FSA issues business improvement orders to SOMPO Holdings & SOMPO Japan

The Financial Services Agency issued business improvement orders to Sompo Japan Insurance and SOMPO Holdings. The pertinent details are as follows — compared to the original publication in Japanese, the “Reasons for disciplinary action” have been reduced in the translation here to the two main factors, the relationship between Sompo Japan and Big Motor, as well as Big Motor’s improper insurance claims.

I. Contents of business improvement order

1. Sompo Japan

(1) In order to ensure sound and appropriate business operations, implement the following:

1. Clarify management responsibility in light of this disciplinary action
2. Establish an appropriate insurance claims payment management system
    — Develop a system to prevent fraudulent claims (including measures to conduct proper damage investigations, provide referral services to repair shops from a customer-first perspective, and establish a system to centrally manage signs of fraudulent claims and take necessary actions)
    — Establish fair and accurate review systems and procedures (including verifying cases where improper non-payment may have occurred due to lack of detailed investigations, and implementing customer responses based on verification results)
3. Establish an effective agency management (insurance solicitation management) system (including measures to ensure proper insurance solicitation according to the characteristics of agencies, and consideration and implementation of proper secondment management for agencies)
4. Establish a system to thoroughly instill compliance and customer protection (including measures to timely grasp negative information, and properly report to top management including the President, and measures to ensure proper reporting to authorities)
5. Foster a sound organizational culture that prioritizes compliance and customer protection over sales (including measures to correct the corporate culture of prioritizing the company’s interests over customers’ interests)
6. Drastically strengthen management (governance) systems to steadily implement and establish the above

(2) Submit an improvement plan concerning the business improvements in (1) above by Friday, March 15, 2024, and promptly implement it

(3) Report progress and status of improvements on the improvement plan in (2) above by the 15th of every 3 months (with the first report covering up to end of May 2024)

2. SOMPO Holdings

(1) In order to ensure sound and appropriate business operations at Sompo Japan, implement the following:

1. Clarify management responsibility in light of this disciplinary action
2. As an insurance holding company, establish systems to ensure sound and appropriate business operations of insurance company subsidiaries (including measures to appropriately grasp and manage the adequacy and effectiveness of Sompo Japan’s internal controls in a timely and appropriate manner)
3. Establish systems to foster a sound organizational culture prioritizing compliance and customer protection over sales at insurance company subsidiaries (including measures to correct the corporate culture of prioritizing the company’s interests over customers’ interests)
4. Drastically strengthen management (governance) systems to steadily implement and establish the above

(2) Submit an improvement plan concerning the business improvements in (1) above by Friday, March 15, 2024, and promptly implement it

(3) Report progress and status of improvements on the improvement plan in (2) above by the 15th of every 3 months (with the first report covering up to end of May 2024)

II. Reasons for disciplinary action

Relationship between Sompo Japan and Big Motor

Big Motor and its subsidiaries BM Holdings and BM Hanaten (collectively referred to as “BM companies”) are major used car dealers with stores nationwide. They were appointed by multiple non-life insurance companies including Sompo Japan as insurance agents to sell automobile insurance and compulsory automobile liability insurance (hereinafter “compulsory auto insurance”).

As an insurance agent, the BM companies had approximately 20 billion yen in insurance premiums handled in fiscal year 2022, of which Sompo Japan’s share was approximately 12 billion yen or 60.5%, representing the largest share among the 7 insurance companies BM companies belonged to. Looking at the breakdown of Sompo Japan’s insurance premiums, automobile insurance was approximately 9.7 billion yen and compulsory auto insurance was approximately 2 billion yen in fiscal year 2022. While Sompo Japan’s share in automobile insurance has been decreasing recently, its share in compulsory auto insurance has been increasing.

In addition, BM companies have auto body and paint divisions, with some stores having auto repair garages onsite. They receive referrals from non-life insurance companies including Sompo Japan to repair policyholders’ accident vehicles when requested (hereinafter “referrals”). For BM companies, receiving referrals from insurance companies leads to increased sales at their repair garages, while insurance companies can expect increased automobile insurance sales and securing compulsory auto insurance to maintain top line (insurance premium revenue).

Improper insurance claims

It has come to light that BM companies, which operate a series of automobile-related businesses encompassing auto sales, maintenance and repairs, have been routinely engaging in malicious acts such as damaging vehicle bodies to expand repair coverage and conducting unnecessary sheet metal work/parts replacement to inflate insurance claims. There is evidence that such fraudulent claims (hereinafter “fraudulent claims”) based on these improper acts have been repeatedly and continuously carried out systematically across BM companies’ extensive network of repair garages.

While Sompo Japan and other major non-life insurance companies had been proactively referring accident vehicles to BM companies, these fraudulent claims have now come to light. In particular, the following issues have been identified at Sompo Japan regarding its response to BM companies, raising doubts about the adequacy of its control and management of BM companies:

- From May 2015 to January 2023, Sompo Japan dispatched a total of 8 employees on secondment to BM companies’ auto body and paint divisions at their request

- After introducing “simplified investigations” conducted primarily by employees other than specialized adjusters for investigating BM companies’ insurance claims, grossly improper operations significantly deviating from internal rules have been adopted

- In July 2022, while Sompo Japan and two other major non-life insurance companies suspended referrals to BM companies in June 2022 upon finding out about the fraudulent claims and were requesting BM companies to investigate the facts, Sompo Japan alone made the management decision to resume referrals to BM companies (hereinafter “resumed referrals”)

These suggest that Sompo Japan’s control and management of BM companies in relation to the fraudulent claims has been rendered ineffective.

In light of these points, investigations into Sompo Japan’s response to these fraudulent claims revealed serious flaws in its management (governance) and three lines of defense, as described in (2) below, indicating that Sompo Japan’s control and management of BM companies has been rendered completely ineffective.

The BM companies’ fraudulent claims are an extremely serious incident with far-reaching impact that could damage the trust in the entire non-life insurance industry given the malicious nature of the acts. In this context, the ineffective control and management of BM companies by Sompo Japan created an environment (opportunities for impropriety) that induced the fraudulent acts by BM companies, and consequently abetted and expanded customer harm from BM companies’ fraudulent claims. Therefore, Sompo Japan’s overall response to BM companies raises serious concerns, to say the least.

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