Japan's Insurance Market 2007

CONTENTS

© 2007 The Toa Reinsurance Company, L imited. A l l r ights reserved. The contents may be reproduced only with the wr i t ten permission of The Toa Reinsurance Company, L imited.

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1

To Our Clients

I t g ives me great pleasure to have the oppor tuni t y to welcome you to our 2007

brochure which is now in i ts eleventh year. I t is encouraging to know that over

the years our brochures have been well received even beyond our own industr y’s

boundar ies as a source of useful, up-to-date information about Japan’s insurance

market, as wel l as contr ibut ing to a wider interest in and understanding of our

domestic market.

During f iscal 2006, the year ended March 31, 2007, despite weakness in personal

consumpt ion, the Japanese economy cont inued to advance a long a moderate

recovery track, suppor ted by the expanding global economy and buoyant pr ivate-

sector demand in Japan.

In the non-l i fe insurance industr y, the general mood of economic recovery had a

posit ive impact on premium income as wel l as on interest and div idend income.

Meanwhile, establishment of appropriate internal control systems, including insurance

payment control systems, became an urgent issue, in v iew of incidents of non-

payment of valid insurance claims that came to light in the industry.

In the reinsurance market, although reinsurance premium rates sof tened somewhat

dur ing the year under rev iew, many re insurance companies recorded favorable

results because there were relatively few natural disasters around the world.

The environment in which Toa Re operates is being transformed by extreme climate

consistent wi th global warming, by structura l changes in the non-l i fe insurance

industry, including the creation of a scheme for small-amount shor t-term insurance

providers in Japan, and by changes in the international regulatory environment for

reinsurance.

By responding to these changes in the bus iness env i ronment in a t ime ly and

ef fective manner, Toa Re is vigorously developing business based on appropriate risk

management in non-life reinsurance, which is our mainstay business, as well as in life

reinsurance and co-operative reinsurance, where we are strengthening our position

in a bid to diversify sources of profit and to expand the scope of our business.

In PROCEED 2008, the medium-term management plan launched in f iscal 2006,

Toa Re sets out its vision: “As a professional reinsurer, we are str iving to become a

corporate group that continues to provide high quality products and services and

is trusted by customers in Japan and overseas.” To this end, we are implementing

var ious measures in Japan and overseas from six viewpoints, namely, Customer/

Marketing, Product /Underwr it ing, Process/Risk Management, Corporate Finance,

Corporate Social Responsibi l i t y and Organizational/Corporate Culture, in order to

achieve development of the entire Group and to enhance the enterprise value.

By endeavor ing to act as an exemplary reinsurance company, we are resolved to

fulf il l our mission: “Providing Peace of Mind”.

In conclus ion, I hope that our b rochure w i l l p rov ide a g reater ins ight into the

Japanese insurance market and I would l ike to express my grati tude to al l k indly

contributed so much time and ef for t towards its making.

Teruhiko Ohtani,President and Chief Executive,

The Toa Reinsurance Company, Limited

2

Trends in Japanese non-life insurance marketand our corporate strategiesToshiaki Egashira President and CEO, Mitsui Sumitomo Insurance Co., Ltd.

(1) Streamlining operations

Since 1996, the year the new Insurance Business Law was enacted and

the deregulat ion/ l iberal izat ion of premium rates and insurance products

star ted to take its steady course, the Japanese non-life insurance sector

has evo l ved in to a f i e rce l y compet i t i ve market where insu re rs were

constantly launching new products and services at an unprecedented pace.

However, ever since industry-wide problems surrounding inadver tent and

inappropriate non-payment of claims sur faced last year, insurers have been

forced to reexamine and reinvent their distr ibution networks and claims

payment operations.

Insurers under took a thorough over v iew of the admin ist rat i ve f low or

process that lies between the sale of an insurance policy and payment of

a claim, and are making fundamental changes and improvements where

necessary in order to prevent such problems from ever reoccurring.

For instance, insurers have set higher standards concerning the scope and

level of information they are required to point out and clarify to customers

du r ing sa les ta l ks. I nsu re rs have a lso rev ised the i r b rochu res and

insurance policies making them “customer-fr iendly”, i.e. more easy to read

and understand. These ef for ts are aimed to ensure insurers are providing

products and services that best satisfies the customer’s individual needs.

Insurers are a lso implement ing var ious improvement measures in thei r

claims processing.

Through such initiatives, we are striving to improve and raise the quality of

our industry, and we will continue to work hard to restore and re-earn the

trust of our customers and society.

(2) Financial results for fiscal year 2006

Regarding income, the industry’s total net writ ten premiums increased by

approximately 1.0% over the previous year. However, some insurers which

have substantially invested managerial resources into the reorganization of

their distr ibution and claims-payment systems have shown a decrease in

income over the previous year.

Look ing at each c lass of business, mar ine insurance enjoyed grow th

in market share because of an upturn in the volume of Cargo & Transit

Current situationof the Japanesenon-life insuranceindustry

1.

1.

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business as a result of the economic recovery.

On the insu rance losses s ide, c la ims payment fo r natu ra l d isaste rs

increased as a result of typhoon and heavy rain events.

As a resu l t , t he unde r w r i t i ng p ro f i t / l oss on a so lo bas is ( i .e. non-

consolidated basis), which indicates the f inancial state for core insurance

business, showed loss in profit.

In terms of our company, our net writ ten premium income decreased by

1.0% from the previous year on a non-consolidated basis, but increased

by 1.5% on a consolidated basis due to signif icant growth of almost 30%

in overseas subsidiaries’ results, which compensated for the decline in the

parent company.

Wh i le the ma in cont r ibu t ing facto rs were the acqu is i t ion of non- l i fe

insurance business in the Asian region from the UK’s AVIVA and the strong

business results of Taiwan’s Mingtai, the steady expansion of business in

other regions also contributed to this significant income increase.

(3) Challenges for the Japanese non-life insurance industry and possible solutions

Some of the other cha l lenges cur rent l y fac ing the Japanese non-l i fe

insurance industry include the following:

① Strengthening global competitive edge

I nsu re rs of deve loped count r ies a re cu r rent l y mov ing rap id l y in to

emerging markets such as BRICs, being at tracted to the accelerated

economic growth of those markets. Leading f inancial and insurance

groups in Europe and the U.S. have been signif icantly expanding their

size and share by leveraging M&A activit ies in the context of f inancial

globalization.

Our Group, the Mitsui Sumitomo Insurance Group, has traditionally been

keen on focusing on opt imiz ing our business por t fo l io by achiev ing

bet ter-balanced diversi f icat ion. I f i rmly bel ieve now is a bet ter t ime

than ever to steadily execute this principle and to establish an optimal

group management structure to keep up and stay ahead of the rapidly

changing business environment.

It is also vitally important to reinforce the Group’s capital strength based

on increased prof i tabi l i t y, and to execute strong r isk management in

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order to emerge as a true global player.

② Solutions to declining birth rate and aging population

The decline in the bir th rate following the peak reached in 2005 means

that we must now come to terms with the social and economic realities

of a total population decrease. Some industr ies, such as education,

have already felt repercussions, but to date the insurance industry has

not been directly af fected by the trend.

However, over the longer term, the declining bir th rate will bring about

a total population decline, and negative ef fects for insurers, such as

market shrinkage, cannot be ignored.

Converse ly, the ag ing populat ion t rend has created new business

oppor tunit ies for insurance companies. Growing demand for pr ivate

insurance coverage, inspired by the need to provide security through

se l f-he lp, has boosted the requ i rement fo r so-ca l led “ th i rd-sector

products” such as medical, nursing-care, and annuity policies.

Non-life insurance companies need to provide appropriate products and

services to satisfy such demand.

③ Solutions to address natural catastrophe risks

More frequent and more severe natural disasters, attr ibutable to global

climate change as evidenced by rising temperature, has cast a shadow

over non-life insurance companies’ management approaches. It is the

insurers’ responsibil ity to reinforce their solvency to cover catastrophe

r isks and to manage their own r isks as providers of compensation for

the ef fects of disasters that impact on society. However, no single

insurer can of fer the capacity to provide society with suf ficient coverage

for damage from intensifying natural catastrophe r isks without r isk ing

damage to i ts own f inancial soundness. Every single insurer, needs

to address the issue of natura l disasters, which are occur r ing wi th

increas ing f requency a round the wor ld, in cooperat ion w i th other

insurance companies, insurance markets and governments in individual

countries, and capital markets.

5

(1) Overview

Mitsui Sumitomo Insurance Co., Ltd. has formulated a new medium-term

group management plan, “New Challenge 10,” with a target year of f iscal

2010, and has been mak ing speci f ic ef for ts s ince Apr i l 2007 towards

realization of that plan. This plan encompasses accomplishments that the

Group should achieve by 2010, a strategy to realize those objectives, and

values which are respected by all Group employees.

The environment of the insurance industry has changed dramatically. With

changes in factors that impact on profitability, such as the deregulation of

loading rates and revisions of standard mortality tables, becoming a reality

in the domest ic insurance market, insurance companies are expected

to meet the higher level of requirements by customers and society. In

l ight of these circumstances, the basic group strategy contained in this

p lan explores the pathway toward CSR-or iented management through

“quality” improvement or iginating from “the customer’s viewpoint,” “trust,”

and “growth.” The plat form on which this strategy wil l be developed is

or iginating al l business activ i t ies on the basis of “qual i t y improvement,”

ensuring “customer’s trust,” generating a positive cycle of corporate “growth”

and increas ing manager ia l resources, and rea l iz ing pers istent qua l i t y

improvement. We listen to and leverage suggestions from all stakeholders

in order to improve our business operations as par t of our drive for quality

improvement. We are also training employees who are engaged in quality

improvement act iv i t ies and providing them with greater chal lenges and

opportunities, together with a conducive working environment.

Meanwhile, regarding the global business environment, there is a growing

need for strengthened solvency because abnormal cl imat ic condit ions

and accompanying natural catastrophe risks are occurring with increasing

frequency around the wor ld, as mentioned above, and leading f inancial

and insurance companies in Europe and the U.S. are constructing giant

corporate groups by leverag ing such act iv i t ies as M& A. To address

these developments, the Group aims to be a world-leading insurance and

financial organization that pursues sustainable growth with corporate quality

as its chief competitive edge. The goal is to lif t Group core profit to over

100 billion yen, or 800 million US dollars as of fiscal 2010. In par ticular, the

Group is investing more managerial resources and allocating more weight to

the overseas and life-insurance businesses in its effor ts to strengthen overall

capacity, build a well-balanced business por t folio, and increase profitability.

New medium-termmanagement planfor Mitsui SumitomoInsurance Group:“New Challenge 10”

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<Graph> Please refer to (Change in Profit Portfolio under New Challenge 10)

Within our overseas business, signif icantly increased premiums writ ten in

the Asian region, which were generated as a result of acquir ing the Asian

business of AVIVA, the acquisition of Mingtai in Taiwan, the star t-up of the

Korean branch, and the formation of a joint venture in India, have made us

one of the top foreign non-life insurers in the Asian region. Fur thermore,

significant expansion of overseas business, mainly in Asia, lif ted the value

of net premiums writ ten to 200 billion yen in 2006.

We intend to strengthen corporate governance, maintain our competit ive

advantages in such regions as ASEAN, faci l i tate strategic development

in high-growth markets such as India and China and in our reinsurance

subs id ia r i es, and invest i n h igh-g row th, emerg ing ma r kets i n o rde r

to increase corporate va lue over coming years. We plan to ra ise the

percentage of profit derived from overseas business from 18% in 2006 to

20% in 2010 by means of these activities.

