TOKYO, June 21 (Reuters) - Japan's financial regulator imposed a slate of business suspensions on Mitsui Sumitomo Insurance Co. Ltd. (8752.T: Quote, Profile, Research) on Wednesday, after the firm failed to pay thousands of auto and health insurance claims.

The Financial Services Agency (FSA) banned Mitsui Sumitomo, Japan's second-biggest casualty insurer by market value, from selling all kinds of insurance for two weeks beginning on July 10, and from selling health insurance indefinitely until it showed it had fixed its compliance problems.

The agency also barred the firm from applying for new product licences for up to a year and from establishing new overseas units for three months, both starting on June 22.

Mitsui Sumitomo was one of about two dozen insurers that admitted last year to failing to pay a combined 8.4 billion yen ($73.4 million) in benefits due to policy-holders.

The firm reported then that it had failed to pay about 27,000 legitimate claims during a three-year period, but a subsequent inspection by the FSA uncovered roughly 18,000 additional non-payment cases worth 885 million yen, the agency said.

"Paying claims is one of the basic functions of an insurance company. If it can't do that then something is fundamentally wrong," an FSA official told reporters.

Last month the FSA banned rival Sompo Japan Insurance Inc. (8755.T: Quote, Profile, Research) from selling casualty insurance for two weeks for a series of violations, including failing to pay claims and padding its sales by paying premiums on behalf of clients.

Mitsui Sumitomo drew harsher penalties because the number of unreported non-payment cases at the firm was more than 10 times that at Sompo.

In some cases, Mitsui Sumitomo agents told customers who complained about the firm's refusal to pay that their premiums would rise if they they pressed their claims, the FSA said.

"This was simply mis-information," the agency official said.

Although health insurance makes up only a small part of Mitsui Sumitomo's business and accounted for less than 1,000 of the mew non-payement cases, the FSA's indefinite suspension of that operation represented an unusually harsh penalty.

Mitsui Sumitomo apologised for the problems in a statement.

"All our employees take the penalty seriously and are working diligently to prevent further incidents and restore faith in the company."

The ban on establishing new overseas units arose from problems found at Mitsui Sumitomo's UK subsidiary.

An unnamed director of the unit paid consulting fees to outside firms without proper contracts or authorisation from the board, creating "the potential for embezzlement", the FSA said.

Mitsui Sumitomo can shorten its one-year suspension from new-product development by up to six months if it can show that it has cleaned up its business, the FSA said.

_____________________________

© Reuters 2006. All Rights Reserved.