formula. 
Since the signing of the 1994 agreement, foreign companies have not
significantly increased their small share of this large market (over
$1.2 billion in annual premiums); the foreign share of the insurance
premiums generated from these five public corporations ranged from
0.02 percent to 1.3 percent in fiscal year 1995, according to FNLIA
statistics. 

The enclosed briefing sections provide (1) a list of U.S.  insurance
companies and brokers operating in Japan in 1996 and the premiums
earned by U.S.  insurance companies in fiscal year 1995; (2) a
summary of U.S.  insurance provider responses to our survey questions
on the implementation of provisions on transparency, deregulation,
competition, and government corporations; and (3) a copy of the
questionnaire with the frequency rates indicating how companies
responded to each question. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :3

In commenting on a draft of this report, USTR agreed with the
information presented. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :4

We reviewed the 1994 U.S.-Japan agreement on insurance and met with
representatives from USTR, U.S.  insurance associations, and U.S. 
insurance providers to identify key provisions.  To obtain U.S. 
company views on Japan's implementation of the 1994 agreement, we
distributed a questionnaire to the 15 U.S.  insurance providers
(insurance companies and brokers) operating in Japan that are either
wholly or majority U.S.  owned.\4 Insurance brokers received a
shorter version of the questionnaire, as some of the provisions did
not directly apply to brokers.\5 Our universe did not include three
joint venture companies in which the U.S.  partner has a 50 percent
or less interest.  In requesting company participation in our survey,
we pledged that company responses would be reported in aggregate form
and that we would not link specific responses with the individual
companies. 

The questionnaire asked U.S.  insurance providers for their views on
the implementation of those provisions for which the companies would
have had first-hand experience.  All questions in the questionnaire
are referenced back to their related provision in the agreement. 
Since the United States and Japan were still negotiating how Japan
would implement the provision on mutual entry, we asked companies for
their views on the potential impact if the third sector were to be
completely deregulated.  After receiving the completed
questionnaires, we traveled to Japan and met with company
representatives to obtain further information about implementation
issues.  In some cases, companies revised their questionnaire
responses, based on explanations provided at our meetings.  While in
Japan, we also met with representatives from the Japanese Fair Trade
Commission and foreign trade associations in Japan (FNLIA, American
Chamber of Commerce-Committee on Insurance, and European Business
Community-Insurance Committee).  We also collected statistics on the
Japanese insurance market.  For fiscal year 1995, we used an exchange
rate of 96.44 yen per U.S.  dollar. 

We conducted our review between February and December 1996 in
accordance with generally accepted government auditing standards. 


--------------------
\4 Out of this universe of 15 insurance providers, 8 are branches, 6
are wholly owned subsidiaries, and 1 is a subsidiary in which a U.S. 
company has a majority interest. 

\5 Brokers did not answer questions 13-17 and 19-35 of the
questionnaire. 


---------------------------------------------------------- Letter :4.1

As we agreed with your office, unless you publicly announce this
letter's contents earlier, we plan no further distribution of the
letter until 21 days after the date of issuance.  We will then send
copies to other interested congressional committees, USTR, the
Secretaries of State and Commerce, the Chairman of the International
Trade Commission, and those firms that participated in the survey. 
We will also make copies available to others on request. 

The major contributors to this report were Elizabeth Sirois,
Christine Broderick, Leslie Holen, and Emil Friberg.  If you or your
staff have any questions about this report, please contact me at
(202) 512-8984. 