As for our life insurance business, ef for ts will be made to increase profits in

the Group’s two life insurance subsidiaries, Mitsui Sumitomo Kirameki Life

Insurance and Mitsui Sumitomo Metlife Insurance.

Kirameki L i fe is cont inuing to consol idate i ts prof i tabi l i t y through sales

reinforcement, driven mainly by a strategy of cross-selling between non-life

Life insurance

Domestic non-life

Overseas

Financial servicesRisk-related

3%

17%

18%

62%

Life insurance

Domestic non-life

Overseas

Financial servicesRisk-related

5%

20%

20%

55%

Y64.7bn

Fiscal 2006 results

Group core profit (GCP) Y100bnor more

Fiscal 2010 planned

GCP

Earnnings growing uponin each business;

■ Quality improvement■ Business expansion■ Strategic investment

(Change in Profit Portfolio under New Challenge 10)

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and life insurance and by diversification of distribution channels. MS Metlife

is fur ther reinforcing its products and its sales support team in the personal

annuity market in order to expand sales capabilities, which mainly involve

financial institution channels, and to maximize profits.

The Group, with a greater commitment to the overseas and life insurance

businesses, as mentioned above, is continuing to develop a well-balanced

business por t folio covering five major business domains: “domestic non-life

insurance,” “life insurance,” “overseas,” “financial services,” and “risk-related;”

striving for “quality improvement” and “business promotion” in each of those

domains; and working to demonstrate the Group’s overall capabil i t ies to

provide customers with maximum value.

(2) Establishment of overseas and regional holding company network

We intend to implement our decision to operate as three regional holding

companies in Asia, Europe, and the Americas in order to fur ther strengthen

our overseas business operations.

Th is change in the management f ramework w i l l ensure more f lex ib le

and timely decision-making in the overseas regional businesses and wil l

establish a management system based on the commitment of each regional

holding company and i ts subsidiar ies, demonstrat ing a shi f t into local-

based business execution.

The t rends w i th in ou r ove rseas bus iness segment i nd ica te a rap id

increase in the propor t ion of local customers, in addit ion to Japanese

customers, whi le the approx imate ly 5,540 loca l l y h i red nat iona l staf f

make up the dominant propor t ion of the Group’s approx imate ly 5,700

overseas employees. In this context, the purposes of establishing regional

ho ld ing companies a re to fu r ther expand overseas bus iness th rough

stronger management; foster regionally or iented, timely decision-making;

and promote management and business execution through cooperation

between the national staf f and directors and employees assigned from

headquar ters.

These ef for ts will provide a plat form that leverages managerial resources,

including the Company’s overseas business experience, human resources

and IT gained through the acquisit ion of AVIVA Asia in the Asian region,

expansion of business in Europe, primarily through membership of Lloyd’s,

and operation of a holding company in the U.S.

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During the last ten years, the ratio of homeowners who take out ear thquake

insurance po l ic ies has doubled and homeowners’ insurance po l ic ies

cover ing wind and/or f lood losses have become a standard choice in

the market. There a re now more and more insurance products that

provide even wider coverage. In addit ion, greater concern for weather-

related r isks in Japan has led to growth in popular ity of var ious weather

derivatives. Recently, there has been considerable discussion on the roles

that insurance companies in developed countr ies can play in addressing

global issues such as cl imate change and pover t y eradicat ion. We at

Mitsui Sumitomo work hard at reducing environmental burdens caused

by insurance businesses, such as min imiz ing our usage of e lect r ic i t y

and paper, and act ive counter-balancing of greenhouse gas emissions

through tree-planting activities. This is in line with our core policy to run

our business focusing on the preservation and improvement of the global

environment and on social responsibility. Today, insurance companies are

required to apply their inherent compensation functions to help address

global issues. Just as international institutions such as the World Bank

suppor t the development of r isk management capabi l i t ies to cope with

natural catastrophe risks in developing countries, insurance companies and

markets of developed countries may also have a signif icant role to play in

this area. Given that the funds expended by international aid agencies for

natural catastrophe risks relief vary significantly year-on-year, the agencies

could be very interested in hedging those risks. The role that the insurance

industr y might play in helping to alleviate pover ty around the world have

also been studied.

I n the t went y-f i r s t centu r y, i nsu rance compan ies a re coming under

increasing pressure to meet higher and more global expectations. While

insurance products are broadly consistent with their respective regional

characteristics, we aim to be an insurer that not only transacts insurance

business in line with the specific needs and conditions of each country or

region but also takes up the challenge of addressing global issues.

Conclusion

3.

9

Introduction

Disastersand Zenrosai

2. Towards “Zenrosai for the members”Tamotsu Ishikawa President, Zenrosai

1.

2.

Zenrosa i (Nat iona l Federat ion of Workers and Consumers Insurance

Cooperatives) is a non-prof i t organization and a cooperative society, to

be managed and utilized by the members who wish to protect themselves

financially and improve their living standards. As symbolized by the slogan

"One for a l l and al l for one", cooperat ive society operates i ts business

for the members in order for them to have better lives based on people's

cooperation.

Under the supervision of the Ministr y of Health, Labor and Welfare and

the Consumers' Livelihood Co-operative Society Law, Zenrosai operates

i ts business based on mutual help. Zenrosai provides comprehensive

insurance coverage to the members for their bet ter and stable l i fe as a

cooperative organization. Currently Zenrosai has 13.9 mil l ion members,

36.1 million contracts, and JPY 653 trill ion total sum insured (as of January

2007) ensuring all workers and consumers help each other for their better

life.

Our members are surrounded by var ious r isks, such as uncer tainty due

to low bir thrate, aging society and unstable social security etc, stressed

self-responsibi l i t y and distrust or unfairness caused by mer itocracy and

individualism.

In this circumstance, Zenrosai, as a mutual help organization, has been

recommending its members to review their coverage for l i fe in total and

to consider the coverage required from the viewpoint of pr ivate security,

corporate security and social security.

In 1954, the f i rst Rosa i (o r ig in of prefectura l workers and consumers

i nsu rance coope ra t i ve) was es t ab l i shed i n Osaka, fo l l ow ing some

estab l ishments of Rosa i nat ionwide, inc luding of N i igata in 1955 and

Toyama in 1956. They star ted fire insurance mainly as mutual help activity

led by the trade unions.

Only f ive months af ter the establ ishment at Ni igata, there occurred the

great Niigata Fire, which is one of the memorable incidents in history. Rosai

managed to handle claim payments exceeding its premium income through

the united ef for ts of members.

Moreover the Great Hanshin-Awaj i Ear thquake in 1995 brought about

serious damage. The death toll was 6,434 and the total claims payment

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“Next 50” activityfor the future

3.

by Zenrosai was JPY 18.5 billion (including an ex gratia payment). Zenrosai

was able to demonstrate real value as "Zenrosai for the members", and it

contributed to the rehabilitation of the lives of its members.

Fol lowing th is d isaster, a "Plea for Comprehensive Disaster Recover y

Assistance Citizens' Conference" was launched and collected 25 mil l ion

signatures. As a result, the "Disaster Relief Bill" was passed at the Diet in

1998.

In order to tackle catastrophic natural disasters, such as series of typhoons

and heavy rain and snow in the past several years including the Niigata-

Chuetsu Ear thquake in 2004, Zenrosai has been demonstrat ing prompt

claim handling and claim payment by the staf f throughout the country under

the enforcement plan for natural disasters.

Zenrosai will celebrate its 50th anniversary in the coming September 2007.

Its slogan is "Take over mutual help for next 50 years" aiming at next step

"centenary".

There are three concepts as below;

1) Develop circle of mutual help and enhanced peace of mind

2) Develop harmonized society for the future

3) Develop organization and human resource for social responsibility

Using this good oppor tunity, we wil l show our great appreciation to the

members and the society. In addition, I would like to improve Zenrosai so

that it may be favorably said that "Zenrosai has improved well as if it was

reborn".

Social contr ibution is one of our activ it ies. Zenrosai has been foster ing

p r i va te c i v i c g roups wo r k i ng on env i ronmenta l i ssues s i nce 1992.

Zenrosai suppor ted 88 organizations and contr ibuted to them an amount

of JPY 29.4 mil l ion last year. This Year, as one of our "Next 50" social

contr ibution activit ies, Zenrosai is foster ing some groups working on not

only environment issues but child issues under the theme "For children who

would contr ibute to the society in the next 50 years in order for them to

maintain abundant nature".

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4.Key issues in future

(1) Towards the future

Zenrosai has been practicing our business and specif ic plans based on

"The Zenrosai 21st centur y v is ion", which was adopted at the General

assembly meeting in 1999. There have had business plans ever y two

years. Currently, we face the final period of the Zenrosai 21st century vision

and have just star ted the 2007-08 business plan as the fif th period of the

21st century vision in order to finish "The 21st century management revision

policy".

Zenrosai Group, consisting of Zenrosai, Saikyosairen and Zenrosai Kyokai,

proposed social cooperation and solidar ity for the 21st century to other

insurance cooperat ives in 1997. I t is moving in the r ight direct ion, for

example by the integration of Forest Workers' insurance cooperatives and

All Japan Tobacco insurance cooperatives, in order to survive and prosper

in the 21st century.

Fur thermore, new functional business centers for customer service, policy

administration and claims handling have been established under "The 21st

century management revision policy" in order to confront mega competition

and mainta in members' secur i t y for thei r l i fe for the purpose of being

"Zenrosai for the members".

A l s o, we h a d r e v i ewe d t h e s t r u c t u r e o f o u r r e g i o n a l o f f i c e s a n d

management.

(2) Develop new type of branch office "Zenrosai Greenbow*"

The f inancial and insurance industr y including Zenrosai is facing var ious

chal lenges, such as "The Year 2007 Issues", including that of the baby

boomers who will retire in large numbers, and Life Bancassurance which is

scheduled to be lif ted by the end of this year.

Zen rosa i faces these sub jec ts and has been deve lop ing "Zen rosa i

Greenbow" as a new b ranch of f ice, wh ich suppor ts comprehens ive

members' life and functions as below;

A) Providing consultation on insurance policies as a counter service, and

consulting services to individuals on request.

B) Strengthening the relationship with trade unions based on "Reviewing

insurance coverage", such as consulting service on the retirement for

12

5.Conclusion

baby-boomers.

C) Holding events with trade unions and local NPO.

The f i r s t "Zen rosa i G reenbow" was opened a t Amagasak i i n Hyogo

Prefecture at the end of last year and we shal l develop more branches

nationwide in the next two years.

＊ "Greenbow" is a compound word, coming from Green which is Zenrosai's

corporate color and Rainbow that is a symbol of cooperative society.

(3) Regulations for cooperatives

The Consumers' L ivel ihood Co-operat ive Societ y Law has never been

amended in the last 60 years since its enactment.

Zenrosai pursues "Zenrosai for the members" as a cooperat ive society

where members par t icipate in i ts activ i t y and help each other. To be a

socially supported organization eternally, Zenrosai has paid close attention

to the amendment in order to maintain and develop the voluntary nature and

soundness of cooperative societies.

Although there have been many reforms in the past, we need to continue them

eternally. If organization and operation stand still, it represents retreat. We

shall continue to improve our business operation as a composite cooperative

insurance organizat ion for workers' l ives. We shal l enhance customer

satisfaction through implementing "Zenrosai for the members", and we shall

furthermore do our best to be reliable and the organization of choice.

National Level Board meeting

Prefectural Level

(47 Prefectures)

Board meeting

General Meeting

Prefectural General Meeting

Members

Workplaces Communities

Area Management Committees

Affinity Groups

Organizer at Workplaces

Area Management Agencies

Affinity Groups in Communities

Organizer in Communities

Domestic Management structure of Zenrosai

13

What CivilizationsDestroyed byEnvironmentalProblems Tell Us

3. Thinking about the Global Environment:Learning about Environmental Problems from History

Masami Ishizaka Vice Chairman, The General Insurance Association of Japan

1.

