Insurance in Japan: Fair, Transparent, and Reliable
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A. The Legal Framework
The insurance regulatory body is the Financial Services Agency. Under Article 313, Paragraph 1 of the Insurance Business Act, the authority of the Prime Minister under Insurance Business Law is delegated to the Commissioner of the Financial Services Agency.
The Life Insurance Association of Japan, The General Insurance Association of Japan, Foreign Non-Life Insurance Association of Japan and the Japan Short-Term Insurance Association have established self-regulatory policy and guidelines for insurance companies and have also provided some services such as dispute resolution services.
The “Insurance Business Law” is the legal basis for insurance companies, which regulates the Supervision of Insurance Companies. In addition, the “Insurance Law” exists as a law concerning the discipline of insurance contracts.
The following key points are the penalties imposed on insurance companies under the Insurance Business Act, specifically Article 315:
- General Punishment
- Unauthorized Insurance Business: Engaging in insurance business without a proper license from the Prime Minister (item 1), conducting small-amount, short-term insurance business without appropriate registration (item 6), or facilitating such unauthorized business under one’s name (items 1, 2, 6 and 7) are offenses.
- Penalties: Violators (items 2 and 7) may face imprisonment for up to 3 years or a fine of up to 3 million yen, or both.
Small-amount, short-term insurance business entails limited-term, low-coverage insurance. For such businesses:- Insurance Period: Maximum 2 years for non-life and 1 year for other insurance.
- Coverage Limit: 10 million yen for non-life and 3 million yen for life insurance.
- Premiums: Annual premiums must not exceed 5 billion yen, and there’s no prohibition on concurrent life and non-life insurance.
- Unauthorized insurance holding companies, with potential penalties including up to two years in prison or a fine of up to 3 million yen. 2
- Failing to submit required business reports, with penalties of up to one year in prison or a fine of up to 3 million yen. 3
- False registration submissions, unauthorized insurance solicitation, and deceptive practices are punishable by imprisonment for less than a year, fines up to 1 million yen, or both. 4
- Failing to deposit funds for foreign insurance companies is punishable by up to 6 months in prison, fines of up to 500,000 yen, or both. 5
- Administrative penalties include fines of up to 1 million yen for unauthorized changes, as per Article 333, and additional penalties under Articles 333 to 339.
- License cancellation and other sanctions can be imposed if there is a violation of laws and regulations and the prime minister’s disposition. 6 Similar provisions are also applicable to foreign insurance companies. 7
B. Insurance Companies
In Japan, insurance providers generally fall into two main categories:
- Life Insurance Companies, which are licensed for life insurance-related activities.
- Non-Life Insurance Companies, which are licensed for non-life insurance-related activities.
It’s important to emphasize that prior to establishing either type of insurance company, the company must determine its organizational structure. In Japan, the structures for insurance companies are divided into:
- Joint stock companies: These companies aim to pursue profits.
- Mutual companies: These are companies whose primary purpose is to offer insurance to its members. The insured individuals essentially become members.
Furthermore, it’s crucial to note that an entity cannot hold both a life insurance business license and a non-life insurance business license simultaneously. However, both types of licenses (for life and non-life insurance companies) can include coverage for health insurance. 8
A foreign branch office, subsidiary office, or insurance agents office can be established and operated in Japan.
The foreign life insurance business and the foreign non-life insurance business cannot be undertaken by the same entity. 9
To secure a license from the Prime Minister, a foreign insurer must fulfill the following requirements, in addition to submitting a license application form and a statement of business procedures:
- A foreign insurer has initiated insurance operations or established a legitimate corporation.
- A foreign insurer has obtained the required license.
Moreover, it’s essential to provide a certificate issued by an authorized body in your home country, validating that you’re lawfully engaged in the same category of insurance business both in your home country and in Japan. 10
C. The Insurance Contract
The regulatory framework encompasses various aspects as outlined below:
- Insurance Business Act Regulations
Under the Insurance Business Act, several categories fall under the ambit of insurance business regulation. These encompass life insurance, non-life insurance, and accident and sickness insurance. These are all categorized as distinct forms of insurance business as per Article 2, Paragraph 1 of the Insurance Business Act.On the other hand, the insurance business law does not apply to insurance policies conducted by a specific organization of which the members are as counterparties or those with less than 1,000 persons as counterparties (excluding underwriting of reinsurance, etc.). 11
- Regulations of Insurance
Under the Insurance Law, an insurance contract can be referred to as an insurance contract, mutual aid contract, or any other name that principally signifies an agreement wherein one party commits to paying insurance premiums and the other party is providing the property benefits based on the likelihood of a specific event taking place. 12 This encompasses contracts for non-life insurance, life insurance, as well as accident and health coverage. These contracts, as mentioned earlier, fall into the category of fixed-amount insurance contracts and are bound by regulations governing contract clauses. Additionally, reinsurance, which is a form of non-life insurance contract, is also classified to be subject to the regulations stipulated by the Insurance Law. 13
The following are examples of the obligations and responsibilities of the insurer and the insured:
A. Obligations and Responsibilities of the Insurance Company
- Obligations in contract conclusion or insurance solicitation
- Obligation to provide information
In accordance with the guidelines outlined in a Cabinet Office Ordinance, insurance companies are obligated to provide information to furnish policyholders and related parties with essential information for their reference. This information encompasses the specifics of insurance contracts, aiming to enhance the safeguarding of policyholders’ interests. 14 - Prohibition of misrepresentation
Insurance companies are barred from participating in the listed activities or any other actions designated by a Cabinet Office Ordinance in the context of contract conclusion or presenting insurance offerings, which includes: 15- Making false statements or omitting vital information in insurance agreements as this could affect policyholders’ decisions.
