The Financial Supervisory Commission (FSC) has proposed to prepare for an enhanced solvency regime for insurers in three phases over the next five years.
The move to adopt the new Insurance Capital Standard (ICS 2.0), to be implemented in 2026, is credit positive for Taiwanese insurers as it would encourage insurers to raise capital or reduce dividends given higher capital requirements expected upon implementation, says Moody's Investors Service.
Mr Kelvin Kwok, analyst, Financial Institutions Group, Moody’s Investors Service, said, “Required capital on life insurance business is likely to greatly increase, because insurers will have to calculate insurance reserves using market interest rates as discount rates instead of the high historical lock-in rates under current practice. In response, we expect insurers to continue to sell products with lower guarantee rates to mitigate additional capital requirements.”
According to the proposed timetable, 2020-2021 is the first phase involving "on-site trial calculations" of solvency. The period from 2022 to 2024 is the second phase which is the parallel testing period. 2025 is the third phase when insurers prepare for integration of the new system and allows them to carry out inspection of all relevant operations. The implementation of ICS 2.0 is in line with the implementation schedule of IFRS 17.
The FSC proposed that life insurance companies adjust their insurance policies and investment strategy to comply with new international standards on insurers’ solvency.
The regulator said that ICS 2.0 would be stricter than the current risk-based capital (RBC) calculation, as under the new rules insurers would need to evaluate their assets and liabilities at fair value every six months, while the RBC calculation allows insurers to adopt a mixed approach, according to a report in The Taipei Times.
Local insurers, which provide long-term insurance products, such as 30-year policies or wholelife insurance, might have difficulty calculating their liabilities on a fair-value basis, as it could be challenging to select the discount rate for their future payment of pension benefits, Insurance Bureau Director-General Ms Shih Chiung-hwa said at a news conference.
Insurance companies are expected to refrain from selling 30-year or whole life insurance products after ICS takes effect, which would be a major change for the local industry, the FSC said.
“As insurers would want to prevent volatility in the valuation of their assets to meet ICS standards, we expect them to prefer investing in fixed-income products rather than equities,” a commission official said.
If an insurer’s ICS ratio does not meet the standard of 100%, it would be considered to have inadequate capital and required to inject new funds, a move similar to the requirement for insurers whose RBC ratio is lower than 200%, Ms Shih said.
The commission would ask all insurers to re-evaluate their assets and liabilities based on ICS this year and next year, after which it would determine whether to implement the global standards with moderate modifications, she said.