I t has been said that the twenty-f i rst centur y wi l l be the centur y of the

environment. This most l ikely refers to the globally spreading awareness

that the resources available to us on ear th are limited and that, if we are not

careful with them, the damage will be irretrievable.

In th is paper, "Think ing about the Global Envi ronment: Learning about

Environmental Problems from History", I would f irst l ike to review ancient

h istor y f rom the perspect ive of the env i ronment; then, I w i l l consider

environmental problems by rev iewing the recent twent ieth centur y and

looking into the future.

(1) Sumerian Civilization of Mesopotamia

The Sumerians were one of the world's oldest civilizations. They developed

flood control and irr igation of agriculture in the Tigris and Euphrates River

Valley in southern Mesopotamia between 4300 and 3500 B.C. From 2800

to 2700 B.C., as the climate became more arid, the large-scale construction

work that was required for irr igation gave rise to an organized society. In

about 2700 B.C., a large city was founded in Ur in southern Mesopotamia.

As the aridity of the climate increased, irr igation for agriculture continued.

The salt in the ir r igation water gradually accumulated in the soil, and the

crop was changed from salt-sensitive wheat to barley. By about 2400 B.C.,

barley harvests are thought to have reached an average of 2,500 liters per

hectare, equivalent to present-day crop yields in the United States and

Canada.

However, sa l t cont inued to accumulate, and upstream, logging led to

soil erosion. Subsequently, soil that f lowed into the r iver was deposited

downstream. Salts included in the slit not only brought the blockage of the

irr igation canals but also accelerated the salt damage.

As a result, around 2100 B.C., the barley yield dropped to about 40 percent

of the previous level. In 2000 B.C., the Sumerian Empire collapsed and the

center of civilization soon moved nor th to Babylonia.

The survival of the people l iv ing in the city depended on the surplus of

bar ley, their staple food. The collapse of the Sumerian civi l ization was,

however, most l ikely caused by the declining production of barley due to

salt damage.

(2) Cretan Civilization

Crete's appearance as a Mediterranean cultural center at the beginning of

2000 B.C. is related to the Mesopotamian civilization.

Because forest resources in Mesopotamia decreased with the development

14

o f c i v i l i z a t i o n , C re te b e ca me a n imp o r t a n t wo o d supp l y base fo r

Mesopotamia, bringing great wealth to the Island.

As a result, Cretan civilization, centered on Knossos, flourished. Although

a large ear thquake caused major damage, Crete's population swelled along

with the reconstruct ion. Together with the growing populat ion and the

development of civil ization, the consumption of wood increased, causing

the forests to shrink, and the civilization declined. The center of civilization

then moved to Southern Greece, which is believed to have had forests at

the time.

(3) Indus Civilization

The Indus civilization was an urban civilization that developed in the Indus

Valley, mainly in Mohenjo-Daro, around 2500 B.C.

F lood i r r igat ion of agr icu l tu re, ma in ly of w inte r c rops, suppor ted the

civilization. The people of the Indus Valley are thought to have farmed by

building weak levees for the Indus River, which slowly widened and flooded.

They then cultivated the silt deposited when the water ebbed away. The

civilization began to decline around 1800 B.C. and ended around 1500 B.C.

While var ious factors, such as an Aryan invasion, a massive f lood and a

transition in the r iver f low, have been identif ied to explain the civil ization's

downfall, the following theory suggests that it was due to climate change.

The climate had begun to cool 5,000 years earlier, and the volume of snow

cover in the West Himalayan region increased. Together with this change,

the mid-st ream and downstream Indus River Va l ley dr ied up, causing

people to gather around the banks of the Indus River in search of water.

Because of the increased volume of snow cover, the flow of the river from

the Himalayas increased in early spring, causing flooding. This allowed the

development of flood irr igation-based agriculture, and thus the formation of

an urban civilization.

During the civilization's decline, Eurasia once again entered a warm period.

The amount of snow cover decreased and the water f low in the ear ly

spring decreased, and this had a major impact on the agricultural society

dependent on the water. This is considered one reason for the fall of the

Indus civilization.

(4) Civilization of Easter Island

Easter Island is an isolated Pacif ic island, 120 square kilometers in area.

The island's f irst inhabitants are believed to have arr ived around the f i f th

centur y. At the t ime, the island was covered with vegetation, including

15

trees, although these were l imited in var iety. Easter Island is a volcanic

island where no r iver runs throughout the year, no lake exists other than

a crater lake, and no mammals live. Soil drainage is poor, hence people

supposedly survived on chicken and the sweet potatoes that grew there.

The populat ion gradual ly increased, cut t ing trees for their dai ly needs.

At the t ime, the greatest demand for wood came from the construction

of enormous stone statues. Massive stones had to be t ranspor ted to

construct the statues. Since only human labor was available on the island,

the only way to transpor t the stones was to cut down trees for use as

rol lers. One to f i f teen stone statues were erected at each of the more

than 300 shrines throughout the island. Trees continued to be cut mainly

for the construction of these stone statues. Deforestation of the island

progressed until even wooden canoes or f ishing gear could not be made.

The crop yield also decreased as a result of soil runoff and other problems

caused by the increase in bare land. By 1550, it became impossible to

sustain a population that had reached 7,000, and as a result battles over

the dwindling resources were constantly seen. Even so, construction of

the stone statues continued unti l the civi l ization f inally collapsed. When

James Cook explored Easter Island in 1774, he found only about 600 to

700 people leading primitive lives.

The above sect ions (1) to (4) a re f rom a 1995 Wh i te Pape r on the

Environment. Sources for the white paper included A Green Histor y of

the Wor ld by Cl ive Pont ing, Kankyou to Bunmei ( The Environment and

Civil ization) by Takeo Yuasa, A Forest Journey by John Perlin, and Kikou

to Bunmei no Suitai (Climate and the Decline of Civilizations) by Yoshinori

Yasuda.

(5) Ancient Civilizations and the Environment

Although there are other examples of the relat ionship between ancient

civilizations and the environment, the following points can be made from the

above examples alone.

＊The Sumerian civilization depended on irr igation, tr iggered a decrease in

agricultural output due to salt damage, and collapsed;

＊Crete and Easter Island lost the forests that were their largest resource

and the foundation of their civilizations, and collapsed; and

＊The Indus civilization collapsed due to climate change.

Among these, the most miserable case was the civilization of Easter Island,

16

which collapsed af ter the people lost their forests and food and ultimately

could not even make canoes to escape from the island. However, i t is

unclear whether the people were unable to foresee the tragedy that losing

the forests would bring about, or whether they realized but could do nothing

to stop it amid the frenzy of constructing stone statues.

(1) Population Shifts and Development of Civilization

Population shif ts on the ear th are closely related to the development of

civilizations.

The population in 10000 B.C. is estimated at about four mil l ion. By the

star t of the A.D. period, the number had increased to 300 million (this and

subsequent figures are estimates). The increase is most likely attr ibutable

to the evolu t ion f rom a hunter-gatherer to an agr icu l tura l l i fest y le and

moreover to the dramatic r ise in agricultural production and development

capability that came with the use of iron tools.

Subsequently, the population rose to 500 million in 1500 and 800 million in

1750, around the star t of the Industrial Revolution. Once that began, the

population doubled from 1750 to 1.6 billion in 1900. The population explosion

since the star t of the twentieth century has been astounding, reaching 2.5

billion in 1950 and 6.1 billion in 2000. The population increased by 4.5 billion

during the 100 years of the twentieth century and 3.5 billion during the latter

50 years alone. The increase in the GNP shows a similar trend.

This growth can be at tr ibuted to the development and advancement of

science and technology in the twentieth century, which has enriched lives

and extended longevity, result ing in the population increase. This great

accomplishment was brought about by the ef for ts of mankind.

The increase in population will not stop. During the f irst 50 years of the

twenty-first century, the population is projected to rise by 50 percent, mainly

in developing countries, reaching 9.1 billion in 2050.

This increase wi l l cer tainly be accompanied by problems such as food

shor tages, depletion of oil and other resources, destruction of the natural

environment, and global warming. The question is how human society can

proceed within the limits of the ear th's tolerance.

(2) Pollution Problems

Dur ing the process of indust r ia l deve lopment, the f i rst env i ronmenta l

problems to be recognized tend to be industrial and urban pollution.

Pol lut ion problems include ai r pol lut ion caused by sul fur ox ides (SOx),

nitrogen oxides (NOx) and dust, water pollution caused by industr ial and

Root Causes ofEnvironmental Problems

2.

17

urban drainage, soil pollution, ground subsidence, noise, vibrations, odors,

pollution-related diseases, such as Minamata disease (encephalopathy and

peripheral neuropathy caused by methylmercury), Itai-itai disease (a type of

acquired Fanconi Syndrome characterized by renal tubular dysfunction and

osteomalacia), Yokkaichi asthma, Kawasaki asthma, and asbestos exposure.

Although industrial pollution came first, the same probl ems occur in urban

l i fe, wi th the addi t ional problems of photochemical smog and garbage

disposal.

Pub l ic regu lat ions, re l ie f systems, and bus inesses of fe r ing po l lu t ion

countermeasures are being established in Japan to tackle these problems.

Although violat ions and new problems ar ise, i t is thought that basical ly

these prob lems can be, have been and are be ing overcome through

these systems and through awareness. However, suf f icient ef for t to take

care of the suf fering of victims is an issue, and prevention ef for ts are also

important. Care must always be taken to ensure that we do not fall behind

or neglect to respond.

(3) Global Environmental Problems

Environmental problems on a global scale and global environmental issues

are recognized as a problem of the twenty-first century.

T h e s e p r o b l e m s i n c l u d e g l o b a l w a r m i n g , s h r i n k i n g r a i n f o r e s t s ,

deser t i f ication, decreasing wildl i fe, acid rain, cross-border movement of

hazardous wastes, marine pollution due to oil and wastes, and depletion of

the ozone layer.

The 1992 Rio Summit established global awareness of the necessity of

sustainable development. Sustainability, namely, maintaining the environment

in a state that allows sustainable use, is an important concept. The United

Nations Framework Convention on Climate Change and the Convention on

Biological Diversity were created as a result of the Rio Summit.

Japan ratif ied both conventions. In the area of global warming, Japan has

just seen the establishment of COP 3 protocols in Kyoto. With respect

to diversi t y, Japan has formed the National Strategy for Biodiversi t y in

adherence to the convent ion. Nex t, I wi l l discuss global warming and

biodiversity.

18

(1) What Is Global Warming?

Global warming is a phenomenon where greenhouse gases such as CO2,

CH4, and N2O absorb infrared rays emit ted from the ear th and warm the

ear th. Without the warming ef fect of these gases, the temperature of

the ear th's sur face would be -19°C. Therefore, an appropriate amount of

greenhouse gases is necessary for human existence.

Global warming is a problem stemming from the sudden increase of CO2, the

main greenhouse gas, in the twentieth century and its continuing increase in

the future.

As indicated by references to the twentieth century as the "Century of Oil,"

a large amount of oil has been used in power generation and automobiles,

and as a fuel and raw material. As a result, a large amount of CO2 has been

emit ted into the atmosphere. Fur ther, forests that absorb the CO2 have

rapidly decreased due to logging, the spread of farmland, and other factors.

This has created conditions where less CO2 is absorbed and the amount in

the atmosphere continues to grow.

