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Insurance for Korean Companies' Japanese Subsidiaries — Global Programs and the Basics of Insuring in Japan
When a Korean company sets up a subsidiary or branch in Japan, should insurance be covered under the head office's program or arranged separately in Japan? This article covers master and local policies, the restrictions under Japan's Insurance Business Act, and the insurance to check in Japan, based on insurers' public material and Japanese law.
When a Korean company sets up a subsidiary or branch in Japan, a question arises: how should the Japanese business be insured? Can the Japanese entity simply be added to the insurance the head office buys in Korea, or does it need its own policies in Japan? In short, property located in Japan and liability arising in Japan in principle require a policy issued by an insurer licensed in Japan. The task is then to design how the head office's insurance and the Japanese insurance fit together.
This article sets out the basic approach based on insurers' public material and Japanese law.
How a global program works
A group operating in several countries can manage its insurance in each country within one framework, known as a global (insurance) program. According to insurers, its basic structure consists of two types of policy.
| Policy | Description |
|---|---|
| Master policy | Issued in the head office's country. Sets the cover and limits common to the whole group. |
| Local policy | Issued in each country where an overseas operation is located, in line with that country's law and market practice. |
Because local policy cover depends on each country's law and standard wordings, it may fall short of the cover and limits the head office wants. The master policy fills the gap.
- DIC (Difference in Conditions): the master policy covers losses that the local policy does not cover but the master policy does. It fills gaps in coverage.
- DIL (Difference in Limits): the master policy pays losses above the local policy's limit. It fills gaps in limits.
This structure lets the head office standardize cover across the group and see gaps and overlaps by location more easily. Insurers' material lists the benefits of global programs as consistent cover, visibility of cost and compliance with each country's regulations.
Restrictions under Japanese law
Many countries restrict insurers not licensed locally from insuring risks within their territory. Japan is one of them.
Article 186 of Japan's Insurance Business Act in principle prohibits foreign insurers without a branch or other office in Japan from concluding insurance contracts relating to persons domiciled or resident in Japan, property located in Japan, and so on. It also requires anyone who wishes to apply to such a foreign insurer for insurance on property located in Japan to obtain prior permission from the Prime Minister. Some contracts specified by Cabinet Order, such as reinsurance contracts and insurance on ships and cargo used in international maritime transport, are exceptions.
For this reason, the Korean head office's master policy alone cannot, in principle, directly cover the Japanese entity's buildings and equipment or liability arising in Japan. A local policy issued by an insurer licensed in Japan is needed.
How DIC and DIL cover under the master policy extends to the Japanese operation must also be designed with this restriction in mind. Insurers' material describes an approach for countries where non-admitted insurance is not permitted: instead of covering the local entity directly, the master policy covers the parent company for the loss of its financial interest in the local entity. Which approach is appropriate needs to be confirmed, including from legal and tax perspectives.
Fronting and reinsurance
When the head office's insurer is not licensed in Japan, a method known as fronting is often used. An insurer licensed in Japan issues the local policy and transfers all or most of the risk to the head office's insurer through reinsurance. Because reinsurance contracts are an exception to the restriction in Article 186, this lets the actual risk be consolidated into the head office's program while complying with Japanese law.
Practical issues in fronting include:
- The fee received by the insurer issuing the policy in Japan (the fronting fee)
- How differences between the Japanese wording and the master policy's cover are handled
- The procedure for loss adjustment and claim payment when a loss occurs (whether the Japanese insurer pays first or waits to recover from reinsurers)
- The Japanese insurer's check of the reinsurer's creditworthiness
How reinsurance works is explained in our insight on reinsurance basics.
Insurance to check in Japan
Apart from the head office's program, some insurance needs checking under Japan's systems and market practice.
| Area | Points in Japan |
|---|---|
| Workers' accidents | Any business employing workers is covered by the government-run workers' accident compensation insurance. Many companies buy private cover on top of this (such as comprehensive workers' accident insurance or employer's liability insurance). |
| Motor | Compulsory automobile liability insurance (jibaiseki) is required by law. Bodily injury liability above it and property damage liability are covered by voluntary motor insurance. |
| Fire and property | Commercial fire insurance as a rule does not cover loss caused by earthquake, volcanic eruption or tsunami. Where needed, an extension is added (see our insight on earthquake cover for businesses). |
| Liability | Arranged according to the business, such as premises and operations liability, and products and completed operations liability. Customers' contracts may require it. |
| Receivables | If credit sales to Japanese customers grow, trade credit insurance can protect against bad debt (see What is trade credit insurance). |
| Directors and officers | Check whether the head office's directors' and officers' liability (D&O) insurance covers the Japanese entity's directors, or whether separate cover is needed in Japan. |
Office or shop leases and master agreements with customers may require specific insurance or limits. Check the insurance clauses in these contracts while preparing to enter Japan.
How to proceed
- Review the head office's program: check the master policy's cover, limits and treatment of overseas operations (whether DIC and DIL apply).
- Identify the Japanese operation's risks: list buildings and equipment, inventory, number of employees, vehicles, sales and customers, and contractual insurance requirements.
- Decide the scope of local policies: identify which insurance must be issued in Japan and set cover and limits.
- Decide how it is underwritten: whether the head office's insurer's Japanese operation or partner writes it, a Japanese insurer writes it, or fronting is used.
- Set up claims handling: decide in advance who to contact when a loss occurs in Japan, how it is reported to the head office, and which language is used.
Frequently asked questions
Q. If the Japanese entity is named on the head office's policy, is a separate policy in Japan unnecessary?
A. As explained above, insurance on property and other interests located in Japan in principle requires a contract with an insurer licensed in Japan. Check whether the head office's insurer is licensed in Japan and whether a local policy has been issued in Japan.
Q. Does a small Japanese entity need to be included in the global program?
A. Not necessarily. For a small operation, arranging stand-alone insurance in Japan may be simpler. Decide by comparing the head office's policy with the cost and administrative effort.
Q. Who pays the premium, the head office or the Japanese entity?
A. The premium for local policies is usually paid by the Japanese entity. How the master policy premium is allocated within the group can be a tax issue, so we recommend checking with a tax adviser.
How Credit Hills can help
Credit Hills is an insurance broker registered in Japan. For Korean companies' Japanese subsidiaries and branches, we identify the insurance needed in Japan, approach Japanese insurers and compare terms, and clarify how it fits with the head office's program. Because we work in both Japanese and Korean, we can explain the same content directly to the person in charge at the Japanese entity and at the Korean head office, each in their own language. We also broker reinsurance, so we can advise on structures combining fronting and reinsurance. For points that require legal or tax judgment, we ask clients to confirm with the relevant professionals.
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