While Taiwan’s life insurance sector bounced back to profit in 2012, the sector’s growth forecast for 2013 is not as glowing, with negative growth expected. However, adjustments and support from the regulator are helping the sector, and life insurers said they are ready and raring to go, intending to expand their businesses, both domestically and internationally.
Taiwan's life insurance industry registered about TWD2.4 trillion (US$80.1 billion) in premium income in 2012 but for 2013, it is expected that income may be about TWD2.1 trillion, said Mr Paul Hsu, Chairman of The Life Insurance Association of the Republic of China (LIAROC). This is due to various factors, but mainly because of the reduction of sales of certain products, including foreign currency products such as RMB investment products.
Elaborating on the expected reduction of sales in RMB investment products, he said: “Although there has been some degree of liberalisation in the Chinese market, we still face limitations. For example, while we can sell RMB investment policies, we still face limitations or caps when investing these funds.”
Mr Hsiung Ming-Ho, President of Cathay Life Insurance Co Ltd, too, said major life insurers have reduced their growth forecast for 2013. He believes that this is in consideration that first-year premiums had hit a historical high in 2012, mainly due to the adjustment of assumed interest rate. “In the first six months of this year, the first-year premiums saw a shortfall of 20%,” he said.
Fierce competition leads to less protection-type policies sold
For Mr Warren Tseng, President of the Taiwan Insurance Institute (TII), he said that the biggest issue for the life sector is the fierce competition for market share.
This competition has led to the marketing of more investment products rather than protection-type products, most of them through bancassurance. “Two-thirds of the total premiums collected comes through this channel. Customers go to the banks intending to deposit funds but end up buying insurance as the returns are higher than bank deposits. This is not healthy. It confuses people about what insurance is all about and it leads to disputes. Also with the collection of so much premiums, the money ends up sitting idle and costs are involved as a result. Only big companies can manage to get a profit,” Mr Tseng said.
Easing of regulations beneficial to market
Despite this slightly sober outlook, the insurers have been positive and welcoming to the relaxation in regulations by the Financial Supervisory Commission (FSC). These include letting insurers invest in infrastructure projects; relaxing restrictions on investment in domestic RMB deposits and in securities denominated in RMB bonds and relaxing regulations on overseas investments by insurers amongst others.
“These relaxation measures by FSC are what the sector needs and will surely be beneficial to the industry,” said Mr Hsu. “Life insurers have a lot of funds to invest and the opportunities to invest in public infrastructure projects is aggressively welcomed by the life sector.”
Increasing overseas investments
The easing of regulations will also improve investment yields, increase overseas investments and enhance capital control, said Mr Hsiung. With a more wide-open and diversified investment environment, insurers can approach their asset allocation properly with stable yields and longer durations in domestic infrastructure projects and the long-term care (LTC) business. Alternatively, they can pursue higher yields relative to domestic investments through investing in overseas fixed-income securities with BB+ ratings, foreign real estate, dim sum bonds and RMB-denominated securities.
With the relaxation in investment restrictions and insurers increasing overseas investments, Mr Hsiung added the insurers would put more effort in market research and deeper industry studies to monitor financial markets’ volatilities and the relationships in between. “Insurers will try harder to set up more precise and accurate risk capital models to ensure their company’s capital is well-managed and controlled,” he said.
Mr Tseng concurred the FSC has been very helpful in extending the overseas investment cap from 20% to 45% and also that the FSC have allowed foreign currency products and these can be invested overseas. He hopes these will alleviate the insurers’ investment needs while noting that with regard to the increased cap of 45%, “many life companies are almost hitting their quotas already.”
More can be done to tackle market challenges
The life sector remains plagued by negative spread and low interest rate environment, and Mr Hsiung is of the view that the insurance industry is still full of challenges currently. He said: “FSC has revised regulations to allow a more flexible investment strategy. We are pleased to see that FSC’s policy sets out clear intentions and a path that will inspire the whole industry, thus helping the sector overcome the challenges.”
In the short term, more openness in investment regulations will help insurers earn higher profits and achieve stronger capital adequacy, as well as increase the insurance industry’s global competitiveness. He suggested that FSC introduce insurers’ funds into urban renewal projects and make insurers the enforcers of such projects, he said. “At the same time, we think that an overseas loan business will increase yields sufficiently based on spread between domestic and foreign interest rates,” said Mr Hsiung.
For a longer term suggestion focussing on developing the insurance industry in future, he suggested that FSC follow Japan’s example in adopting different criteria for insurance companies based on its size and quality. “We suggest that FSC release all investment limitations such as the rating requirement at least above a specific level, the concentration limitation of each asset class, etc. And FSC only needs to focus on requiring insurers to maintain their RBC requirements above a specific standard with different risk factor charges on different investment items,” he said.
It is also important for FSC to build a “complete withdrawal mechanism for insurers”, thus letting insurers exert self-discipline and putting all their efforts into maximising the company’s profit and policyholders’ interests.
Benefits will surface in time to come
Mr Hsu felt FSC has helped the industry a great deal with its policy amendments. “Reducing the restriction of the overseas investment target is expected to generate benefits in these two years. The industry needs time to ‘digest’ it and adjust their investment portfolio,” he said.
On solving the issue of negative spread, he said that insurers’ equity is currently under FSC’s regulation and insurers are required to file for approval from FSC to release cash dividends, which have been restricted by the regulator.
Further, FSC is strict on the inflow of short-term funds from new business, and had implemented measures on insurance companies’ liability reserves in order to avoid a situation of too much idle cash. As such, Mr Hsu thinks these measures are sufficient to cope with the current negative spread and low interest rate environment issues. “I would suggest FSC continue its observations and open up the market further when the time is right,” he said.
Cross-strait cooperation
With the declining premium income and matured domestic market, expanding overseas is a key strategy for many life insurers in Taiwan and many of them are looking at China.
Mr Hsu said: “The Taiwanese life industry needs to do three things: innovate, create, and expand markets.” He cited the Chinese market as their key target given the advantages of similar language and culture.
As the cross-strait cooperation between FSC and the China Insurance Regulatory Commission (CIRC) progress is underway, the life sector has listed certain issues which they hope that the regulators would address.
Mr Hsiung listed two suggestions: 1) relaxing foreign ownership restrictions for life insurance joint-venture types in China; 2) establishing relevant regulations for insurance fraud prevention as well as setting up a platform for mutual recognition of professional certification.
Mr Hsu said: “CIRC requires that Taiwan insurance companies have to be established for at least 30 years in order to enter China – we hope this can be reconsidered and revised to perhaps 10 or 20 years. Thirty years is too long and there are not many insurance companies in Taiwan that have been established for that long.”
He added: “Between FSC and CIRC, we hope one will play a larger, leading role. We hope that when the CIRC Chairman comes to attend the IAIS in October, we can work on taking discussions further.”