- Encouraging policyholders or insured individuals to provide false information to the insurance company.
- Taking actions that obstruct policyholders or insured individuals from sharing important details with the insurance company, or advising against such disclosure (disclosure obstruction).
- Canceling existing insurance without informing policyholders or insured individuals, then terminating established contracts through the involvement of a third-party (unfair transfer solicitation).
- Offering discounts, rebates, or special benefits to policyholders or insured individuals.
- Sharing information that might lead to misunderstandings about the content of an insurance contract when compared to others (misleading comparative information).
- Offering definitive judgments on uncertain future matters, potentially conveying false certainty, such as dividend forecasts, employee surplus distribution, and other Cabinet Office-specified uncertainties.
- Initiating actions involving policyholders or insured individuals while being aware of special benefits promised by related insurance company parties, like submitting applications.
- Understanding customer intentions
Insurance companies must comprehend the customer’s intent for contract conclusion or solicitation, propose fitting insurance contracts, clarify contract specifics, grasp the customer’s intent at contract conclusion, and offer a chance for the customer to verify contract alignment. 16 - The Obligation to explain and the prohibition of providing definitive judgments are based on the Act on the Provision of Financial Services until the conclusion of an insurance contract.
According to this Act, an insurance company is required to provide its customers with explanations regarding market risks, credit risks, and other associated risks. Furthermore, the company must also detail the limitations pertaining to the timeframe within which rights can be exercised or canceled. 17Additionally, during the period leading up to the contract conclusion, it is possible for an insurance company to furnish customers with conclusive assessments concerning uncertain matters tied to the sale of the insurance product. This includes the potential to inadvertently lead customers into mistakenly believing in the certainty of these judgements. 18
- Obligation to provide information
- Responsibility of the insurance company due to the insurance agent’s actions
The affiliated insurance company holds the responsibility for compensating policyholders for damages resulting from the actions of the insurance solicitor/agent. 19 - Obligations upon insurance contract conclusion
Upon concluding an insurance contract, the insurance company must promptly furnish the policyholder with a document detailing the specifics of the insurance agreement. 20 - Responsibilities in the event of an insured incident
- Insurance payment obligation
When an insured event takes place and an insurance claim is submitted, the insurance company is under obligation to provide insurance benefits. - Obligation for delayed compensation
Upon receipt of an insurance claim, the insurance company has the option to delay insurance claim payments if a reasonable time has passed for confirming necessary claim-related details. In such cases, the company is also liable to compensate for the delay. 21
- Insurance payment obligation
B. Obligations and Responsibilities of the Insured
- Responsibilities during insurance contract conclusion
In contract conclusion, the insured is obligated to disclose essential risk-related details as requested by the insurer. 22 Additionally, the same notification requirement applies when reinstating a life insurance contract. - Responsibilities under the insurance contract
The contract might include a provision for the insured to promptly inform the insurer of any changes in risk-related notification items. If such a provision exists, the insured must adhere to it. 23 However, life insurance contracts often omit provisions about increased risk. - Responsibilities in case of an insured event
- Obligation to Notify
In non-life insurance contracts and fixed-amount accident and health insurance contracts, if the insured becomes aware of damage resulting from an insured event, the insured must promptly notify the insurer. 24 Non-life insurance contracts often stipulate the obligation to notify both the damage and the occurrence of the insured accident.
In life insurance contracts, although not obligatory for the insured, the policyholder or beneficiary must promptly inform the insurer of the insured’s death. 25 - Obligation to explain in non-life insurance contracts
Non-life insurance contracts generally require the insured to explain details of damages. - Obligation to prevent damage in non-life insurance contracts
Upon discovering an insured event in non-life insurance contracts, the insured must strive to prevent damage escalation. 26 Breach of this obligation in some contracts results in deducting preventable damage from claims paid.The insurer is responsible for necessary damage prevention expenses incurred by the policyholder or insured. 27 This cost-sharing provision is optional and may be excluded from the contract.