Annual emissions of CO2 from fossil fuels were equivalent to 500 million tons

of carbon in 1900. This amount has risen dramatically to the equivalent of 7.5

billion tons of carbon per year from 2002 to 2005.

As a result, the concentration of CO2 in the atmosphere increased from

about 280ppm in the mid-eighteenth century to 379ppm in 2005, a level that

had not been exceeded during the previous 650,000 years.

According to the Four th Assessment Repor t by the Intergovernmenta l

Panel on Climate Change (the "IPCC," a United Nations organization where

scientists make scientif ic, technical, and socio-economic assessments on

global warming), the following phenomena have been occurring during the

last century:

＊The ear th's temperature has risen 0.74°C over the last 100 years. From

1961 to 2003, the sea level rose by 1.8mm per year. Furthermore, the rate

of increase is accelerating nowadays.

＊Ice at the North Pole has decreased by 2.7 percent every 10 years.

＊The amount of precipitation has changed in many regions. Severe long-

term drought areas have grown, and the frequency of heavy rainfall has

increased in many countries/areas.

＊The intensity of typhoons and hurricanes is growing.

(2) Future Effects of Global Warming

The Fourth Assessment Report by the IPCC makes the following forecasts

GlobalEnvironmental Problems

3.

19

about the progress of global warming:

＊Atmospheric concentration of CO2 will be between 490ppm and 1,260ppm

by the end of the twenty-first century.

＊The temperature will r ise by 1.1°C to 6.4°C and the sea level will r ise by

18cm to 59cm during the twenty-first century.

＊30 to 40 percent of species will become extinct, with variations depending

on the rise in temperature.

＊Increased frequency of extremely high temperatures, heat waves and heavy

rainfall will become highly likely. Precipitation will change depending on the

region, with increased intensity of typhoons and hurricanes.

＊Damage caused by floods and storms will increase. Diseases and deaths

caused by heat waves, floods, and droughts will increase. Several hundred

million people will face severe water shortages and food shortages.

If these situations become a reality, a large-scale population migration will

occur, with the possibility that the world will be thrown into chaos.

(3) Responses to the Global Warming Problem

1) In response to the global warming problem, the United Nations Framework

Convention on Climate Change was agreed upon at the Rio Summit in

1992. At COP 3 in 1997, all advanced countr ies agreed to the Kyoto

Protocol, with targets including reduction of greenhouse gases by 5

percent of the 1990 amount by 2008 to 2012. Japan has agreed to a

6 percent reduction. Other countries continue to work to carry out the

agreement.

2) The Japan Business Federation has created voluntary action plans to

reduce greenhouse gases in each industr y and is work ing to reduce

energy consumption and carbon dioxide emissions, and increase unit

consumption. As a member of the Japan Business Federat ion, the

General Insurance Association of Japan has also created and is carrying

out a voluntary action plan and it par ticipates in a social movement to

reduce carbon dioxide gas through the promotion of Eco & Safe Driving.

(4) Future Responses to the Global Warming Problem

1) A further rise in temperatures due to global warming should be viewed as

unavoidable.

According to the Fourth Assessment Report by the IPCC, a temperature

increase of more than 2 to 3°C is extremely likely either to decrease net

benefits or to increase net costs. Therefore, the temperature increase

must at least be stopped at about 2°C. The EU has made such a

20

decision.

In terms of Japan, a 2°C increase in the temperature means that Tokyo will

have a temperature similar to Kagoshima (at the south end of Kyushu).

Although there are various provisional calculations, CO2 must be reduced

by 45 to 80 percent by 2050 to prevent a 2°C temperature increase. This

reduction wil l be dif f icult to realize wor ldwide, including in developing

countries. Unquestionably, it will require the participation of countries that

emit large amounts of CO2, such as China, India, and of course the United

States. Their attitudes toward participation are becoming more favorable.

2) Global Warming Countermeasures

Prevention of global warming will require dil igent ef for ts, innovations in

scientific technology and their dissemination, reform of attitudes towards

production and daily l i fe, and improvements in social systems. At the

same time, the response must be global.

i) Reducing the use of and demand for fossil fuel, and improving energy

efficiency

A reduction in fossil fuel use through energy conservation, economizing,

and ef f icient energy use is essential. Therefore, it is also necessary

to par ticipate in the use and dissemination of existing technology and

the development, improvement, and dissemination of new technology.

Awareness and enforcement of energy conservation needs to reach all

fields, from manufacturing, distribution, construction, housing and office

administration to typical domestic life.

i i) Non-petroleum energy sources and reduced carbon dioxide energy

supplies

Non-petroleum power generation, such as nuclear power, solar power,

hydraulic power, wave power, tidal power, wind force, geothermal power,

biomass, and waste power generation is required.

Solar-powered automobiles, fuel cell vehicles, automobiles running on

bio-ethanol, and other solutions are also necessary.

iii) Carbon dioxide gas fixation

An increase in forests and conservation of rainforests are required.

Fixation of carbon dioxide gas to the ocean floor and fixation within the

ocean and underground must be studied and achieved.

iv) Improvements in social system infrastructures

An increase in costs related to CO2 emissions is required, such as

through an environment tax, emission f rame trading, and emission

regulations.

Measures such as subsidies for energy conservation, public financial

support for research, and the use of increases and decreases in taxes

wi l l be necessar y. Env i ronmenta l repor ts by companies, label ing

21

such as the "Eco-mark," the disseminat ion of ISO standards, and

dissemination of household environmental accounting books will also be

effective. Environmental education and national movements to prevent

global warming are also required.

v) Global responses

The ent i re wor ld, inc luding deve lop ing count r ies, must respond.

Developing countries will require the provision of capital and technical

support, as well as short-term measures such as the use of the Clean

Development Mechanism (CDM).

(1) Japan's Land and Nature

1) Japan has a land area of 378 thousand square kilometers, or 37.78 million

hectares.

Japan is a country with many forests: 19 percent is untouched nature (1

percent natural grasslands and 18 percent natural forests), 24 percent is

secondary forests, consisting of re-growth after the natural forest has been

destroyed, and forested areas account for another 25 percent, making the

combined total forest area about 70 percent of the land. Farming land

accounts for 23 percent, and urban and developed land accounts for 4

percent (2001 study).

2) Although the percentage of forests has remained vir tually unchanged at

70 percent for a long period of time, the amount of untouched nature has

decreased and forested areas have increased.

3) Farmland is gradually decreasing. The number of farms is decreasing in

villages and the meso-mountainous areas near the villages. The mountains

near the villages are turning into wastelands. The population decrease

in farming villages due to the exodus of people to the cities, as well as

depopulation caused by dif f iculty in f inding successors, is worsening.

Since the late 1950s and early 1960s, fossil fuel has replaced firewood

as a primary fuel. As people stopped using firewood, the mountains near

the villages were neglected and left to grow wild. About 10 percent of the

49,000 villages in depopulated areas are having dif ficulty in continuing to

function as a village.

Villages and the mountains nearby are vital for biodiversity. Fif ty percent

of endangered species live there. The outlook continues to be a cause for

concern.

4) As reforestation decreases the food for mountain animals and people

leave the villages and the mountains nearby, the number of wild animals is

increasing in the meso-mountainous regions.

Compared with 25 years ago, the habitat of the Japanese deer increased

Sustainability /Biological Diversity Issues

4.

22

by 70 percent, the Japanese macaque by 50 percent, the Japanese black

bear by 20 percent, and the wild boar by 30 percent, particularly in meso-

mountainous regions. This has resulted in an increase in damage caused

by these animals, which had previously been protected. Damage caused

by wild animals and birds totals ￥20 billion annually. Of the 60 percent of

this damage caused by animals, wild boars, deer and macaques account

for 90 percent. This damage also causes people to abandon their farms.

Handl ing these wi ld animals is an emerging problem. In 2004, 170

thousand deer and 280 thousand wild boars were captured. However, the

recent lack of hunters is another immediate problem.

5) The number of endangered species in Japan is increasing because of the

decrease and fragmentation of natural vegetation due to development,

the deter io rat ion of v i l lages and mounta ins nearby, the invas ion of

exotic species such as mongoose, raccoon and black bass, the ef fects

of chemica l substances such as PCB, DDT, and d iox ins, and the

development of artificial costal ecosystems in kelp forests, on tide land and

on natural coasts.

With over 90 thousand known species of animals and plants, Japan is rich

in diversity and indigenous species. However, 746 species of animals and

1,994 species of plants are endangered.

6) Japan has abundant natural water, forests, and animal and plant species.

It is our generation's responsibility to protect this.

The Nat ional Strategy for Biodivers i t y was formulated based on th is

awareness.

The impact of the g loba l warming descr ibed above on the natu ra l

environment is inevi table. How we respond wil l be a major issue for

biodiversity preservation.

(2) Importance of Preserving Biodiversity

The existence of biodiversity plays the following important roles for us:

1) All living things on ear th interact with each other within the ecosystem,

forming the irreplaceable foundation for human existence.

2) Protecting nature and forests guarantees the safety of human l i fe by

providing a supply of safe drinking water and playing a role in preventing

disasters.

3) Nature provides humans with valuable resources, such as crops, raw

materials for industrial use and medicine.

4) Nature is the source of a diverse and rich culture. Changes in animal and

plant life will change the cultures that depend on it.

23

(3) Basics of Preserving Biodiversity

We must act with the following in mind to preserve biodiversity.

1) P reser ve the d ive rs i t y of the l i v ing th ings un ique to each a rea in

accordance with their character ist ics. Make sure no new threats of

extinction appear for species living in Japan.

2) Strive for the sustainable use of nature that spans generations.

3) People should be aware that all l iving things and the ecosystem are of

immeasurable value and that they must act with care and humility.

Var ious preservation activ i t ies, legislat ion and businesses, as well as

the dai ly l i fe of ever y person, should be based on this fundamental

understanding. Please refer to the National Biodiversity Strategy of Japan

for specific measures and policies.

Reference: Environmental In i t iat ives by the Non-Life Insurance Industry and the General Insurance Association of Japan

In recent years, environmental initiatives have been a key issue for companies

in fulfilling their corporate social responsibility (CSR). The General Insurance

Association of Japan (GIAJ) developed the "Non-Life Insurance Industr y

Action Plan for the Preservation of the Environment" in 1996 and has been

actively working with each member non-life insurance company to preserve

the global environment.

1. Non-Life Insurance Industry Initiatives

(1) Establishment of an Environment Committee

An Environment Committee has been established to exchange views on

environmental initiatives at each non-life insurance company and to discuss

overall industry policies on environmental init iatives. The Environment

Committee meets regularly and is composed of the Department Head of

the GIAJ, who serves as chairman, and general managers of environment-

related depar tments of the 22 member companies as the commit tee

members.

(2) Main Activities of the Environment Committee

1) Establishing Targets

Recently, the commit tee set a target for waste reduction as par t of

an initiative toward the establishment of a recycling-based society in

November 2006. The target is to achieve a reduction of 20 percent

or more in waste output f rom company-owned of f ice bui ld ings in

24

Tokyo by fiscal 2010, with fiscal 2000 as a base line. Global warming

countermeasures established in Apr i l 2007 included an 18 percent

reduct ion in head of f ice e lect r ic i t y consumpt ion in f isca l 2010,

compared to f iscal 2000. The entire industry is working to achieve

these targets.

2) Hosting Lectures on Environmental Issues

Lectures on environmental issues have been held since 1998 with the

aim of enhancing awareness and broadening knowledge among the

employees of non-life insurance companies. The lectures have been

held 44 times so far, with total attendance of more than 1,600.

