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Super-aged demographic can spur Taiwanese life market

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Source: Asia Insurance Review | Jun 2017

Taiwan Life & Health Pensions & Annuities Financial Performance

In this mature life market which faces challenges such as intense competition, tight regulatory control and a low interest rate environment, the spark of opportunity lies in innovation and its rapidly ageing society. 
By Ann Toh
  • The Taiwanese life insurance market is highly mature and continues to suffer from a negative interest rate spread;
  • The population’s advancement towards super-aged status creates opportunities for health insurers; and
  • Life insurance in Taiwan remains a relationship-based business, with sales driven by good agent-customer connection and face-to-face bancassurance interaction.
In 2017, total premium income in the Taiwanese life insurance market grew by 7.06% to reach TWD3,133.4 billion (US$103.7 billion). Behind this growth belie several challenges that if not managed well, could have a detrimental effect on the sector, industry associations and life insurers told Asia Insurance Review
   The first is intense competition amongst the large domestic players and smaller multinational providers. 
   As at end 2016, there are 23 domestic and six foreign insurers in the Taiwanese life segment. The top five insurers – Cathay Life, Fubon Life, Nan Shan Life, Shin Kong Life, China Life and Chunghwa Post – accounted for 65.7% of the segment’s gross written premium in 2014. 
   The market is mature and developed, with life insurance premiums equivalent to 18.34% of the island’s GDP, thus limiting potential gains. The life segment is characterised by price wars, undifferentiated product offerings and thin margins, which had triggered the withdrawal of many foreign insurers from the segment.
Life Insurance Premium Income
Tight regulatory control
The problem of intense price competition in the market is exacerbated by tight regulatory control, say industry players. “Because the development of new products is tough due to regulations, every player has the same products and goes for the same market segment. This does not have a desirable effect on Taiwan’s life insurance market,” said Ms Kitty Ching, former Executive Vice President, Investor Relations Department, Cathay Financial Holdings. (Ms Ching has since taken on a position at the Taiwan Insurance Institute).
   Product development, especially for innovative products, is highly controlled, said industry players, with a “very long” process of approval. Sometimes, by the time the approval is given, the market opportunity to launch the product is lost, they noted. Or the product ends up very different from what they originally had in mind due to the new stipulations, and “everyone ends up selling the same policies”.
   Ms Ching and many senior executives called for the regulatory environment to loosen its oversight to embrace and encourage the innovation of new products and induct new operational models and ways of thinking into the Taiwanese life sector – such as disruptive InsurTech technologies - to avert the intense price competition and fulfil the market’s changing needs. 
   She also warned that if the channel for product introduction is not smoothened, the industry’s profitability and its adoption of new technologies in step with foreign counterparts will be impacted. “If the rest of the countries are on the highway, and Taiwan is like a car on a slope, struggling to get up, it is not good for customers’ needs in their different life stages,” she said. 
   Acknowledging that the onset of insurance tech and new product innovations will inevitably cause conflict with existing regulations, Taiwan Insurance Institute (TII) President Mr Wu Chung-Chuan said the role of the supervisory system should be “to focus on the corporate governance structure, while assisting the industry to raise its innovation and professionalism”.
Low interest rate environment
Low interest rates, including domestically, is another dark cloud hovering over the Taiwanese insurance market. 
As a result of the low interest environment and historical business having been issued with much higher internal guaranteed returns (of 6-7%), the market is suffering from a general negative interest spread, and solvency and profitability issues continue to dog the sector.
   However, this is not a new challenge, as interest rates started their downward trend since 2001. Insurers – with regulatory loosening – have taken steps to mitigate the risks by selling lower-guarantee products and investment-linked policies, as well as increasing their proportion of overseas investments and mix of higher-yield fixed income instruments, such as US corporate bonds. Data from TII shows that of the TWD19.07 trillion in available funds recorded by the life insurance industry in 1H2016, foreign investment totalled TWD11.61 trillion, or 60.88%.
   Mr Abel Lin, Senior Executive Vice President of Cathay Life, as well as many other executives, say their companies are managing the interest rate spread issue well and their financial standing is robust. Data from TII shows that liability-to-owners’ equity ratio (leverage) increased from 17-fold at the end of June 2015 to 18-fold in June 2016, indicating that life insurers have higher tolerance for future losses.
   While the low interest rates continue to have an adverse effect on the sale of new policies, and investments in riskier assets have exposed incumbents to unfavourable capital and currency market movements, Mr Lin is optimistic the rebound in interest rates since last November is an early sign of a gradual increase in global interest rates, which will bring some relief to the burden of the low yield situation in Taiwan. 
   “From the fourth quarter of last year to now, interest rates seem to have climbed a bit. With Trump looking like he would cut corporate tax, and since American policy has a huge influence on international financial markets, together with other political trends such as Brexit and the French elections - although these are still ‘wait-and-see’, on the whole, we will see global interest rates slowly increase,” he said.
   Secretary General of the Life Insurance Association of the ROC, Mr Lin Jin Shu urged insurers to focus on strengthening their capital positions to increase investment flexibility and intensify their risk management capabilities.
Rapidly ageing population an opportunity for life insurers 
Despite the few dark clouds, the prospects for Taiwan’s life insurance industry remain strong, due to demographic trends such as a rapidly ageing population and government regulations addressing this issue. 
   By 2018, up to 14.5% of Taiwan’s population will be 65 or older, making it an aged society. In 2026, it will become a super-aged society, with senior citizens making up 20.5% of its population. 
   The Taiwanese government has been committed to promoting a variety of long-term policies targeted at addressing the issues of an ageing society, including revision and reform of the pension system and promotion of a social security system. 
   In 2015, it passed a Long Term Care Act, and in September 2016, the revised Long Term Care 2.0, which greatly expands the array of services provided by the government to care for the elderly, as well as widens the scope of people capable of receiving these services. Budgets have also been significantly bolstered to fund the needs of the elderly. 
   TII’s Mr Wu said life insurance products catering to an aged society will be a significant opportunity for insurers, adding: “The role of private insurers is very important in complementing the government’s various measures on strengthening the pension scheme, social security system and elderly care.” 
   He also gave a slew of recommendations for the regulator and private insurers to work together to promote investment in private health insurance and spur demand for life insurance products supporting policyholders’ post-retirement livelihoods. These include:
  • Encourage innovation and variety in commercial annuity products. Currently, the common types of annuities in Taiwan are traditional immediate or deferred annuities, interest-sensitive annuities and variable/unit-linked annuities. 