- Obligation to preserve rights in non-life insurance contracts
If the insured gains both claim rights and rights against a third party due to an insured event, the insured must cooperate with the insurer. Waiving rights, transferring, or disposing of rights to third parties is not allowed. Breach of this obligation may exempt the insurer from paying claims.
- Obligation to Notify
The term “consumer” here pertains to the policyholder. Several examples of customer protection in insurance contracts are outlined below:
- Safeguarding Policyholders for Insured Events Prior to Contract Conclusion
Unless the policyholder was aware of the insured event, or the insurer knew of its non-occurrence, the insurance period predates the contract conclusion (retroactive insurance validity). 28 - Ensuring Policyholder Protection at Contract Conclusion
The policyholder, except for specific cases, must inform the applicant in writing or electronically within eight days of application or delivery of withdrawal-related information. Records serve for withdrawal or contract cancellation (cooling-off). 29 - Policyholder Protection against Insurer’s Cancellation Right Exercise
a. Protection against Cancellation due to Notification Obligation Breach- Constraints on Insurer’s Cancellation Right
Cancellation is permissible if the policyholder or insured intentionally or negligently fails to disclose facts or makes false disclosures. However, it’s disallowed in certain situations, as follows:- When the insurer was negligent or unaware of breach facts during contract conclusion;
- When the insurance intermediary hinders fact notification by the policyholder or insured (disclosure obstruction);
- When the insurance intermediary neglects to notify the policyholder or insured about disclosure facts or suggests false disclosure (instruction of non-disclosure).
- Cancellation Right Exclusion Period
The insurer’s right to cancel due to disclosure duty breach lapses if not exercised within one month of awareness of the cause. The same applies if five years pass since the contract conclusion. 30 - Limitation on Cancellation Right Due to the Expiry of Life Insurance Contract Period
In life insurance contracts, it’s customary that the insurer can’t cancel if no event for claim payment occurs within two years from the date of liability commencement.b. Protection for Termination due to the violation of Increased Risk Notification
Cancellation right due to the violation of risk notification becomes void if not exercised within a month of awareness of the cause. This also applies if five years pass since the increased risk. 31
- Constraints on Insurer’s Cancellation Right
- Coverage for Insurance Premium Payments
- Cancellation of Excess Insurance in Non-Life Contracts
The policyholder and insured must act in good faith regarding insured amounts exceeding the value at the contract conclusion. Excess portion cancellation is possible if no gross negligence occurs, except when a fixed value for insured value is agreed. 32 Due to cancellation, the excess portion is retroactively nullified, 33 and the policyholder can seek a premium refund for restoration. 34 - Claims for Premium Reduction based on Decreased Value
After contract conclusion, if insured value considerably drops in non-life contracts, the policyholder can notify the insurer of such dropped value in order to request a future premium reduction. 35 - Claims for Premium Reduction Based on Reduced Risk
If risk decreases considerably after contract conclusion, the policyholder can request future premium reduction corresponding to the risk reduction. 36 - Life Insurance Contract Reinstatement
As a rule, premium non-payment leads to contract expiration. Yet, in life insurance contracts, policyholders can request reinstatement within three years from lapse. Upon insurer’s acceptance, policyholders pay unpaid premiums by a specified date, reinstating responsibility.
- Cancellation of Excess Insurance in Non-Life Contracts
- Safeguarding against Damage Expansion Costs in Non-Life Contracts
In non-life contracts, the insurer bears necessary costs to prevent damage occurrence or expansion. 37 This provision is optional and contract-dependent. - Dividends for Participating Contracts in Life Insurance
Generally, life insurance is long-term, with premiums calculated for future risks. Economic benefits, often distributed to policyholders, result from the premium calculation. Mutual companies give dividends as surplus distributions to employees. 38 - Money Refunds in Contract Cancellation Events
- Refund of Non-Life Contract Unexpired Premiums
In non-life contracts, if the contract ends prematurely, policyholders can demand an unexpired premium refund based on unjust enrichment. Contract terms usually include refund provisions. - Refund of Premium Reserves and Surrender Value in Life Contracts
Upon certain contract terminations, such as cancellation due to increased risk or cancellation by policyholder due to the insurer’s bankruptcy, the insurer must refund premiums. 39 Surrender value is paid if the policyholder cancels the contract or due to other policyholder-related reasons.
- Refund of Non-Life Contract Unexpired Premiums
- Policyholder Protection in Life Insurance Company Reorganization
In life insurance companies, policyholders have a general lien on total assets during reorganization as a preferential reorganization claim.