3) Improved Fuel Ef ficiency and Reduction of Accidents with the "Eco &

Safe Driving" Program

Accident rate data clear ly show that the implementation of the Eco

Driving program not only contr ibuted to environmental conservation

and improved fuel efficiency, but also helped to reduce the number of

car accidents (fuel efficiency improved by 7.89% and the accident rate

declined by 49.6% *Source: Data from the "Eco Driving" Department of

ASUA Corporation). Incorporating the role played by Eco Driving in the

decline in car accidents into the Eco & Safe Driving program, the GIAJ

takes part in awareness activities such as creating leaflets, guidebooks

and stickers and distributing them to consumers and companies, and

hosting events.

To promote the Eco & Safe Driving program, the following "Five Points of

Eco & Safe Driving" have been widely disseminated.

2. Initiatives Unique to the General Insurance Association of Japan

The following are measures taken by the GIAJ.

(1) Acquisition of ISO 14001 Certificate

In September 2001, the GIAJ became the f irst f inancial trade body in

Japan to obtain the ISO 14001 Certificate, and it has been conducting full-

scale environmental preservation initiatives. As a result, in fiscal 2006, it

reduced consumption of copy paper by 20.8 percent compared with fiscal

2001. Electricity consumption also decreased by 33.3 percent. The GIAJ

is also actively promoting the purchase of green products.

(2) Promoting Awareness of Environmental Issues

The GIAJ works to promote awareness through methods such as featuring

the latest information and various environmental initiatives in High School

Educational Materials, an information magazine for high school students,

and in SONPO, an information magazine for consumers, both of which are

25

POINT 1 : Avoid "Jack-Rabbit" Starts

Effect on the Environment: Star t ing the car less abruptly than usual (about 20km/h dur ing the f i rst 5 seconds) can

improve fuel consumption by about 11%.

Effect on Safety: Gent le operat ion of the accelerator enables smoother accelerat ion and g ives dr ivers

suf f icient time to make quick responses for safer driving.

POINT 2 : Actively use engine braking

Effect on the Environment: Fuel supply is cut of f when engine braking is used, thus improving fuel consumption by

about 2%.

Effect on Safety: The earlier the accelerator is released, the earlier speed is reduced. As a result, drivers are

given suf f icient time to make quick responses for safer driving.

POINT 3 : Drive safely at a constant speed, according to traffic conditions

Effect on the Environment: When a car accelerates and decelerates frequently, fuel consumption worsens by about 2%

in city driving and about 6% in suburban driving.

Effect on Safety: Driving at a constant speed according to traf f ic conditions prevents unreasonable over taking

for safer driving.

POINT 4 : Keep a sufficient distance between cars

Effect on the Environment: When the distance between vehicles is too shor t or speed f luctuates, the car accelerates

and decelerates frequently. As a result, fuel consumption worsens by about 2% in ci t y

driving and about 6% in suburban driving.

Effect on Safety: Maintaining a suf ficient distance between cars reduces the risk of collision.

POINT 5 : Ensure complete inspections and maintenance,

such as maintaining appropriate air pressure in tires

Effect on the Environment: When a i r p ressure in t i res is 50kPa (0.5g/cm2) lower than the appropr iate leve l, fue l

consumption worsens by about 2% in city driving and about 4% in suburban driving.

Effect on Safety: Regu la r inspect ions a re requ i red fo r safe dr i v ing. Traf f ic acc idents caused by poor

maintenance can be prevented.

Five Points of Eco & Safe Driving

published by the GIAJ.

(3) Support for Environment-related Non-Profit Organizations

The GIAJ col lects used stamps, telephone cards and other i tems to

donate once a year to non-profit organizations in support of their activities.

The GIAJ will continue to actively promote initiatives to preserve the global

environment.

26

Introduction

4. The trends of the Internal Control-ReportingScheme in JapanAkira Kubota Certified Public Accountant, Grant Thornton Taiyo ASG

1. Japan's Financial Instruments and Exchange Law will require management to

report on the status of internal controls at their companies from the fiscal year

beginning April 2008. Japanese management has typically not emphasized

internal controls over its other management responsibilities, and is therefore

struggling how to respond to the requirements of the new system. Reflecting

this concern, a number of books covering various approaches to internal

control have recently been published. Moreover, the coming change has

given consultants an excellent opportunity to market their services to clients.

Corporations are inf luenced by their countr y of domici le, and Japanese

corporations are no exception. In general, Japanese management and

administrators provide broad guidel ines for directing employee behavior

rather than deta i led procedures. Employees implement these broad

guidelines, working out details through the interaction of one individual with

another. Operating procedures represent refinements of this process at the

individual employee level. This environment has not been conducive to a

notion of internal controls in which management and administrators determine

unambiguous rules that employees must rigorously enforce.

This ar ticle summarizes the internal control-repor ting scheme implemented

in Japan, and then considers approaches to internal control that Japanese

companies may want to take using the example of a non-l i fe insurance

company.

(1) Regulatory summary

The following summarizes the internal control-repor ting scheme based on

Japan's Financial Instruments and Exchange Law.

The internal control-reporting scheme

2.

Companies Covered Listed Companies

Management

Reporting

Companies are required to submit an internal control report

evaluating internal controls related to financial reporting for

each f iscal year (Financial Instruments and Exchange Law,

article 24-4-4)

Auditing Certified public accountants must certify the internal control

repor t (F inancia l Instruments and Exchange Law, ar t ic le

193-2-2)

Penalties Up to five years in prison or up to ¥5 million in fines, or both

(Financial Instruments and Exchange Law, article 197-2)

Period Applied from fiscal years beginning on or after April 1, 2008.

27

On February 15, 2007, the Business Accounting Council of the Ministry of

Finance issued the "Standards for the implementation of evaluation by the

management and audits by auditors under the internal control-repor ting

scheme" (the "Implementation Standards") as the guideline for implementing

the internal control-repor t ing scheme of the Financia l Instruments and

Exchange Law.

(2) Method for evaluating internal control

The new internal control-reporting scheme requires management to evaluate

whether internal systems for checking the accuracy of financial reporting are

functioning effectively. Management conducts this evaluation from the twin

perspectives of "company-level controls" and "process-level controls".

① Company-level controls: Management designs internal controls from a

company-wide perspective.

② Process-level controls: Administrators in each division incorporate the

intentions of management in designing internal controls for their individual

div is ion. Disclosure processes are evaluated separately f rom other

business processes.

(3) Definition of internal controls

Internal controls create the process for achieving the following four objectives:

① Effectiveness and ef ficiency of operations: Are operations redundant or

inefficient?

② Reliability of f inancial repor ts: Have accounts been manipulated or are

amounts incorrect?

③ Compliance with laws and regulations relating to business activities: Is the

company in compliance with laws and internal regulations?

④ Prese r va t ion of assets: Has the company a rb i t ra r i l y acqu i red o r

abandoned assets?

The second item, reliability of financial reports, is the object of the Financial

Instruments and Exchange Law.

Ef fective internal controls require suf ficient attention to the following basic

elements:

① Honest management and employees (control environment);

② Acknowledging and responding to risks (risk evaluation and response);

③ Management including organization, jurisdiction and internal rules, and

28

allocation of responsibility (control activities);

④ Appropriate preparation and communication of information (information

and communication)

⑤ Confirmation of compliance with rules (monitoring); and

⑥ Effective use and application of information technology (IT support).

(4) Evaluating company-wide internal control

Company- l eve l con t ro l s cove r t he app roach management t a kes i n

reducing the r isk of misstatement in f inancial repor ts and their method of

communication within the company. Management empirically explains them

by the evidence of the document, organizational controls and their behavior,

etc.

The fo l lowing a re among the cont ro l env i ronment issues that requ i re

explanation:

① Integrity and ethical values;

② Management philosophy and stance;

③ Management policies and strategies;

④ Functions of the Board of Directors, Corporate Auditors and Auditing

Committee;

⑤ Organizational structure and practices;

⑥ Authority and responsibility;

⑦ Human resource policies and administration.

(5) Determining the scope of evaluation

The scope of evaluation of company-level controls and disclosure controls

includes all operating locations within the consolidated group.

The scope of evaluation of process-level controls is determined according to

materiality. The following are methods for deciding the scope of evaluation

and implementation standards.

① Rank operating locations in descending order of impor tance until they

account for two-th i rds of net sa les. Processes at these locat ions

associated with corporate objectives, including sales, accounts receivable

and inventories are subject to evaluation.

② The above processes may be excluded for operating locations that are not

material.

③ Evaluation of operations that with high qualitative materiality should be

included:

29

＊Operations with comparatively high risk, such as financial transactions

and derivatives transactions;

＊Estimates and projections, such as reserves, impairment and deferred

tax assets;

＊Atypical or irregular transactions.

(6) Process-level controls

Contro l l ing the r isk of misstatement for operat ions that are subject to

evaluation involves evaluating the status of preparation and actual application

using materials such as flow charts. In general, the results of evaluation are

presented in a Risk Control Matrix.

The following issues are relevant to evaluating the status of preparation:

① Have appropriate internal controls been instituted that prevent or allow

timely discovery of fraud and errors?

② Has appropriate segregation of duty been instituted?

③ Are the people in positions of responsibility aware of the importance of

internal controls and experienced in implementing them?

④ I s i n fo r ma t i on w i t h r espec t to i n te r na l con t ro l s be i ng p rope r l y

communicated, analyzed and used?

⑤ Have methods for timely handling of irregular issues discovered through

internal controls been determined?

The status of actual application may be confirmed by verifying samples such

as records of implementation. An example of the required sample size would

be a minimum sample of 25 transactions that regularly recur on a daily basis

to obtain a 90 percent level of confidence assuming a normal distribution.

(7) Disclosure

The Accounting Division is primarily responsible for disclosure. This process

entails evaluating all operating locations when finalizing financial reporting.

Disclosure procedures include the following:

① Procedures for preparing the financial statements from the general ledger;

② Procedures for recording entr ies and what they represent for issues

involved in prepar ing the consolidated f inancial statements including

consolidation adjustments, collation of written reports and reclassification;

③ Procedures for recording items to disclose in the financial statements.

30

(8) Material weaknesses in internal controls

Mater ia l weaknesses in in te rna l cont ro ls mean def ic ienc ies such as

misstatements that exceed predetermined l imi ts and the potent ia l fo r

qua l i tat ive ly mater ia l misstatements. The propor t iona l re lat ionship of

calculated amounts to consolidated total assets, consolidated net sales and

consolidated income before income taxes determines their mater ial i t y in

relation to material weaknesses. For example, materiality for consolidated

income before income taxes is generally considered to be around 5 percent.

Management must disclose material weaknesses to general investors in the

internal control report.

(9) Objectives of the Japanese system

As explained earlier, except for certain issues such as the absence of direct

reporting from certified public accountants, the Japanese system is largely

the same as Section 404 of the Sarbanes-Oxley Act in the United States.

However, implementation standards in Japan have been improved based

on consideration of the status of application of the Sarbanes-Oxley Act in

the United States. These improvements include emphasis on company-

level controls and a focus on key processes within the scope of evaluation.

At their core is the idea that management's evaluations should center on

mater ial issues. The objective of the Japanese system is not to create

voluminous written reports following comprehensive evaluation of companies'

internal controls.

The f inancial statements of non-life insurance companies have distinctive

characteristics. On the balance sheets, investment securities are prominent

among assets and underwriting reserves are prominent among liabil i t ies.

For large non-life insurance companies, underwriting income from insurance

transactions generated by core operat ing activ i t ies dur ing each year is

an amount equivalent to 30 to 40 percent of the balance of investment

securities. Management needs to consider which line items they should

emphasize, and how they can contro l the r isks associated wi th those

emphases. Assigning priority based on amounts would lead management

to emphasize evaluation of investment securities and underwriting reserves.

