The general insurance distribution system in Japan is agency, brokerage and direct distribution by officers or employees of insurance companies.
Agents and brokers must be registered with the Prime Minister in accordance with the Japanese Insurance Business Law (Officers and employees of insurance companies are not required to be registered in order to solicit insurance contracts.). Therefore, only registered agents and brokers, as well as staff members of insurance companies, are authorized to engage in insurance distribution.
As part of the registration process, the supervisory authority must ascertain whether there are grounds for refusing an application: for example, from applicants who have been declared bankrupt and who have not yet been rehabilitated, who have been imprisoned in the preceding three years, or whose previous registration had been revoked within the preceding three years. Under the Insurance Business Law and its related regulations, agents and brokers are prohibited from such conduct as giving rebates or premium discounts, making false representations or failing to represent important matters regarding insurance contracts to their clients. If the registered agents or brokers violate relevant laws and regulations, the supervisory authority shall implement administrative penalties, including the revocation of the registration and the suspension of business.
1. General Insurance Agency System
The agency is the main channel for general insurance distribution in Japan. The function of an agency is as follows:
(1) Consulting for insurance.
(2) Soliciting (suggesting plans for) and concluding insurance contracts with customers.
(3) Calculating insurance premiums, accepting application forms from customers and reporting contracts to the insurance company.
(4) Receiving insurance premiums and issuing receipts to customers.
(5) Keeping insurance premiums received from customers and adjusting those premiums and commissions with the insurance company.
(6) Delivering insurance policies to customers.
(7) Maintaining insurance contracts including the procedures for changing contract terms and cancellations.
(8) Accepting notifications of claims from customers and reporting those claims to the insurance company, including collecting claims documents from customers.
The general insurance agency system was reviewed at the end of March 2001. The administrative guidelines concerning personal qualifications and agency classifications, as well as the level of agency commissions which depend upon agency classifications, were abolished. Subsequently, each general insurance company takes its own measures to promote further development of agency qualifications.
As the GIAJ regards agency education as integral to the industry's social responsibility to ensure proper sales of insurance products and the protection of policyholders, it launched a new agency education system common to the industry in April 2001. Two kinds of examinations are available under the system; one for people who wish to be engaged in general insurance distribution so that they can better equip themselves as general insurance agents, and the other for general insurance agents who have already been engaged in distributing general insurance products. The subjects of the latter examination consist of legal compliance, laws and regulations, and taxation.
In order to further enhance the quality of the insurance professionals with whom customers deal directly, the GIAJ revamped these examinations in October 2007. The GIAJ has also required general insurance agents and solicitors to renew their credentials every five years from fiscal 2008, and has established a new "insurance product learning system" to assist professionals in advancing their knowledge of insurance products.
2. Insurance Brokerage System
An insurance brokerage system was introduced to the Japanese insurance market in April 1996 by the enforcement of the new Insurance Business Law.
Insurance brokers are not allowed to start their operations until they are registered with the Prime Minister. At the time of registration, insurance brokers must prove that they are fit to conduct insurance distribution, their ability being judged by means of an examination by the Insurance Brokers Association of Japan, based on the Comprehensive Guidelines for Supervision of Insurance Companies issued by the Financial Services Agency.
In order to clarify the roles or functions which insurance brokers take, the Insurance Business Law prohibits them from concurrently acting as general insurance agents or life insurance solicitors. In addition, an insurance broker is legally bound to act with the utmost good faith (the so-called "duty of best advice"). Furthermore, insurance brokers differ from general insurance agents in that they are not empowered by insurance companies to conclude insurance contracts, to accept applicants' representations, or to receive insurance premiums.
Since insurance brokers are independent from insurance companies, they are liable for loss or damage to policyholders resulting from their activities. Whereas in the case of general insurance agents, the insurance companies concerned ultimately assume, in principle, the responsibility for such losses.
Therefore, from the viewpoint of protecting policyholders, insurance brokers are legally obliged to make a cash deposit which endorses their financial means to cover their liability. The minimum cash deposit required is 40 million yen and the maximum 800 million yen.
Insurance brokers are allowed to act as intermediaries for the conclusion of insurance contracts on condition that they deal with the insurance products of insurance companies licensed in Japan. However, regarding reinsurance, ocean marine hull insurance, ocean marine cargo insurance, commercial aircraft insurance, etc., they are allowed to mediate for unlicensed foreign insurers directly.
3. Direct Distribution
A distribution system where officers or employees of general insurance companies distribute insurance products directly is called "Direct Distribution" and includes the following different forms.
(1) Special Trainees System
To strengthen their distribution network, individual insurance companies have their own "Special Trainees System" to train their exclusive and full-time agents.
The purpose of the Special Trainees System is to give staff members selected courses to enable them to acquire knowledge of and practice in general insurance soliciting within a certain period. Although the organization of this system varies from company to company, a common stipulation is that trainees will work for the company as its exclusive agents in the future.
(2) "Chokuhan-Shain" System
Direct distribution, known as the "chokuhanshain" or the "direct salesperson" approach, is the method where staff members of general insurance companies are engaged directly in the distribution of general insurance products.
Direct response markets insurance products through advertisements on mass media, direct mail, telephone and the Internet. Some foreign insurers and newly established insurance companies adopt it as their distribution channel and use it to sell automobile and personal accident insurance policies.
Insurance sales through the Internet are usually operated by either insurance companies or their agents. Irrespective of the operator, insurance sales through the Internet are categorized into the following two types.
a. Off-line transaction
Booking an insurance contract on a Web site, and then meeting a sales person from an insurance company or an agent to conclude a contract, or requesting materials for insurance products on Web sites, and then returning the application form with his/her seal to the insurance company to finalize a contract.
b. On-line transaction
From application to premium payment, everything is electronically processed on the Web site. The premium payment is usually settled with a credit card.