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Japan’s new insurance solvency regime

A blueprint of the regime for insurance supervision

The International Association of Insurance Supervisors (IAIS) has been developing the Insurance Capital Standard (ICS). Solvency II, a prudential framework for insurers in Europe, was implemented in 2016 and is now under review. Several jurisdictions have been updating their own solvency regimes. Japan is not an exception.

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What is the current status of Japan’s solvency regime modernisation?

Japan has been working on modernising its solvency regime for the supervision of insurers for more than a decade. In May 2019, the Financial Services Agency, Japan (Japan FSA) created a study group to discuss future directions towards the development of a new, ‘economic value-based’ solvency regime. In June 2020, the study group published a report entitled ‘The Study Group Report on the Economic Value-based Solvency Regime’, recommending implementation of the new regime in April 2025.

What is the future direction?

The June 2020 Report has presented the following three high-level guiding principles. This article summarises the Report, focusing on key items, including the three.

  • The new solvency regime will be constituted of three pillars.
  • The standard formula will be broadly consistent with that in the ICS.
  • The new regime will be implemented in April 2025.

Any challenges and global implication?

The new regime can strengthen policyholder protection. At the same time, it may pose new challenges for the supervisor. The article discusses three critical areas that require in-depth analysis and provides some preliminary thoughts on how insurers should be supervised under the new regime. The discussion may inform the finalisation of the IAIS ICS.

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