Fur thermore, underwriting income seems slightly less in terms of absolute

amounts, but it is the main result of core sales activities. The large number of

transactions requires management to evaluate underwriting income because

it is qualitatively material. A brief assessment of r isk control for three line

items follows.

Internal controlsat a non-lifeinsurance company

3.

31

(1) Investment securities

Non-l i fe insurance companies manage premium income received f rom

policyholders as assets such as investment securities. As a result, their

balance sheets are heavily weighted toward these managed assets.

Investment securities account for more than 70 percent of the assets of large

Japanese non-li fe insurance companies. Typically, therefore, investment

securities are a quantitatively material line item.

The actual existence of investment securities is the first key issue.

Companies must be careful of the r isk that the investment secur it ies on

the balance sheet may not exist. A small number of people can execute

numerous investment secur i t y transactions. Therefore, a single person

responsible for managing investment securities accounting for more than 70

percent of total assets represents a material weakness in internal controls.

From the standpoint of company-level controls, segregation of duty would

control the risk associated with the actual existence of investment securities.

In other words, companies need to give multiple people responsibil ity for

approving, executing and recording transactions and handling custodial

issues.

Moreover, an effective monitoring control is to assign responsibility for directly

conf irming balances with the custodian to a person who is not directly

involved in securities transactions.

(2) Underwriting reserves

Non-li fe insurance companies receive premiums from policyholders, and

make insurance payments to policyholders when insured losses happen.

Underwriting reserves as of the balance sheet date are a liability because

they are a reserve against future payments non-life insurance companies

may have to make that is funded in part using a portion of premium income.

Consequently, underwrit ing reserves account for a substantial por tion of

liabilit ies on the balance sheet. The underwriting reserves of some large

Japanese non-life insurance companies are comparable to more than 50

percent of total assets. Typically, therefore, underwrit ing reserves are a

quantitatively material line item.

Administrative divisions routinely employ the consistent accounting methods

for underwriting reserves that supervisory bodies have established. From the

standpoint of company-level controls, companies should assign responsibility

fo r admin ist rat i ve d iv is ions to people w i th a su f f ic ient understanding

of under wr i t ing reser ve account ing. Moreover, the person ass igned

responsibility needs to remain informed of the latest information on changes

32

to accounting methods.

Underwr i t ing reserves require the application of theoretical calculat ions

using a variety of basic materials, which give rise to the risk of erroneous

account ing. Methods for contro l l ing th is r isk include compar ing data

from each division with pr ior-year data and having administrators' review

accounting results.

(3) The cycle of premium income

The cycle of premium income is a core operat ion of non-l i fe insurance

companies. I t entai ls var ious r isks, such as the recording of f ict i t ious

premium income during the cycle or misappropriation by people in charge

of cash paid by pol icyholders. However, each sales location executes

the cycle, and fraudulent activity at a few of them is not l ikely to exer t a

pronounced impact on the financial statements of the company as a whole.

Presumably, the sales locations of non-life insurance companies formulaically

conduct routine operations in predictable units using routine, homogeneous

processes. Companies prepare operat ional manuals according to the

guidance of supervisory bodies that serve as company-level controls for the

cycle. Compliance with the operational manual by multiple sales offices and

the people in charge of them is therefore important. Methods for monitoring

and control include training in the use of the manual and monitoring by the

internal auditing department.

Management needs to recognize clearly that internal controls are tools for

internal corporate management. The objective relevant to the f inancial

repor ts is precluding manipulat ion. I t ser ves as the star t ing point for

management in countering the risks they consider material, and for promoting

the internal control-reporting scheme in Japan.

In Closing

4.

33

5. Trends in Japan's non-life insurance industryUnderwriting & Planning Department The Toa Reinsurance Company, Limited

(1) Trends in the Domestic Market

Since st ronger corporate per formance has resul ted in more shipping,

par t icular ly among manufacturers, the mar ine insurance sector and the

sales of casualty insurance that respond to legal, credit and other risks have

been strong. Moreover, credit ratings have been improving, as indicated

by higher Standard & Poor's ratings for Japanease government debt and

the debt of six domestic insurance companies. On the other hand, the

problems of inappropriate non-payment of claims, discussed below, resulted

in administrative sanctions from the Financial Services Agency (FSA). These

issues led insurance companies to make significant and necessary changes

in the way they had done their business during the past fiscal year.

In the trend toward restructuring in the insurance industry, Millea Holdings,

Inc. made Nisshin Fire and Marine Insurance Company, Limited a wholly-

owned subs id ia r y in September 2006 and is work ing to expand i ts

operations.

(2) Expansion into Overseas Markets

Japanese non-life insurance companies have been working to diversify the

sources of premiums and earnings by expanding operating bases overseas

in areas such as Asia and the so-called BRICs nations of Brazil, Russia, India

and China, where rapid economic growth would help awaken the demand for

insurance.

A summary of recent overseas initiatives follows:

Industry Trends

1.

Date Company Recent Overseas Initiative

January 2006Tokio Marine & NichidoFire Insurance Co., Ltd.

Acquisition of a direct takaful insurance business license in Malaysia

August 2006Tokio Marine & NichidoFire Insurance Co., Ltd.

Acquisition of Asia General Holdings, Limited, a l ife and non-life insurance company in Singapore and Malaysia

August 2006 Nipponkoa Insurance Co., Ltd. Alliances with Ingosstrakh Insurance Company of Russia and Vietnam Insurance Corporation

August 2006Nissay Dowa General Insurance Co., Ltd.

Alliance with Ingosstrakh Insurance Company of Russia

September 2006 Sompo Japan Insurance Inc. Alliance with Bohai Property Insurance Co., Ltd. of China

December 2006 Sompo Japan Insurance Inc.Inves tment i n Be r j aya Gene ra l I nsu rance Be rhad of Malaysia

February 2007 Nipponkoa Insurance Co., Ltd.All iance with Abu Dhabi National Insurance Company of the United Arab Emirates

34

In addit ion, Tok io Mar ine & Nichido Fire Insurance Co., Ltd. and Mitsui

Sumitomo Insurance Co., Ltd. moved aggressively to develop a new source

of earnings in the reinsurance business by injecting fur ther capital into

reinsurance subsidiaries based in Bermuda, in January and November 2006

respectively.

(3) Product Development Trends

The pr ice compet i t ion fo l lowing the deregulat ion of p remium rates in

1998 began with the automobile insurance sector. In 2006, the revision

of advisory pure r isk premium rates calculated by the "Non-life Insurance

Rating Organization of Japan" caused price competition to expand to the

fire insurance sector, which had been essentially unchanged. As non-life

insurance companies are acutely aware of the intense sales competit ion

in their business, they endeavor to minimize the range of increase of, or

to reduce, the premiums applying even for regions where multiple natural

catastrophes such as t yphoons over the past few years have caused

advisory pure risk premium rates to upturn.

(4) Sales Channel Trends

Restr ictions on bancassurance sales are being lif ted in stages as par t of

the liberalization of f inancial regulations. They will be completely li f ted in

December 2007 with the end of restrictions of products including whole life

insurance, term insurance, medical insurance and automobile insurance.

Bancassurance sales have been strong in product areas in which restrictions

have already been lif ted, such as variable annuity insurance. Hence, non-

l i fe insurance companies ini t ia l ly approached bancassurance sales with

cares for fear of the conflict with insurance agencies, but now even they are

energetically implementing bancassurance sales strategies.

Japan Post, which will become a private firm in October 2007, has shown its

intention to enter the bancassurance market. The impact this decision will

have on existing sales channels is a matter of intense interest in the industry.

(5) Commencement of a Small-amount Short-term Insurance System

With the enactment of a new Insurance Business Law in Apr i l 2006, a

small-amount short-term insurance system began. As the minimum capital

requirement for small-amount short-term insurance providers has been set at

¥10 million, as opposed to the ¥1 billion required for insurance companies,

35

it was initially predicted that unregulated co-operatives or new companies

from outside the insurance business would enter the market. However, limits

on the sum insured and insurance periods under the products which they

are permit ted to underwrite are severely restr icted. Moreover, excluding

the d i f fe rence in cap i ta l requ i rements, the condi t ions fo r obta in ing a

corporate charter are nearly as stringent as those for an insurance company.

Consequently, just four companies had been registered as small-amount

short-term insurance providers as of July 2007.

(6) Trade Insurance

The reforms of the trade insurance system in April 2005 lif ted restrictions on

private insurance and primarily enabled services for small and medium-sized

companies. Moreover, in May 2007 restrictions were lif ted for the member

companies of expor t associations centered on large companies in each

industry.

Following Tokio Marine & Nichido Fire Insurance, Sompo Japan Insurance

and Mitsui Sumitomo Insurance, in September 2006 Aioi Insurance Co., Ltd.

entered the trade insurance market. In May 2007, Nipponkoa Insurance

concluded an alliance with American Insurance Underwriters and entered the

market. As a result, competition in the trade insurance market is expected to

intensify further.

(7) Catastrophe Bonds

Tokio Marine & Nichido Fire Insurance issued securities linked to earthquake

risks in 1997, and securities linked to wind and flood risks in August 2006.

If a typhoon stronger than a set scale occurs, the principal amount of the

securities may decrease or be totally eliminated. Thus these securities are

a means of reinsurance payment for Tokio Marine & Nichido Fire Insurance.

The market for these securities has become increasingly global in scale.

Direct company Alliance partner

Tokio Marine & Nichido FireInsurance Co., Ltd.

Atradius Credit Insurance N.V. (Netherlands)

Mitsui SumitomoInsurance Co., Ltd.

Euler Hermes Group (France & Germany)

Sompo Japan Insurance Inc. Coface SA (France)

Aioi Insurance Co., Ltd. Coface SA (France)

Nipponkoa Insurance Co., Ltd. American International Underwriters (USA)

36

Mitsui Sumitomo Insurance Co., Ltd. and Kyoei Fire & Mar ine Insurance

Company, Limited also issued securities linked to wind and flood r isks in

2007.

The combined resu l ts of the 22 members of the Genera l I nsu rance

Association of Japan for f iscal 2006 recorded a premium increase on the

back on an economic recovery. However, natural disasters such as Typhoon

13 ("Shanshan") caused payments for insured losses to increase, which

resulted in decreases in ordinary income and net income.

Net premium income increased by 0.7 percent, or ¥51.7 billion, compared

with the previous fiscal year to ¥7,537.2 billion. Primary factors included a

rebound in automobile and marine insurance.

Net claims paid increased by 3.0 percent, or ¥126.5 billion, compared with

the previous fiscal year to ¥4,337.4 billion. Factors included an increase in

payments for insured losses as a result of natural disasters.

Insurance underwr i t ing expenses and general administrat ive expenses

increased by 1.6 percent, or ¥18.5 billion, compared with the previous fiscal

year to ¥1,161.1 billion. Moreover, the expense ratio increased by 0.1 percent

to 32.2 percent from 31.1 percent for the previous fiscal year.

Underwriting loss totaled ¥104.7 billion, compared with underwriting profit

tota l ing ¥15.9 bi l l ion for the previous f iscal year. Factors included the

increase in net cla ims paid, insurance underwr i t ing expenses, general

administrative expenses and claims expenses.

Ordinar y income including investment income decreased ¥68.8 bi l l ion

compared wi th the prev ious f isca l year to ¥414.7 b i l l ion. Net income

decreased ¥55.3 bill ion compared with the previous f iscal year to ¥251.0

billion.

(1) Business Improvement Order Issued for the Inappropriate Non-payment of Claims

The FSA issued administrative sanctions, including suspension of operations,

to 10 non-li fe insurance companies for the inappropriate non-payment of

claims with so-called "third-sector products," including medical insurance.

