S&P Reports Japanese Insurers Facing Increasing Scrutiny

Standard & Poor’s Ratings Services said in a new report that the risk management practices and internal control policies of Japan’s insurers are coming under increasing scrutiny following a series of public scandals over nonpayment of insurance claims.

At the same time, the regulatory environment is changing, with more stringent financial administration being pursued and reforms to corporate laws aimed at improving governance underway.

According to the report “Japan’s Insurers Need To Address Strategic Risk Management”, authored by Standard & Poor’s credit analyst Koichi Hamasaki, because of the extensive media coverage of the insurance industry, reputation risks are rising for the insurers, and are threatening to erode enterprise value and corporate credibility.

Under these circumstances, the entire insurance industry is scrambling to strengthen its risk management and compliance systems. Thus far, however, the efforts seem to have focused on responding to the more stringent financial administration and legal system reforms.

Considering the structural shortcomings in company compliance systems and the lack of risk management policies—both of which were pointed out when the Financial Services Agency (FSA) first handed down strict administrative punishments for nonpayment of insurance claims—the responses of the companies appear more aimed at appeasing the FSA, according to S&P.

Furthermore, similar to industrial corporations, insurance companies also face the need to improve internal controls in response to reforms of corporate laws regarding governance, the report continues. For example, it cites the Financial Instruments and Exchange Law, which will require the submission of an internal control report which must be evaluated by management and certified by an auditor—the Japanese version of the Sarbanes-Oxley Act—from fiscal 2008.

Standard & Poor’s has introduced the analysis of enterprise risk management (ERM) as a new criteria in rating insurance companies, believing that it is important to not only evaluate whether downside risks such as scandal prevention are appropriately controlled, but also whether risk management is being proactively conducted in order to improve enterprise value by optimizing risk-adjusted return. Standard & Poor’s expects ERM to play an increasingly significant role in the ratings process, providing a clearer view of a company’s financial strength.

S&P expressed concern that Japanese insurance companies are “too passive in their attitudes toward enhancing risk management and internal controls, and that their responses are directed more at meeting compliance and audit needs.” To improve enterprise value, however, the insurers will need to more actively manage these issues, the report concludes.

Source: RatingsDirect, Standard & Poor’s
www.ratingsdirect.com.