Like the 64 million others who came that year, John Amos arrived in Osaka in 1970 to see the exposition, a sprawling assemblage of propaganda pavilions planted on the outskirts of the city. The Soviet exhibition looked like a used spacecraft lot laid out under the watchful eye of cosmonaut Yuri Gagarin’s giant portrait. People lined up for hours at the American pavilion to see moon rocks Apollo 11 had shuttled home the previous year.
But it was the surgical-style masks the Japanese wore that really made an impression on Amos, an Alabama-born, heavy-smoking, attorney-by-training.
They wear them to cut down on the risk of getting colds, someone told him.
That sounded promising.
Fifteen years earlier Amos—along with his two brothers—had founded American Family Life Insurance Company in the western Georgia city of Columbus. The company had done well, pioneering not only an innovative form of supplemental health insurance, but an innovative way of selling it. (They marketed to companies who, in turn, offered it to their employees. Most other companies simply sold policies with flotillas of salesmen knocking on doors.)
Of course, the insurance Amos and his brothers sold wasn’t for run-of-the-mill colds. No, the empire of American Family—now better known as AFLAC—was built on cancer.
Fertile Ground
Before Aflac’s ubiquitous duck advertisements—Aflaaaack—started airing in early 2000, the company was a relatively little known player in the US supplemental insurance market. And while brand awareness and revenue have both soared in the US since then, few Americans realize that Aflac’s stateside operations are largely a sideshow.
The overwhelming majority of its profits—some 75% of Aflac’s pre-tax earnings in 2012—come from Japan and have done so for years. The company’s position in Japan has helped Aflac consistently outpace the industry average in profit growth. And the cornerstone of Aflac’s Japan business is one incredibly bleak-sounding product line: Cancer insurance.
If your business thrived on a healthy fear of cancer, there were few better places to be than Japan in the 1970s. Cancer was in the midst of a decades long climb that would eventually make it Japan’s top killer in 1981. It remains the number one cause of death in Japan.
No one knows exactly why the rate of the disease—particularly stomach cancers—first exploded higher in the 1950s.
Some think the rise was tied to Westernized diets during the post-war occupation period. Others suggest the delayed effects of the heavy military-industrial buildup of the 1930s, which exposed workers to hazardous materials used in the shipbuilding, iron, steel and chemical industries.
Still others blamed a bout of amphetamine addiction that swept Japan in immediately after World War II, as military stockpiles of speed—regularly issued to on-duty sentries, and members of the special forces, such as Kamikaze pilots—found their way into the general populace. The rise of lung cancer was less mysterious. Smoking rates climbed to some of the highest in the industrialized world in postwar Japan, as a generation of fatherless street kids took up the habit.
It’s worth noting that rising rates of cancer deaths may merely be a symptom of success. While cancer rates began rising in the 1950s, so did Japanese lifespans, as poverty-related causes of death such as tuberculosis, which long plagued the country, dropped with the arrival of broad-based prosperity. An aging population also essentially ensures that cancer will rise as a cause of death since the elderly are much more likely to be stricken with the disease.
Fear, Silence and Death
Amos knew cancer. By some accounts, the idea for Aflac’s line of cancer insurance policies came after his father died of the disease. (A heavy smoker, Amos himself would die from complications related to cancer in 1990.) And Amos also knew a market when he saw one. ”Anybody who will wear a mask will buy health insurance,” explained Aflac’s current CEO, John’s nephew Dan Amos, to the Atlanta Journal Constitution, of his uncle’s hunch about Japan.
A 1994 profile of the company in Forbes described Amos’s approach to market research this way:
With his brothers William and Paul, he started Aflac in 1955 selling medical insurance, and in 1958 specialized by selling cancer insurance to Americans. He didn’t know much about cancer statistics, but figured that where there was fear there was an opportunity to charge premiums high enough to make money. Says Kriss Cloninger III, Aflac’s chief financial officer, “John just counted on things always working out.”
In Japan, there was plenty of fear. There was also plenty of demand for insurance. (It remains one of the world’s largest insurance markets.) And there wasn’t a lot of something else: Competition.
Stigma
It’s hard to sell cancer insurance if you don’t use the word cancer. And in Japan, the word isn’t used lightly. In fact, as Aflac was getting established in Japan—it was licensed in Japan in 1974—the word was barely used at all.
Until relatively recently, physicians there wouldn’t even necessarily inform patients that they had the disease, considering the diagnosis too dispiriting for patients to hear. A 1992 survey of Japanese physicians found that only 13% communicated cancer diagnoses to patients, though disclosure rates have risen substantially in recent years. Emperor Hirohito died of cancer in 1989, without having been given the diagnosis. (Although in a sign of changing times, his son’s battle with prostate cancer has been a matter of public record.)
In Japan, there have been practical reasons to avoid the topic. For one thing, openly talking about cancer might mean you could lose your job. Even today, the cancer stigma remains so strong in Japan that many Japanese assume anyone who has the disease couldn’t possibly work. A government survey in 2012 found that of cancer patients who left their jobs after falling ill, about 40% reported having been instructed or pressured by their employers to leave.