The companies under sanction implemented measures to prevent recurrence,

such as rev is ing thei r systems of payment for insured loss and newly

deploying personnel in the divisions responsible for claims.

(2) New Rules for Selling Insurance

The FSA has revised its supervisory guidelines for insurance companies,

Overview ofResults for Fiscal2006

2.

Regulatory topicsfor 2006

3.

37

and has introduced a system that requires a "Statement of Intent" at the

point of purchase in the insurance sales process. The new system was

introduced against a background of increasingly intense sales competition

among insurance companies. Salespeople were emphasizing insurance

product benefits exclusively, and the complex structure of products made the

coverage they provided dif ficult to understand. The consequences included

a rising number of cases in which policyholders were unable to receive the

payment for insured loss that they expected.

The new system is designed to preclude such problems by requir ing the

insurance company and the customer to confirm in writing at the point of sale

that the product meets the customer's needs.

(3) Revision of Method for Calculating Solvency Margin Ratio

The solvency margin ratio expresses an insurance company's ability to pay

claims. Should it fall below 200 percent, the FSA orders the company to

take corrective action. The calculation standards are being revised against

the background of divers i f icat ion of insurance products, the technical

development of asset management and advancement of risk management.

The FSA revised the r isk coef f icient, and is studying the introduction of

market valuation of insurance liabilities watching the directions in international

accounting standards.

Losses from major natural disasters during fiscal 2006 were as follows.

Fiscal 2006 Dataon Losses fromMajor Natural Disasters

4.

Name of Loss Date of Loss Claims Paid (JPY Billion)

2007 Noto Peninsula Earthquake

March 25, 2007 2.5

Name of Loss Date of Loss Claims Paid (JPY Billion)

Heavy rain, July 2006 July 15-24, 2006 7.5

Typhoon 13 September 15-20, 2006 132.0

Typhoon 13 was a factor in the deterioration of balances for Japanese direct

companies.

(Source: The General Insurance Association of Japan)

(2) Wind and Flood Damage

(1) Earthquakes

38

6. Trends in Japan's life insurance industryLife Underwriting & Planning Department The Toa Reinsurance Company, Limited

The life insurance industry as a whole has been on a gradual recovery trend

as a result of the upturn in stock prices. Looking forward, competitiveness

is l ikely to increase as a result of trends including acquisitions, mergers,

the establishment of new companies and strategic al l iances both within

the industry and involving companies in other industr ies. An overview of

strategic al l iances and other key developments since Apr i l 2006 follows

below.

(1) The Kyoei Kasai Shinrai Life Insurance Company, Ltd. Becomes a Subsidiary of Fukoku Mutual Life Insurance Company

Fukoku Mutual L i fe Insurance Company ("Fukoku Mutual") acquired 80

percent of the stock of The Kyoei Kasai Shinrai Life Insurance Company,

Ltd. ("Kyoei Kasai Shinrai Life") and concluded a business alliance with The

Kyoei Fire & Mar ine Insurance Company, Limited ("Kyoei Fire & Mar ine")

cover ing the sale of i ts non-li fe insurance products. Fukoku Mutual has

close ties with Kyoei Fire & Marine.

By acquir ing the stock of Kyoei Kasai Shinrai Life, a subsidiar y of Kyoei

Fire & Marine, which in turn has a strong relationship with the credit union

industry, and by concentrating bancassurance sales at Kyoei Kasai Shinrai

Life, Fukoku Mutual will strengthen its ability to respond as restrictions on

bancassurance are lif ted.

(2) Merger of AIG Edison Life Insurance Company and AIG Star Life Insurance Company, Limited

Two American International Group, Inc. companies in Japan, AIG Edison

Life Insurance and AIG Star Life Insurance, agreed to merge by the end of

2007. The newly established company is expected to be named AIG Life

Insurance Company, Limited.

(3) Merger of AXA Life Insurance Company, Limited and Winterthur Swiss Life Insurance Co., Ltd.

The AXA Group acquired Winter thur Group from Credit Suisse Group, and

subsequently decided to merge AXA Life Insurance and Winter thur Swiss

Life Insurance within a holding company. Winter thur Swiss Life Insurance

will be a wholly owned subsidiary of AXA Japan Holding Co., Ltd., and will

operate as AXA Financial Life Insurance. It will specialize in insurance sales

through financial institutions, including bancassurance.

Life InsuranceIndustry Trends

1.

39

(4) The AXA Group and SBI Holdings, Inc. Establish a New Life Insurance Company

A X A Japan Holding Co., Ltd. and Sof tbank Investment Hold ings, Inc.

(now SBI Holdings, Inc.) have established a company to prepare for the

establishment of a new life insurance company. They aim to quickly enter

the life insurance market in the second half of fiscal year 2007, and will focus

primarily on internet transactions.

(5) Sony Life Insurance Co., Ltd. and AEGON N.V. Jointly Establish a Life Insurance Company

Sony L i fe I nsu rance and AEGON N.V., a l i fe i nsu rance company i n

Nether lands, concluded a basic agreement to establish a l i fe insurance

company with 50 percent share of stocks each other. This is the first active

investment for AEGON N.V in Japan. The newly established company will

develop and sell individual annuity insurance, and plans to market them

through bancassurance sales and other f inancial insti tutions. Sony Life

Insurance is part of a holding company, Sony Financial Holdings Inc., which

is preparing to go public on / after fiscal year 2007. Once it does, Sony Life

Insurance will be the second life insurance company in Japan to go public

following T&D Holdings, Inc.

(6) Alliances with Companies in Other Industries

The Prudential Life Insurance Company, Ltd. formed an alliance with a major

credit card company to provide card services to customers. On the other

hand, Sony Life Insurance formed an alliance with the nursing care business

of Watami Co., Ltd., which also operates a chain of restaurants. The strategy

of this alliance include customer retention and service enhancement.

Moreover, in the fiscal year end of March 2006, the trend toward improved

d isc losure became more w idespread. Ma jo r compan ies dec ided to

disclose breakdowns of core profits, including negative spread as well as

administrative expense margins, mortality rate margins and Embedded Value.

Fiscal year 2006 results for 38 li fe insurance companies in Japan are as

follows:

＊ Total Amount of New ContractsDur ing f isca l year 2006, the tota l amount of new indiv idual insurance

contracts for all 38 companies decreased 15.8 percent to JPY67.9 tr il l ion

from the previous fiscal year due to weakness in the market for death benefit

products. The per formance of small/medium sized insurance companies

Life Insurers:Trends in BusinessPerformance

2.

40

were strong compared with that of large companies. Sales of individual

annuities increased 2.2 percent to JPY8.9 trillion from the previous fiscal year

because large companies moved aggressively to develop bancassurance

sales, although results were stable at small/medium-sized companies.

＊ Business in ForceAs of the end of f iscal year 2006, new individual insurance contracts in

force decreased 4.1 percent to JPY1,026.3 tr il l ion from the previous year.

Results at foreign-affiliated companies and subsidiaries of non-life insurance

companies were solid, although the per formance of large companies was

sluggish. On the other hand, individual annuit ies in force increased 6.8

percent to JPY85.8 tr i l l ion from the previous year, the four th consecutive

annual increase, because of steady growth in the volume of new individual

contracts. Group insurance in force decreased 4.7 percent to JPY362.6

trillion from the previous year, due to a substantial drop in new contracts for

the second consecutive fiscal year.

＊ Annualized PremiumsThe tota l of annual ized premiums f rom the new contracts of indiv idual

insurance and individual annuities increased 10.2 percent to JPY2.4 trillion

from the previous fiscal year. While the performance of new contracts with

medical and living benefits saw sluggish growth, that of individual annuity

insurance was strong due to bancassurance sales. In-force business also

produced a steady result in annual ized premiums, r ising 4.3 percent to

JPY19.4 trillion from the previous fiscal year.

＊ Premium RevenuesPremium revenues decreased 2.1 percent to JPY28.5 billion from the previous

f iscal year. Sales of death benef i t products were dul ly, and previously

strong growth in sales of third sector products including medical insurance

cooled. While all 10 subsidiaries of non-life insurance companies improved

per formance in fiscal year 2006, overall results for the 38 companies have

been decreasing since fiscal year 2002.

＊ Asset ManagementDuring f iscal year 2006, interest and div idend incomes decreased 18.6

percent f rom the st rong resul ts of the prev ious f isca l year. However,

the economic recover y trend and r is ing stock pr ices suppor ted fur ther

improvement in the f inancial posit ion of insurance companies. Negative

spread, above all of large companies, has decreased. Many companies

added to reserves as a result of increased interest and dividends incomes,

and steady addit ions to internal reserves strengthened the trend toward

policyholder distributions through means such as dividends. As a result of

rising stock prices and other various factors, total assets of the 38 companies

41

increased 4.9 percent from the previous year to the JPY220 tr il l ion levels.

Total assets have increased for four consecutive fiscal years.

(1) Death Benefit Products

The average amount of death benefit for individual life insurance contracts as

of the end of fiscal year 2005 was under JPY10 million. This was the lowest

level since 15 years earlier, at the end of fiscal year 1990, and reflects the

changing needs of policyholders for limited death benefits insurance with

healthcare riders.

On the othe r hand, ma jo r Japanese l i fe i nsu rance compan ies have

successively introduced various kinds of products with lower premiums that

limit the amount of death benefits. These products are designed to expand

the market by appealing to younger people with lower incomes and lower

insurance participation, since the middle- and older-aged market is already

mature.

In addition, with the long-term interest rate rising, various kinds of products

sensit ive to market interest rates, such as returns l inked to the 10-year

government bond, are appear ing. For example, Daido L i fe Insurance

Company's fixed-term death benefit insurance and Alico Japan's whole life

insurance variable rate death benefit fall into this category of products.

(2) Medical Insurance

Given the decrease in marriage rates and the ongoing drop in the bir thrate,

many companies are emphasizing medical insurance as policyholders move

toward products that enhance medical coverage and limit the amount of

death benefits.

Many kinds of medical insurance products have appeared under the concept

of lower premiums.

In Japan, concerns about lifestyle related disease have increased.

Moreover, the hospitalization period for l i festyle related diseases remains

lengthy, although per iod of hospital stays for other diseases have been

shor ter. Consequent ly, many products push down costs v i r tua l l y by

inc reas ing the ma x imum number of days covered fo r hosp i ta l i za t ion

due to l i festyle related diseases, while reducing the number of days for

hospitalization coverage due to other diseases. On the other hand, policies

specifically for long-term hospitalization coverage have appeared, including

products with inexpensive premiums that cover hospitalization only af ter a

fixed period of time.

Product Trends

3.

42

Moreover, AIG Edison Life Insurance has developed products that provide a

rebate for good health at the expiration of premium payment by refunding the

dif ference between premiums paid and various claims paid. Conversely, The

Gibraltar Life Insurance Company, Ltd. has developed a product that waives

premium payments after a diagnosis of any of the three major adult diseases

and refunds the equivalent of premiums already paid. As mentioned above,

some products of fer lower premiums by discount ing premiums i f f ixed

requirements are satisfied, or by reducing actual premiums paid to zero.

In addition, products targeting people who have not been able to purchase

insurance, by limiting the items to disclose, are increasing. Alico Japan is

selling a new product with three items to disclose, the smallest number of

items among domestic products sold.

