Japan’s Non-Life Insurers’ progress report on Business Improvement Plans
Japan’s Financial Services Agency (FSA) issued business improvement orders to the major Japanese non-life insurance companies (Tokio Marine & Nichido Fire Insurance, Sompo Japan Insurance, Mitsui Sumitomo Insurance, and Aioi Nissay Dowa Insurance) at the end of December 2023 for price-fixing on corporate insurance premiums. This was followed by business improvement orders targeting those involved in the Big Motor scandal (fraudulent insurance claims, secondment of personnel, etc.) at the end of January.
Business improvement plans were due by the end of February, and updates on the implementation of the plans required every three months, by the 15th of the following month. In other words, Friday, June 14 was the due date, and press releases allowed a glimpse into the remediation undertaken to date.
As the central bad actor in the Big Motor scandal, we will primarily focus on Sompo Holdings, but will add some “highlights” from the other reports at the end. In addition, a conduct report commissioned by Sompo Holdings from external experts became available last week as well.
The Business Improvement Orders
The Business Improvement Plan
The plan submitted by Sompo therefore had items at the Holdings level, as well as at Sompo Japan Insurance, and items that are common across business line as well as those that specifically address the issues highlighted by price-fixing or fraudulent claims.
Some of the action items are far-reaching and seem rather fundamental to running a business organized in a holding company structure, so one is tempted to ask why the regulator has not previously forced improvements in governance such as a Chief Compliance Officer or a Chief Internal Audit Officer at the holding company level (picking this out as an example, with the detail below)
Drastically strengthen governance to diligently implement the business improvement plan and ensure measures are firmly established
(1) Strengthen and improve the effectiveness of Group governance
(2) Revise the institutional design of operating companies (major domestic companies)
(3) Appoint a Chief Compliance Officer
(4) Establish a Compliance Office
(5) Appoint a Chief Internal Audit Officer
(6) Clearly define the relationships between Group Chief Officers (CxO) and Chief Officers (CxO) of individual companies
(7) Strengthen specialized personnel
The Progress Report
Credit to Sompo for putting together a one-page overview of the various initiatives and their status, in addition to the three page update for Sompo Holdings and the eleven pages for Sompo Japan Insurance, although the update is currently only available in Japanese (a reminder here that the TSE as part of their governance reforms is also pushing for timely and comprehensive language disclosures).
The key highlight from the progress report was the release of a public version (is there a private/company-internal version, and if so, what is the difference?) of the report by the external investigation committee, which was initially established in June 2023.
The investigation was commissioned to clarify the facts and causes of the premium adjustment practices, as well as to examine the related governance, organizational culture, and systems and practices in the non-life insurance industry, and to receive consideration and recommendations on preventive measures.
The investigation report revealed that many employees in the sales department of Sompo Japan engaged in inappropriate behavior without any resistance, and that this had continued over a wide range of activities for a considerable period of time. It also pointed out problems with Sompo Japan’s compliance program and business model, which take into account the business environment of the non-life insurance industry.
In addition to the fundamental problems pointed out in the administrative action, such as an excessive emphasis on sales, a corporate culture that neglects compliance and customer protection, a top-down corporate culture that does not challenge decisions made by superiors, and a dysfunctional three-line management system, the report also gave a harsh evaluation of the transparency and reliability of the governance process, and pointed out that the successive management teams who created and established structural problems bear a heavy responsibility.
MS&AD Group
Right off the bat, MS&AD deserves credit for publishing all progress report press releases in English as well. For MS&AD, we will also go back to the submission of the business improvement plan as theirs included great graphics that succinctly indicate the conduct issues to be addressed.
MS&AD also provided a succinct summary of the progress made, in addition to the detailed Aioi Nissay Dowa Insurance (nine pages) and Mitsui Sumitomo Insurance (eight pages) updates.
- In order to detect risks inherent in the Group and respond autonomously, the Company have established the Group Risk Management Committee, in which relevant officers of the Company and the domestic insurance companies in the Group participate, and the Group Risk Review Working Group, in which all divisions of the Company participate (both of which include outside experts).
- In order to consolidate knowledge within and outside the Group and strengthen the functions of audit & supervisory board, audit & supervisory board member (including an outside audit & supervisory board member) of the Company and the domestic insurance companies in the Group have decided to establish the Group audit & supervisory board member meetings for discussion and exchange of opinions, and to hold these meetings in the first and second half of the FY2024.
- As matters that require reporting from group companies to the Company, we have included matters related to “identification of the risks (forecast and detection ), assessment of the risks and necessary response” and “cultivation of a sound corporate culture” shall be stipulated in the Rules of the Group management supervision contracts and Director Association of the Company to strengthen the system for timely and appropriate reporting of important management matters of group companies.
- In order to strengthen governance in conjunction with group companies, the Company commenced participation as an observer in the management meetings of MSI and ADI.
- In order to strengthen the auditing function of the Internal Audit Department, the Company reorganized and newly established the organization to improve Risk sensitivity and strengthen monitoring the entire Group.
- In order to build a more robust compliance promotion system as a group, the Company revised its compliance program and added “promotion of compliance education and training for thorough compliance” and “Strengthening of internal control system for compliance with the Antimonopoly Act.”
Please follow us to read more about Finance & FinTech in Japan, like hundreds of readers do every day. We invite you to also register for our short weekly digest, the “Japan FinTech Observer”, on Medium or on LinkedIn. Our global Finance & FinTech Podcast, “eXponential Finance” is also available through its own LinkedIn newsletter, or via our Podcast Page.
Should you live in Tokyo, or just pass through, please also join our meetup. In any case, our YouTube channel and LinkedIn page are there for you as well.