For decades, Japanese public attitudes often focused on cancer’s genetic component, so a diagnosis of the disease could have implications for entire families. People often worry that a cancer diagnosis can render family members unsuitable for marriage because of the risk of genetic defects. That may be a distant echo of the atomic bombs that struck Hiroshima and Nagasaki. Both survivors of the bombings—known as Hibakusha—and their offspring have long faced social discrimination in Japan. (The 2011 Fukushima nuclear disaster also reactivated deep-seated worry about radiation exposure in Japan.)
The dread of cancer—where the course of the illness can last years—also runs against against long-held Japanese notions of what an “ideal death” looks like: sudden, peaceful and painless. There’s even a precise word for it “pokkuri shinu.” (Pokkuri is an onomatopoeic phrase meaning something like “sudden bursting” or “popping.”) In English, ”pokkuri shinu” translates roughly into “popping off.” In fact, so important is the notion of pokkuri shinu that there are actually specific temples throughout Japan, known as pokkuri dera, where elderly Japanese pray for a no-muss, no-fuss demise.
The stigma associated with cancer has lessened quite a bit in recent years. But the prospect of such a terrible death, mixed with streaks of stoicism and reserve that run in Japanese culture made cancer a virtually unmentionable topic until relatively recently. And if doctors couldn’t even mention it to patients, insurance companies wouldn’t either.
“Aflac was the only company willing to write [cancer insurance], or even discuss it,” said Yaron Kinar, a life insurance industry analyst who covers Aflac for Deutsche Bank.
No competition
So what exactly is cancer insurance?
Japan already has compulsory national health insurance which covers cancer treatments. But supplemental insurance of the sort that Aflac sells provide payments that can be used for extra medical expenses associated with the disease, such as private nursing costs, private rooms, travel and family lodging costs, as well as lost income. (For the record, hospital stays for cancer treatment tend to be much longer in Japan.) These costs can be substantial.
Aflac started selling cancer insurance policies in the US in 1958. And after Aflac started up in Japan in 1974—the same year the company listed on the New York Stock Exchange—it was the first company to introduce cancer insurance in the country. Until 1981, it remained the only one. For the first few years Aflac was in Japan, the company had a literal monopoly on selling cancer insurance in Japan.
In fact, thanks to wrangling between the US and Japan over trade issues, Japanese regulators kept large domestic insurance companies from competing in some supplemental insurance products, such as cancer insurance, until the sector was deregulated in 2001.
It was seen as a small concession to the US, which had been hammering Japan on opening its rather closed economy. In an interview with the Atlanta Journal Constitution back in 2000, an insurance industry analyst summed up the view of Japanese policy makers: “Nobody is going to buy dreaded disease insurance, so let’s give it to the Americans. Let them have it.”
But they did buy it. Oh boy, did they, as some of Japan’s largest corporations gave their stamp of approval to Aflac’s offerings.
As it got established in Japan, Aflac inked deals with thousands of Japanese corporations establishing in-house subsidiaries of the company. In some instances, managers who recently retired at a Japanese corporation company would turn around and establish an Aflac outpost in the very same office. Here’s how the New York Times wrote about Aflac’s in-house agencies at Japanese corporations back in the 1990s.
Such an arrangement means that the 43,000 Japanese companies offering Aflac policies effectively endorse the Georgia company’s insurance. And the list of participating companies reads like a roll-call of Japan Inc.—Hitachi, Sony, Toyota, Nissan, Dai-Ichi Kangyo Bank, Sumitomo Bank, Mitsui, Mitsubishi and thousands of others.
Boom
By 1991, Aflac held 99% of a the cancer insurance market, according to March 1992 story in the Japanese business weekly Nikkei. By the end of 2001—the year that Japan deregulated its supplemental insurance market, allowing large insurers in the cancer market—Aflac Japan had more than 13 million policy owners. That year, Aflac Japan accounted for 74% of the company’s pretax operating earnings.
Aflac’s prized position in the Japanese cancer market has continued to help power the firm’s explosive profitability in recent years. Aflac’s growth in return on equity (ROE), a key measure of profitability, has historically hovered in the mid-to-high-20% range annually. ROE growth for the insurance industry as a whole has been around 13% annually.
“If you look at Aflac’s both earnings growth and ROE, it is far superior to the industry,” says Kinar, the Deutsche Bank insurance analyst. The company’s outperformance had much to do with its unique position in Japan, Kinar adds.
Aflac did lose its corner on the cancer market along the way. The deregulation of Japan’s insurance market was accompanied by the entry of large competitors into the once-cushy world of cancer insurance. Giant Japanese insurer Nippon Life immediately entered the market in January 2001. Tokio Marine and MetLife Alico have also bitten off a fair share of the cancer market that was once all Aflac’s.
So is Aflac’s successful run in Japan over? The growth of cancer insurance has slowed markedly in the face of new competitors. But the company still controls about 50% of the cancer insurance market, according to Moody’s. Revenue from Japan accounted for 77% of Aflac’s total revenue in 2012, up from 75% in 2011. At the end of the 2012 there were some 14 million cancer policies in force in Japan.
The company has made a push into other kinds of insurance in Japan. And Aflac just finalized a deal with Japan’s massive postal system to expand the offerings of Aflac cancer products at post office locations throughout the country. (Aflac began selling cancer insurance in Japanese post offices in 2008.) So cancer will remain a cornerstone of Aflac’s business for a long time to come.