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Sompo’s Suspension Order Is A Wake-Up Call For Japanese Insurers
Japanese insurance group Sompo Japan has received a partial business suspension order from the Financial Services Agency, Japan’s financial regulator, because of illegal sales practices.
Japanese insurance group Sompo Japan has received a partial business suspension order from the Financial Services Agency, Japans financial regulator, because of illegal sales practices. Some believe the suspension served as a warning to other insurers in the country that may have used similar practices.
On May 25, the FSA forced Sompo to suspend sales of non-life products for two weeks. One branch has been prevented from selling non-life policies for a month. The firm cannot sell any life insurance policies for one month. The regulator also said it will not approve any new insurance products or alliances with other insurance companies or banks for three months. Finally, the FSA has ordered the company to improve its internal management.
An FSA investigation discovered two different types of unlawful sales practices. One involved staff paying for clients premiums themselves to hit sales targets for life insurance. The other involved certain branches and agencies using clients signatures to renew insurance policies or apply for new ones without consulting the client.
The reason such issues have arisen is the critical deficiency of the frameworks for compliance, business management and internal control, said the FSA in a statement issued to Reactions.
Another reason for these practices could be the pressure on insurance companies to boost their premium income. Property-casualty pricing was deregulated in Japan in 1997, and since then rates have fallen and competition has increased.
Generally speaking, the Japanese property/casualty market is at a very competitive stage, says Shiyo Imai, assistant v.p. and analyst at rating agency Moodys Japan. There is pressure to underwrite a specific level of new premium. Sales people were under pressure to underwrite new policies in a very difficult operating environment.
Although all companies face these pressures, Imai does not think there will be more regulatory action from the FSA. Sompos suspension order could wake up other insurers to what the regulator is capable of. We dont expect another round of harsh suspension orders, she says. Companies are more aware of what the FSA is interested in and what they are required to do.
Despite the suspension order, Moodys has affirmed Sompos Aa3 financial strength rating with a stable outlook. Fellow rating agency Fitch also affirmed its AA- financial strength rating of Sompo following news of the suspension order.