   Mr Wu suggested that the annuity market could be opened up to encourage innovation and variety, such as introducing the enhanced annuities prevalent in the UK market. This will allow less healthy citizens to enjoy a higher annuity payout and also offers them a fairer deal. 

  • Promote a more diverse variety of life insurance policies. These include policies with “in-kind” benefits that do away with monetary claims payments (eg policies that compensate via direct use of medical services such as telecare) and “spillover” benefits (eg policies whereby insureds enjoy reduction in premium if they lower their risk or take steps to improve their health). Mr Wu said these innovative policies meet the changing demands of insureds, and life insurers should work actively towards introducing these plans.
  • Encourage policies that insure the uninsurable, such as people with cancer and other chronic diseases, as these plans are available outside Taiwan but not yet offered locally. The industry should design policies that further segment risk. 
  • Develop commercial long-term care insurance to complement the government’s Long Term Care 2.0 initiatives.
  • Build a local database for long-term care incidents. In Taiwan, the history for long-term care insurance is short, and evidence collected so far is from overseas incidence rates, which may not be applicable locally due to cultural factors and other local conditions. 
  • Use tax incentives to spur Taiwanese to purchase products for an ageing society. Currently, the tax deduction enjoyed by Taiwanese for insurance products is TWD24,000, which is often insufficient for taxpayers’ use. Mr Wu proposed having separate limits for “annuity premium” and “long-term care insurance”, or an increase in the current tax deductible limit. This will spur locals to actively use the products to plan for their retirement, economic security and medical care. A 
Interest-sensitive life policies jump 34% in 1H2016 
Figures from the Taiwan Insurance Institute (TII) showed that in the first half of 2016, the life insurance industry in Taiwan recorded a 9.84% growth in total premium income to reach TWD1,549.1 billion (US$51.4 billion), from TWD1,410.3 billion in the same period in 2015. 
   Steady rises in both first-year and renewal premiums contributed to the growth in premium income. First-year premium income accounted for TWD654.5 billion, a 12.55% increase from 1H2015, while renewal premium income grew 7.95% to TWD894.6 billion.
Breakdown of premium income by product
Overall, the increase in premium income was a result of growth in premium income generated from traditional products, amounting to TWD1,421.5 billion, or 91.76% of the total premium income. 
   Of these policies, life insurance accounted for TWD1,159.9 billion (up by 23.87% year-on-year); health insurance generated TWD161.6 billion in premium income (up by 4.6%); accident insurance totalled TWD31.1 billion (up by 2.64%); and annuity premium income reached TWD68.9 billion (up by 28.31%).
Increased sales from interest-sensitive policies
The overall impressive demand for traditional insurance policies can be attributed to Taiwanese insurers continuing to declare competitive interest rates, against a backdrop of persistently low interest rates across Europe, the US, Japan, and Taiwan, TII said. This has driven up sales of interest-sensitive insurance policies. 
   TII noted that a number of insurance companies in Taiwan started lowering their declared interest rates around April or May last year, or replaced old policies with new ones. 
   Meanwhile, when the regulator moved to require insurance companies to reduce policy sales commissions paid to distribution channels, banks pushed for the sale of single-premium interest-sensitive insurance policies before the new regulation came into effect, leading to a growth of insurance policy sales in June last year. 
   As such, the first-year premium income generated by interest-sensitive life insurance policies increased 33.75% to TWD289 billion in 1H2016. The first-year premium income of interest-sensitive annuity insurance policies also grew 26.72% to TWD64.1 billion in 1H2016.