Sincerely yours,

JayEtta Z.  Hecker
Associate Director
International Relations and Trade Issues


LIST OF U.S.  INSURANCE PROVIDERS
OPERATING IN JAPAN IN 1996
============================================================ Chapter I



                               Table I.1
                
                  U.S. Insurance Companies and Premium
                  Revenue Collected in Japanese Fiscal
                               Year 1995

                         (Dollars in millions)

                                                              Premiums
U.S. insurance companies and units                                  \a
------------------------------------------------------------  --------
American Family Life Assurance Co.\b                          $5,192.7
American International Group Companies                         4,610.2
 AIU Insurance Co.\c
 American Home Assurance Co.\c
 American Life Insurance Co.\b
 JI Accident & Fire Insur. Co. (50% U.S. owned)\c*
CIGNA                                                          1,113.5
 CIGNA Insurance Co.\c
 INA Life Insurance Co., Ltd. (90% U.S. owned)\b
Prudential Life Insurance Co., Ltd.\b                            800.0
Allstate                                                         580.0
 Allstate Auto. & Fire Ins. Co. (50% U.S. owned)\c*
 Saison Life Insurance Co. (50% U.S. owned)\\b*
Kemper Insurance Co. Limited                                      19.6
 Lumbermens Mutual Casualty Co.\c
Chubb Group of Insurance Companies                                 8.0
 Federal Insurance Company-Japan\c
Unum Japan Accident Insurance Co. (new co. in FY94)\c              0.6
Liberty Mutual Insurance Co. (new co. in FY95)\c                   0.1
======================================================================
Total U.S. premiums                                           $12,324.
                                                                     7
----------------------------------------------------------------------
Legend

FY=fiscal year
*=Insurance companies that did not participate in the GAO survey. 

Note 1:  Japan's 1995 insurance fiscal year begins April 1, 1995, and
ends March 31, 1996. 

Note 2:  Yen premiums were converted to U.S.  dollars using an
exchange rate of 96.4425 yen per U.S.  dollar based on the
International Monetary Fund average market exchange rate for the
second quarter of 1995 through the first quarter of 1996. 

Note 3:  In cases of partial U.S.  ownership of a Japanese insurance
operation, GAO calculated a prorated U.S.  share of total company
premiums. 

\a Premiums:  for non-life insurance companies these are net direct
premiums, including risk plus savings premiums.  Net direct premiums
are the total premium received from policy holders.  They do not
include net reinsurance premium and are net of cancellations and
other returns.  For life insurance companies these are premium
income. 

\b Life insurance company. 

\c Non-life insurance company. 

Sources:  Statistics of Life Insurance Business in Japan, 1995, ed. 
Hoken-kenkyujo (Tokyo, Japan:  Insurance Research Institute) and The
Statistics of Japanese Non-Life Insurance Business, 1995, Annual
Special Issue, ed.  Hoken-kenkyujo (Tokyo, Japan:  Insurance Research
Institute). 



                               Table I.2
                
                         U.S. Insurance Brokers

----------------------------------------------------------------------
Alexander & Alexander of Japan, Inc.

AON Risk Services Companies, Inc.

Johnson & Higgins Japan

Marsh & McLennan Japan, Ltd.
----------------------------------------------------------------------
Note:  All four insurance brokers participated in the GAO survey. 


QUESTIONNAIRE HIGHLIGHTS
=========================================================== Chapter II


   SUMMARY OBSERVATIONS
--------------------------------------------------------- Chapter II:1



   (See figure in printed
   edition.)



   TRANSPARENCY
--------------------------------------------------------- Chapter II:2



   (See figure in printed
   edition.)



   DEREGULATION
--------------------------------------------------------- Chapter II:3



   (See figure in printed
   edition.)



   DEREGULATION (CONTINUED)
--------------------------------------------------------- Chapter II:4



   (See figure in printed
   edition.)



   DEREGULATION (CONTINUED)
--------------------------------------------------------- Chapter II:5



   (See figure in printed
   edition.)



   DEREGULATION (CONTINUED)
--------------------------------------------------------- Chapter II:6



   (See figure in printed
   edition.)



   COMPETITION
--------------------------------------------------------- Chapter II:7



   (See figure in printed
   edition.)



   GOVERNMENT CORPORATIONS
--------------------------------------------------------- Chapter II:8



   (See figure in printed
   edition.)


U.S.  INSURANCE PROVIDER RESPONSES
TO QUESTIONNAIRE
========================================================== Chapter III



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   edition.)



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*** End of document. ***