Financial Council Insurance System Working Group Minutes
Overview
Amid changes in the risks facing businesses, the creation of a reinsurance captive system was considered. The Secretariat outlined directions for the system’s design, and members discussed risk management, financial soundness, eligible lines of business, and supervision. Views were broadly supportive of establishing the system, with a shared direction to prioritize the reinsurance model. Further consideration will be given to effects on direct insurers and policyholders, companies’ management structures, and the system’s effectiveness.
Key points
- Views were broadly supportive of considering the creation of a reinsurance captive system.
- Key issues included corporate risk management, captive financial soundness, and checks by direct insurers.
- Many members favored initially considering lines in the second sector, while treating direct-writing captives as a future issue.
- Some members also argued that coverage should be limited to non-mass risks faced by businesses.
Overview
The group was established in response to a request to strengthen insurance functions that support business growth investment and ensure the safety and security of public life, in light of growing uncertainty surrounding businesses and households. Its subjects for consideration are the creation of a reinsurance captive system and the framework for the life insurance safety net system.
The Secretariat explained that, with natural disasters becoming more frequent and severe, transferring corporate risks under the same conditions as before has become more difficult, while awareness of optimizing capital costs and accountability has also grown. Captives were positioned as one risk financing method through which companies adjust the risks they retain and transfer.
Impact
Members said that establishing the system could broaden companies’ risk financing options and support more advanced risk management and growth investment. They also noted that having a system in Japan could help accumulate capital, risk information, specialized personnel, and experience domestically.
Details
Under a reinsurance captive arrangement, a company contracts with a direct insurer, which transfers part of the risk through reinsurance to a captive under the company group. The captive may transfer further risk to the reinsurance market as needed, and the company uses consolidated information to decide which risks to retain within the group and which to transfer externally.
It was explained that Japan has no system specific to captives and that using the reinsurance model requires an insurer license. Japanese companies establish captives mainly overseas, including in Hawaii, where systems are in place. In interviews, cited benefits included optimizing costs through centralized insurance management, addressing risks that direct insurers approach cautiously, and channeling the benefits of loss prevention back within the group.
Taking into account that captives assume only risks within a group, the Secretariat proposed optimizing licensing reviews and minimum capital requirements, and limiting policyholders to those recognized as within the group. Other issues for consideration included eligible lines of business, governance, and simplified solvency regulations to ensure claims-paying ability.
The discussion raised issues including the effects on direct insurers and general policyholders if a captive fails; companies’ risk management capabilities and personnel; recovery of reinsurance proceeds and collateral; intra-group movement of capital and funds; management of outsourced operations; and tax predictability. Further discussions will examine the system’s effectiveness and eligible lines of business at subsequent meetings.