Taiwan: Outlook bearish despite new solvency regime
New solvency framework unlikely to fix Taiwan’s gloomy market outlook.
Andrew Putwainposted on Thursday, August 24, 2023
Taiwan’s insurance industry will see a new solvency framework implemented, but observers predict little improvement due to current bearish market conditions.
The new framework will encompass a Solvency II-style three-pillar regime, which is in the process of being rolled out in other east Asian developed markets.
Taiwan will adopt a modified version of the International Capital Standard (ICS), K-ICS. The changes here are similar to those enacted in South Korea and Japan, which are also installing regimes.
Hong Kong is following suit, and other Asian markets, such as Indonesia, are shaking up their solvency systems too.
"An unfavourable economic environment has weakened
insurers’ organic capital growth."
Taiwan’s version of ICS is expected to launch in 2026. In a 2019 statement on the change, the local Insurance Bureau said the move was about “following global updates and closely monitoring the risks that insurance enterprises are exposed [to]”.
How are local markets doing?
These solvency changes have the potential to make local Taiwanese markets stronger on the international stage – especially after recent years of suffering due to US economic conditions.
“Domestic life insurers are preparing to implement Taiwan’s Insurance Capital Standard in 2026, a new localised solvency framework that aims to better reflect risks,” said Fitch Ratings in its “Taiwan Life Insurance Dashboard: August 2023”.
“However, an unfavourable economic environment has weakened insurers’ organic capital growth,” it added. This situation could mean continued financial blows to the industry.
One of the main conditions behind this prediction is global inflation and interest rate hikes, which have trickled down from US markets to Taiwan – and into consumers’ pockets. Whilst the annual inflation rate in Taiwan rose to 1.88% in July 2023 – up from an over two-year low of 1.75% in the previous month and almost in line with market expectations of 1.90% – it was still far lower than rates in the West.
However, economic commentators still expected consumers to cut back on areas that could fuel insurance growth.
"We also expect premium decline in Taiwan’s life industry to moderate due
to an already-low base in the coming 12-18 months."
Economists believe that Taiwan’s inflation rate – lower than many other countries’ – will see its central bank maintain low interest rates.
Fitch Ratings said it believed these conditions have spurred life insurers to issue subordinated debt to rebuild their equity bases. The ratings company added that it believes many insurers could face capital pressure under the more stringent solvency regime.
“We also expect premium decline in Taiwan’s life industry to moderate due to an already-low base in the coming 12-18 months. This follows a challenging few years, [which have been] demonstrated by plunging premiums and net income [amidst] US interest rate hikes.”
The Taiwanese life insurance industry witnessed a decline of 21.4% in 2022 due to uncertain macroeconomic market conditions, which impacted the industry’s renewals, said Anurag Baliarsingh, Insurance Analyst at research company GlobalData.
“Premiums from foreign-currency-denominated life insurance policies, which accounted for 46.7% of new business in 2022, declined by 32%. This was due to the appreciation of the US dollar, which caused an increase in the prices of these policies,” he continued.
Taiwanese insurers are still overwhelmingly putting their capital into foreign investment, according to Fitch.
From 2020 to 2023, the category made up approximately 60 to 70% of investment mixes, with bonds coming in second. Real estate and stocks made up smaller amounts. Bank deposits significantly shrunk as a mix over the period.
Life insurers were also hit by losses, with Fitch emphasising that their capital had “plunged” – driven by “unrealised investment losses on foreign bond investments from US interest rate hikes”. “The risk-based capital ratio of Taiwan’s top-six life insurers, which represent 71% of industry premiums, remained above the 200% regulatory minimum but trended downward,” it said.
Nevertheless, Taiwan’s life insurers are still seeing good growth in their investment portfolios, according to the Taiwanese Insurance Institute’s data. Total asset amounts in 2023 were NT$34,175 billion (£849 billion).
In its report, Fitch noted that it expected premiums to decline in Taiwan’s life industry to moderate from a low base within the next 12-18 months, following a “years-long decline” from the 2019 level.
“Premiums dropped by 21% in 2022 on uncertain economic conditions and lower sales of savings products amid tighter regulation,” said the report. “New business from foreign currency-denominated policies also fell due to the appreciation of the US dollar, which raised policy prices.”
"After years of decline, Taiwan’s life insurance industry is
forecast to recover from 2024."
There were mixed blessings though: health insurance expanded on Taiwan’s “rapidly ageing population [and] rising awareness of health risks and healthcare needs”.
Premium decline slowed to 11% in H1 2023 after a 21% plunge in 2022, with market sentiment weakening due to volatile financial market conditions. There was also a shift away from unprofitable savings-type products amidst tighter regulation.
Life insurers’ sales focus is likely to shift to health and accident policies – and away from saving products – over the next two years. This is to improve profitability, incentivised by global accounting standard IFRS 17, which will be adopted in 2026.
“After years of decline, Taiwan’s life insurance industry is forecast to recover from 2024, supported by positive regulatory developments,” said GlobalData’s Baliarsingh. “However, despite this recovery, Taiwan’s life insurance industry is not expected to reach its previous levels of growth in the near future,” he continued.
The solvency changes will ultimately strengthen Taiwan’s market and boost its stability in the long term – but macroeconomic conditions mean short term growth spikes are unlikely.