D. Claims
In the process of submitting insurance claims, both life and non-life insurance companies require specific documents as outlined by each provider. The deadline for fulfilling the claim obligation depends on the completion of this document submission process.
The exact required documentation varies depending on each insurance company. For example, under non-life insurance claims, the following documents are typically mandatory:
- Insurance Claim Form: Provided by the insurance company. This form initiates the claim process.
- Identification Documents: Essential for verifying the claimant’s identity. These include the insured person’s identity card.
- Proof of Insured Event and Damage: Vital documentation confirming the event and the damage caused, which can include various records or evidence.
In contrast, for life insurance claims due to a policyholder’s death, the following documents are usually needed:
- Insurance Claim Form: Specific to each life insurance company.
- Death Certificate: Essential for confirming the insured person’s demise.
- Public Records: Official documents such as copies of official family registers, a document showing the insured person’s death.
- Identification Documents of Insurance Beneficiary
In addition to the documents above, an insurance policy card is commonly requested. If an insurance policy card isn’t available due to card loss or damage, alternative methods can re-establish the claimant’s entitlement.
The third party referred to here is the insured person in a non-life insurance contract and the beneficiary in a life insurance contract. Both the insured and the insurance money beneficiary are required to submit documents outlined by the insurance company and initiate a formal claim request. Each document submission serves to substantiate the occurrence of an insured event and confirms the claimant’s eligibility to receive insurance benefits.
Insurance companies can reject claims for various reasons, one of which is when the insurance contract is invalidated or canceled due to fraud by the policyholder or a related party. 40 Errors in insurance contract conclusions are also a reason for claim rejection. 41
Additionally, fraudulent intent by the policyholder to obtain insurance money could lead to invalidation. 42
Non-payment of premiums after the grace period can lead to claim rejection. While insurance contracts often include grace periods, non-payment of premiums after this period can exempt the obligation to pay claims, or result in the termination of the contract.
Exemptions in non-life insurance contracts:
- Intentional damage by the policyholder or insured; 43
- Damage from the insured event due to gross negligence by the policyholder or insured; 44
- Damage due to war or disturbances related to the insured event; 45 and
- Exemptions are stated in the contract.
Life insurance contract disclaimers:
- Suicide by an insured person (with customary liability period limits in the contract). 46
- Policyholder’s intentional cause of insured person’s death. 47
- Beneficiary intentionally causing insured person’s death. 48
- Insured person’s death due to war or disturbances. 49
- Other stipulated exemption reasons in the terms and conditions.
Exemptions from fixed-amount accident and health insurance:
- Insured person causing the claim through intentional or gross negligence. 50
- Insurance policyholders intentionally or grossly negligently causing an insured event to occur. 51
- Beneficiary causing claim due to willful misconduct or gross negligence. 52
- Benefit events from war or disturbances. 53
- Additional exemptions in terms and conditions.
A. Cancellation for Violation of Notification Obligation:
If the insurer cancels the contract due to a violation of notification obligation, the insurer won’t pay benefits for events until cancellation. 54 However, events without notification breach still qualify for benefits.
B. Cancellation due to Violation of Increased Risk Notification:
If the insurer cancels the contract due to a violation of increased risk notification (possibly if the policyholder or insured delays notification due to misconduct/negligence), the insurer retains the right to cover events from increased risk to cancellation. 55
C. Cancellation for Serious Reasons:
- If the policyholder, insured, or beneficiary triggers events to get benefits, the contract may be canceled. No benefits for events from occurrence to cancellation 56
- Fraudulent claims by the insured/beneficiary can cancel the contract. 57
- The insurer may cancel the contract due to loss of trust, which makes contract continuation difficult. 58
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As a proud member of the Alliot Global Alliance, ADCO Law has released our first set of Insurance Comparative Guidelines. Our guidelines consist of an extensive examination of three different jurisdictions: Indonesia, the Philippines, and Japan.
From the types of insurance companies available and legal frameworks to the regulations that govern insurance contracts and claims, we want to provide valuable insight into how different approaches to insurance regulation can impact businesses and the overall economic landscape.
The Authors:
Fukuyama Yasuko
Partner, Spring Partners
[email protected]
Seigo Ito
Partner, Spring Partners
[email protected]
Watanabe Masato
Senior Associate, Spring Partners [email protected]
Disclaimer: The following article is intended for general informational purposes only and should not be interpreted as legal advice by ADCO Law, SKY Law, and Spring Partners, proud members of the Alliott Global Alliance (AGA). The viewpoints expressed herein do not represent the official legal stance of any of these firms. Consequently, the firms cannot be held accountable for any actions taken by individuals who use this article for purposes other than those for which it is intended.
For more information about AGA, please visit https://www.alliottglobal.com/
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