   By contrast, investment-linked products lost their allure owing to dampened investor confidence stemming from fluctuations in global financial markets. First-year premium income from investment-linked products dropped by 54.15% to TWD83.5 billion in 1H2016. The premium income generated by investment-linked insurance policies also declined 45.71% to TWD127.7 billion for the same period. 
Industry channel mix
In 1H2016, bancassurance and agency channels generated TWD326.7 billion (49.92%) and TWD285.5 billion (43.62%) of the life insurance industry’s total first-year premium income, respectively. The two distribution channels represented 93.54% of the total market share, while other channels accounted for merely 6.46%.
   The Taiwanese life insurance industry remains a relationship-based business, said Ms Maria Chen, Deputy Leader, Financial Services, PwC Taiwan. “Agents have very good connections with their customers, and even in bancassurance, face-to-face relationships are very important. So the human element is crucial to the sales process,” she said. Ms Chen sees InsurTech being used not in replacing agents and bancassurance sales people, but in the use of Big Data to segment customers more finely so that new products can be tailor-made for each group. 
Are Taiwanese really well protected?
Taiwan’s insurance penetration (i.e. ratio of insurance premium to GDP) in 2015 was 18.97%, the second highest in the world. Its insurance density (i.e. average insurance expenditure per capita) was TWD133,109 in 2016. In 2015, the ratio of the number of in-force policies of life insurance and annuity to the size of the population was 234.16%. 
   But senior insurance executives who spoke to Asia Insurance Review said Taiwanese remain under-protected, as the bulk of premium income is spent on savings-type products (see Table 2). 
Life insurance premium income – By product type
   “Premiums for savings products are typically big-ticket so they also tend to inflate insurance density,” said Mr Chen Chang-Jeng, Deputy Secretary General of the Life Insurance Association of ROC.
Savings-type products still the most popular
While the industry has been actively trying to convince the Taiwanese to increase the protection element of their insurance coverage, it is an uphill task as Taiwan’s life insurance sector has long been a central conduit for organised savings. 
   “Taiwanese consumers prefer insurance products that combine insurance with financial planning and savings. As bank interest rates are low – typically at about 1.5% – Taiwanese use life insurance as a savings accumulation tool, because they can get a higher interest rate of about 2%. So the typical Taiwanese consumer wants his insurance budget to achieve some protection, and some savings for himself, so he can use it whenever he wants to,” said Ms Maria Chen, Deputy Leader, Financial Services, PwC Taiwan.
   “So any products tied to savings will be their first choice. This trend will continue – PA and Health will still grow, but not by a whole lot,” she added. 
Educating consumers
Ms Kitty Ching, ex-Executive Vice President, Investor Relations Department, Cathay Financial Holdings, believes savings products have boomed in the last few years as a result of the government’s retirement reform, which has raised consumers’ awareness of the need to fund retirement with their private resources. 
   Mr Lin Jin Shu, Secretary General of the Life Insurance Association, said: “Our insurance companies have told consumers to build up their protection. Seventy percent of them have health insurance, and about 60-70% have PA. So everyone does have the basic protection. It’s just that protection insurance is not growing as fast as the savings products.”
   Insurers such as Cathay Life have put in effort to educate customers to buy term and invest in mutual funds or its unit-linked products. But Mr Abel Lin, its Senior Executive Vice President, said this has not been easy. 
   “They just want short-term savings products with a short maturity and will buy again once these mature. Cash-back is also very attractive – this is why our unit-linked products also has this feature. This demand is so strong that you will need to cater for it.”



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