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Preparing for a Deregulated Market

Japan's insurance industry has been gradually deregulating since the 1994 and 1996 trade accords between Japan and the United States, and Japan's 1996 plan for a financial "Big Bang." Deregulation of the so-called "third sector," the segment in which AFLAC principally operates, began January 1, 2001. To prepare for a more competitive environment, AFLAC Japan has taken inventory of its strengths and weaknesses for the last several years. Based on this review, we improved many elements of our business.

One area of focus in preparing for deregulation has been our distribution system. During 2000, we recruited 2,039 new agencies, bringing the number of agencies we have recruited to more than 7,000 in the last three years. By comparison, we averaged less than 700 new agencies per year from 1994 through 1997. Most of our new recruits are individual rather than corporate agencies. Individual agencies give us better access to Japan's immense small-business market. We estimate that there are roughly 40 million Japanese workers who are employed at small businesses. Since our penetration in this market is less than 20%, we believe there is great potential for expansion.

To further improve our distribution system, we signed a strategic marketing agreement with Dai-ichi Mutual Life Insurance Company in September 2000. This marketing alliance brings together Japan's second largest life insurance company and AFLAC, the leading third-sector company. Dai-ichi Life has more than 1,900 sales offices and a sales force of over 50,000 in Japan. Dai-ichi Life's salespeople, who should begin selling for us in April, will in effect be an extension of our tremendous distribution system of corporate and individual agencies. By enhancing our distribution system, we believe that we will be able to better penetrate the individual and small-business market with AFLAC's products.

One of the attractions to AFLAC is the compensation we provide to members of our sales force. To give them more options, we introduced an alternative commission contract in mid-2000. The new contract pays a first-year commission rate that is significantly higher than our original contract, but limits the renewal commissions to a nine-year period. By the end of the year, about 2,000 agencies had signed on for the new commission schedule. In addition, Dai-ichi Life elected to operate under the new contract. Offering flexible compensation should continue to benefit our agency recruiting. The new commission contract should also help our newly recruited agencies get off to a quicker start in building their business.

We also continued to refine our product line for a deregulated market. In mid-2000, we began selling new, lower-premium cancer life and care products to meet the needs of cost-sensitive buyers. Approximately 29% of new cancer life and 59% of care policy sales were from the lower premium products. At the end of 2000, we introduced a major revision to our cancer life policy. This new product, called 21st Century Cancer Life, offers a variety of coverage choices to our customers. As a result, employers will be able to offer a customized AFLAC cancer life policy to better suit the needs of their workers. While providing increased flexibility to our customers, we also believe our product will continue to offer a better value than competing products in the Japanese marketplace. Improving our product line and identifying new product opportunities is an ongoing process, so we will continue to actively research and develop more products and riders.

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