Economic-Value Solvency Regulation: Framework and Development

Economic-value-based solvency regulation is designed to protect policyholders, enhance insurers’ risk management, and provide information to consumers and market participants.

The framework consists of the first pillar, which establishes common solvency-ratio standards and supervisory intervention; the second pillar, which captures risks not fully addressed by the first pillar and promotes enhanced internal management; and the third pillar, which promotes appropriate dialogue between insurers and external parties.

Based on these principles, the Financial Services Agency of Japan is developing the regulatory framework through a combination of laws, cabinet-office ordinances, notifications, Q&As, and supervisory guidelines.

For policyholders, establishing a framework for supervisory intervention as a backstop for policyholder protection contributes to institutional protection.

For insurers, the framework creates an environment in which the first pillar establishes common standards and supervisory intervention, the second pillar promotes enhanced internal management, and the third pillar promotes appropriate external dialogue through disclosure.

For consumers, market participants, and other external stakeholders, disclosure promotes appropriate dialogue with insurers and contributes to ensuring that insurers are subject to appropriate discipline.

The first pillar establishes common standards for solvency ratios and a framework for supervisory intervention as a backstop for policyholder protection. Its basic structure is aligned with ICS, and its regulatory elements include a standard model, verification, solvency standards, and supervisory measures.

The second pillar captures risks not fully addressed by the first pillar, verifies insurers’ internal management, and promotes its enhancement. The third pillar institutionalizes information disclosure to promote appropriate dialogue between insurers and external stakeholders.

The main laws and other rules for the first pillar include Articles 130 and 132 of the Insurance Business Act, Articles 86 and 87 and attached forms of the Ordinance for Enforcement of the Insurance Business Act, classification orders, the first-pillar notification, the rating notification, the verification notification, the Notification No. 3, Q&As, and supervisory guidelines. The second pillar concerns enhanced risk management, while the third pillar concerns disclosure under Article 111 of the Insurance Business Act, Article 59-2 of its enforcement ordinance, and the third-pillar notification.

The regulatory review began with the establishment of the expert panel on May 31, 2019, and progressed in stages through the June 2020 report, the status of discussions in June 2021, the provisional decision on the basic content in June 2022, the status of discussions toward finalization in June 2023, and the direction of remaining issues in May 2024.

In the public-comment process, proposed partial amendments to the Ordinance for Enforcement of the Insurance Business Act and other materials were published on October 31, 2024, while draft first-pillar notifications and other materials associated with the adoption of ICS by the IAIS were published on January 31, 2025. The 2025 field test using these materials is being conducted for insurers and other parties.

For previous field tests, links to implementation or results have been organized for each of the years 2024, 2023, 2022, 2021, 2020, 2019, 2018, 2016, 2014, and 2010. In addition, yield-curve construction tools, past public comments, and commissioned studies have been organized as information on the development and operation of the framework.

The commissioned studies include a survey of market impact dated May 24, 2023; a survey on the status of internal models in other countries dated May 17, 2019; and a survey on the structure of external catastrophe models for natural-disaster risk dated July 6, 2012.