Failure of Nissan Mutual Life (1997)
The first Japanese life insurer to fail since the war, in April 1997, brought down by the gap between the rates guaranteed on its older policies and the yield on its investments.
In the late 1980s, Japanese life insurers sold large volumes of savings policies guaranteeing high rates for their whole term, set off the yields of the day. The bursting of the financial bubble and the steady fall in rates then pushed investment yields below the promised rate: that is the negative spread, a loss booked every year for as long as the policies stay in force. It cannot be fixed by ordinary management, since the insurer can neither cut the guaranteed rate nor exit the contracts, and new business written at lower rates does not offset the old book. Nissan Mutual Life opened a series of Japanese life insurer failures that ran through 2001, and showed that a rate guarantee without enough asset duration shifts the whole risk of falling rates onto the insurer.
On April 25, 1997, Japan's Ministry of Finance ordered Nissan Mutual Life to suspend operations and placed it under administration, with an estimated deficit of about 300 billion yen. Its policies were taken over in October 1997 by Aoba Life, set up by the Life Insurance Association of Japan, at a reduced guaranteed rate; the industry's 200-billion-yen protection fund was exhausted in the process.
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