The Taiwanese life insurance sector has generally increased margins in savings-type products, but various hurdles remain evident, says Moody's Investors Service which is maintaining its negative outlook on the sector.
In a report released yesterday, Mr Frank Yuen, a Moody's Assistant Vice President and Analyst, said: “The negative outlook is based on several factors: the industry is making slow progress in selling products with higher protection elements; there is rising asset risk from a more aggressive investment allocation; and the sector's capital position is weak. These factors will persist in the coming 12-18 months."
"Furthermore, Taiwan life insurers may have reduced their negative-spread burdens, but the cost has been additional investment risks. "
The report, which is titled "Life Insurance – Taiwan: Rising asset risk underpins negative outlook", says that the persistent accumulation of spread-dependent products will steer insurers' asset allocations towards overseas investments. This accumulation adds to their asset and liability management challenges, including higher currency risks, liquidity risks and reinvestment risks. The industry's profitability, and thus its internal capital generation, remains weak as insurers pass on to policyholders most of the yield enhancement from more aggressive investment allocations.
Amid increasing asset risks and high equity leverage, Moody's expects that the capital buffers of insurers – which help them withstand material volatility in the capital markets – will diminish. Moody's expects that savings-type products will remain the main source of premium growth, supported by Taiwan's high household savings, ample domestic liquidity, and very low interest rates. At the same time, there has been some improvement in product mix as major life insurers have lengthened premium terms, thereby increasing margins on new business. Regulatory changes have also steered a consistent improvement in product mix.
However, most insurers still carry significant legacy policies with high guarantee rates, which has led to the high average cost of liabilities. In addition, the industry shows slow progress in developing protection-type products but has stepped up efforts in selling more US dollar-denominated policies and investment-linked polices to mitigate rising asset risks.