(3) Individual Annuity

Against the backdrop of aging of society, the amount of new indiv idual

annuity contracts has caught up with group insurance for the f irst time in

10 years. In particular, the individual variable annuity insurance market has

expanded through bancassurance. The total amount of individual annuity

through bancassurance sales since October 2002 has risen from JPY12.3

trillion on March 31, 2006 to JPY16.6 trillion on March 31, 2007. The variable

annui t y accounts for 68% of the amount. Insurance companies have

launched various kinds of products to meet projected demand for annuity

fund management from baby boomers reaching retirement age in fiscal year

2007. Regarding the products to offer safety by guaranteeing accumulated

capital, there appeared Ratchet-type products which raise the guaranteed

minimum death benefit each year through asset management. On the other

hand, lower-costs products that reduce expenses because they have no

guaranteed minimum death benefit have increased.

Products have also appeared that accommodate the expected increase in

interest rates following the end of the zero interest rate policy implemented

by the Bank of Japan. Asahi Mutual Life Insurance Company has launched

a fixed annuity individual insurance with a single payment that distributes an

investment yield every five years.

The Dai-Ichi Life Mutual Insurance Company has launched a variable annuity

with heightened interest-rate sensitivity because the expected interest rate is

reviewed twice a month. Moreover, the upward trend of the expected interest

rates is evident behind insurance companies' strengthened financial ground

by reducing negative spread. For example, Nippon Life Insurance Company

has raised the interest rate on variable rate 10-year annuities to 1.5 percent

from 1.2 percent. Insurance companies consider managing guaranteed

43

minimum death benefit risk as a significant issue.

S ince f isca l year 2005, the Min ist r y of F inance has int roduced ru les

in respect of reser ves associated with the guaranteed minimum death

benefit for variable annuity insurance. Given these circumstances, Swiss

Reinsurance Company has begun providing var iable annuity guaranteed

minimum death benefit reinsurance capacity in Japan, and Millea Holdings,

Inc. has decided to establish a variable annuity reinsurance subsidiary on

the Isle of Man in the United Kingdom to underwrite the risks associated with

their subsidiary, Tokio Marine & Nichido Financial Life Insurance Co., Ltd.

(4) Foreign-Currency Denominated Products

Foreign currency-denominated products are increasingly popular because

they are expected to provide higher returns than Japanese yen-denominated

products. However they also carry foreign exchange r isk. Among these

products, AIG Edison L i fe has launched the f i rst product in Japan that

protects capital volatility against foreign exchange risk by guaranteeing the

principal on a Japanese yen basis at the expiration date with 10-year call

protection for accumulated capital.

In addition, NIPPONKOA Life Insurance Company, Limited has launched a

U.S. dollar-denominated fixed individual annuity product that increases the

convenience of use for policyholders because premiums and death benefits

are denominated in Japanese yen. With this product, policyholders can

receive the annuity in Japanese yen by attaching a rider.

The standard mortality tables, which are the basic data for the calculation

of premium rate and reserves, were revised in April 2007 for the first time in

11 years. One of the representative newspapers in Japan, The Nihon Keizai

Shimbun, reported that the mortality rate for males decreased by an average

of 12 percent and for females decreased by an average of 18 percent.

Above all, the mortality rate in old-aged people significantly decreased. The

standard mortality tables for use with death benefit and annuity were revised.

In addi t ion, standard mor ta l i t y tables for medical products were newly

established in consideration of capability of living benefit.

Consequently, insurance companies revised their rates, especially for death

benefit insurance products. However, not all companies responded to this

revision in the same manner, as some insurance companies did not revise

their rates of medical products.

Revision of Standard Mortality Tables

4.

44

The primary sales channel in Japan has been calling on customers by sales

person. In recent years, however, the sales channels have diversi f ied.

Large domestic insurance companies had hesitated to use new channels.

Nowadays, however, they are especially active in making use of them.

(1) Bancassurance

Bancassurance sales had been limited to certain products, but all restrictions

will be lif ted in December 2007. Strong sales of individual annuity products,

for which restrictions had already been lif ted, resulted in an increase in the

establishment of subsidiaries to specialize in bancassurance within groups.

In addition to companies formed through alliances, Dai-Ichi Life Insurance

decided to establ ish Dai- Ichi Front ier L i fe Insurance Co., Ltd. wi th the

objective of providing products to the individual annuity market through

financial institutions. It is the first time that a life insurance company has

newly star ted up a fu l ly owned l i fe insurance subsidiar y domest ica l ly.

This company wil l not have internal sales networks, but wil l specialize in

developing and underwriting new products.

The lif ting of restrictions on bancassurance has caused market competition

to intensify. For example, Nippon Life Insurance had been reluctant about

the lif ting of restrictions on bancassurance, but has made moves such as

strengthening its sales structure to support sales at financial institutions.

(2) Walk-in Outlets

Mitsui Life Insurance Company Limited, Sumitomo Life Insurance Company

and Sumi tomo Mi tsu i Bank ing Corporat ion agreed to operate wa lk- in

insurance agencies, established Insurance Designers Co., Ltd., and began

sales. They handle the products of more than 10 companies including

foreign affiliated firms, centered on third sector products.

Among foreign companies, Alico Japan has established walk-in outlets to

handle direct sales, mainly medical insurance. Among co-operatives, the

April 2001 Credit Life Insurance for Mortgage Loan

October 2002 Individual annuity insurance, "Zaikei" savings Insurances

December 2005Single-Premium Endowment Insurance and Single-Premium Whole Life Insurance

December 2007 (Planned) Complete Approval of Bancassurance

Chronology of the Lif ting of Restrictions on Bancassurance Sales in Japan (Life Insurance Products)

Diversification of Sales Channels

5.

45

National Federation of Workers and Consumers Insurance Cooperatives

(Zenrosa i ) has estab l ished i ts f i r s t wa lk- in ou t let. Moreover, severa l

companies that have already handled walk-in insurance shops are proactively

working to expand their number of outlets.

(3) Internet Sales

As mentioned earlier, AXA Japan and SBI Holdings have a plan to establish

a company sel l ing l i fe insurance via internet, and Winter thur Swiss Li fe

Insurance and Shinsei Bank have jointly developed variable individual annuity

insurance for which remote application is possible. It is the first investment-

type individual annuity product sold via internet in Japan. This product does

not guarantee the principal and saves costs to target younger people.

Many companies are making moves overseas, and above all, Dai-Ichi Life

Insurance has been particularly aggressive. It has acquired a life insurance

company in Vietnam, and has already begun sales. In India, it has concluded

an agreement with a state-owned bank to jointly establish a life insurance

company. Dai-Ichi Life Insurance is the first Japanese insurance company

to enter the direct insurance business in Vietnam and India. In addition, Dai-

Ichi Life Insurance has made an agreement with a large Thai life insurance

company, Ocean Life Insurance Co., Ltd., to provide reinsurance capacity for

group insurance to Japanese-af filiated companies. Dai-Ichi Life Insurance

has also concluded a business alliance with Shin Kong Financial Holding Co.,

Ltd. in Taiwan that includes capital participation.

Furthermore Nippon Life raised its share of stocks in Bangkok Life Assurance

Limited, up to the foreign capital equity par ticipation limit of 25 percent in

Thailand. Moreover, Tokio Marine and Nichido Fire Insurance, which holds

Tokio Marine & Nichido Life Insurance Co., Ltd. as a subsidiary, acquired

Asia General Holdings Ltd., a life and non-life insurance company operating

in Singapore and Malaysia. I t also jointly established a takaful business

company with a major Malaysian bank, and developed the first life and non-

life comprehensive mortgage takaful products for the Malaysian market.

The Insurance Business Law was amended in April 2006.

As a resu l t , i n o rde r to enhance i ndus t r y soundness and p ro tec t

policyholders, co-operatives not controlled under any specif ic law had to

cease operations by September 2006, unless they repor ted as specif ied

insurers, although organizations such as intra-corporate co-operatives and

labor union co-operatives were excluded. 389 organizations had repor ted

by the deadline. However, organizations must choose to become either an

insurance company or a small-amount short-term insurance provider during a

two-year transitional period to continue the business.

Overseas Strategies of Life Insurance Companies

6.

The Small-amount Short-term Insurance Business

7.

46

The operating and minimum capital requirements for small-amount short-term

insurance providers have been relaxed compared with ordinary insurers. In a

key development, Mitsubishi Corporation invested 81 percent share of stocks

and established a firm under the standards for a small-amount shor t-term

insurance company with Aon Affinity Japan Ltd. to handle products including

medical, personal accident and residential property insurance. In addition,

the AIG Group and the Takken Family Foundation concluded an alliance in

the residential property co-operative field.

Smal l-amount shor t-term insurance prov iders can handle the fo l lowing

insurance:

The supervision of small-amount shor t-term insurance providers, including

regulatory issues such as reserves and solvency margin ratio, is now on

the same level as that for insurance companies with the formulation of the

Guidel ine for Small-Amount Shor t-Term Insurance Provider Supervision,

which is based on the Guideline for Insurance Companies Supervision used

for insurance companies.

Supervision of insurance companies regarding policyholder protection issues

such as sales tactics and payment of claims/benef its was strengthened

during the past year.

The enactment of the Financial Instruments and Exchange Law, which is

an interdisciplinary regulatory regime that covers a wide array of f inancial

inst ruments wi th investment funct ion, impacts sa les tact ics. This law

categorizes investors by attributes and business, with applicable regulations

dif fer ing according to category. In general, f inancial insti tutions are not

al lowed to sol ici t amateur investors to buy f inancial products which are

improper according to customer knowledge, financial condition and purpose

Maximum Period of Insurance

Type of Insurance Period of Insurance(Maximum)

Non-life insurance 2 years

Life insurance & medical insurance 1 year

Trends in the Supervision of Insurance Companies

8.

Maximum Sum Insured

Type of Insurance Sum Insured (Maximum)

Death or total permanent disability due to disease JPY3 million

Non-life insurance JPY10 million

Hospital stay benefits for treatment of diseaseor injury

JPY0.8 million

Death or total permanent disability due to injury JPY6 million

47

of the contract. However, this regulation does not apply to professional,

institutional investors. The Insurance Business Law itself is not subject to the

Financial Instruments and Exchange Law, but sales of variable insurance and

variable annuities are.

Moreover, the Guidel ine for Insurance Companies Supervision imposed

the obligation to create and provide to the expected policyholder a "let ter

of intent" that confirms the needs involved in the application for insurance

products. These guidelines came into effect in April 2007.

Insurance products have become more diverse and complex. Problems have

occurred regarding issues such as nonpayment of claims/benefits by li fe

insurance companies mainly due to complexity of products. The Financial

Services Agency has therefore issued a directive requiring all companies to

report on the status of their performance in areas such as payment of sum

insured. The Life Insurance Association of Japan and insurance companies

are also working to beef up the payment assessment systems.

In the meantime, insurance law, which is now a section of the Commercial

Code, is being fundamentally overhauled for the first time in nearly 100 years,

including rules of conclusion of third sector insurance contracts other than

life and non-life insurance. The method of calculation of the solvency margin

ratio, which is an indicator of the soundness of insurance companies, is also

undergoing revision.

Japan Post has issued a plan for transferring operations following privatization

in October 2007. The privatization of Japan Post will create separate mail

delivery, post of fice, retail service and life insurance firms under a holding

company structure. A separate public corporation wil l assume in force

contracts with government guarantees. The company, which will run the

life insurance business, will provide insurance through the post office firm's

branches under an agency contract. It will continue to offer the guaranteed-

issue insurance and riders up to a limit of JPY10 million, as it does at present.

However, new contracts are decreasing, with both the amount of sum insured

and the number of new contracts down approximately 15 percent from the

previous year. Following privatization, the company intends to handle new

business, including new products such as variable annuities and third sector

insurance products, and insurance with examination predicated on higher

limits. The holding company will list the stocks of the company and eliminate

government funding four years after privatization.

Privatization of the Postal Life Insurance System

9.

48

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