24 May 2019

Taiwan to tighten rules for life firms

Taiwan’s regulator, the Financial Supervisory Commission (FSC), is planning to introduce stricter regulations for life insurers in the second half of this year to improve their financial resilience and risk profiles.

The change would incentivise insurers to write protection-type policies and move away from policies linked with wealth management.  

However, if insurers were to implement such a switch, they would need to find long-dated assets to match the liabilities. And with a lack of local long-dated assets this could prove to be a headache for insurer’s ALM teams, as well as increase the firm’s risk exposure to foreign exchange risk. 

In a recent trip to Hong Kong, Insurance Asset Risk learnt from local stakeholders Taiwan is a large unit-linked market and one where insurers are heavily exposed to foreign exchange risk.

Frank Yuen, vice president and senior analyst for financial institutions in Asia Pacific, at rating agency Moody’s Investors Service said: “Taiwan is a key market exposed to a higher FX risk because of the lack of assets to meet the cost of liabilities in the local market.”

Local insurers have increased exposure to foreign markets in terms of corporate bonds or US dollar bonds, he continued. “In terms of the credit quality, it is good, but the risk for the insurer is that they don't fully hedge this US dollar exposure - over 60% of the assets in foreign currency are not fully hedged.”

Sally Yim, Moody’s associate managing director for financial institutions in Asia Pacific added Taiwanese firms have legacy policies with high guarantees so “they need to invest in riskier assets to compensate or meet the cost of liability of the policy”.

Following a meeting this week between the FSC chairman Wellington Koo and 22 life firms, Koo said according to the Taipei Times: “We are here to resolve companies’ three major problems: overheating, low equity-to-asset ratios and the implementation of the new International Financial Reporting Standards [IFRS] 17.”

Taiwanese life insurers have reported a premium income increase of NT$ 3trn ($95.1trn) over the last three years, of which NT$ 2trn was spent on investments, Koo is reported to have said. However, the bulk of their investment is made overseas, leaving them vulnerable to exchange rates and interest rates.

Insurers had a low average equity-to-asset ratio of 5.85% at the end of March, Koo said. With the introduction of IFRS 17 around the corner, companies have to prepare and set aside a larger reserve before adoption.

Yuen told Insurance Asset Risk Taiwanese firms will be particularly impacted by IFRS 17 due to their high-guarantee portfolios.

South Korea is facing a similar issue, Yim said, but the Korean regulators have been much more vocal about adopting IFRS 17 on the set deadline. “Whereas for Taiwan, they also have some need for replenishing capital, but the regulator is taking more of a slower approach to adopt two or three years after the official implementation date.”

If Koo’s comments to local media are anything to go with, it seems the Taiwanese regulator is now ready to change to second gear.