Insurance with Taiwanese Characteristics
Industry features flush customers, overseas exposure, and hands-on regulator
31 Oct 2019 | Daniel Yu and Peter Dedi
Taiwan’s investors, flush with liquidity, love to buy insurance. Many have numerous policies. But they are not necessarily for that rainy day or lazy retirement dream.
Insurance customers increasingly prefer savings and investment policies over traditional protection-oriented ones in a quest to tap the higher guaranteed rates and better the low yield – less than 1% - offered by government bonds and bank deposits.
Taiwan’s cash-rich life insurers, of course, love to sell these policies.
But to cover their obligations to policyholders, they have invested heavily in US dollar bonds and fixed-income exchange-traded funds (ETFs) with US-dollar underlying securities, increasing their exposure to risks in currency fluctuations, particularly of the US dollar.
The island’s Financial Securities Commission (FSC), which regulates the securities markets, banking and the insurance industry, intends to play a buffering role between insurers and customers by implementing strict regulations dealing with insurance products, including their sale, marginal profit and premiums.
It also plans to supervise the insurance companies’ investment and risk management, including setting a ceiling on their foreign investments and mandating that ETF bonds meet its decentralization rules so as to avoid liquidity problems.
And to avoid chained systematic risks, the FSC will limit the amount Taiwan’s 25 insurance companies can invest in each other’s financial products. 
“The [capital risk] situation is good for the moment and I hope it can become healthier in the future,” says Wellington Koo, chairman of Taiwan’s FSC, adding “we may have to do some stress tests because the financial market situation is elusive”. (See Koo’s exclusive interview with Daniel Yu in this issue.)
To assess the FSC’s moves and the state of the market, The Asset spoke to three top executives at Taiwan’s leading financial holding companies, all serious players in the insurance sector.
Risk vs stability
Jerry Harn, president of Fubon Financial Holdings, admits: “Most of the products – actually 70-80% - of the insurance we are selling is for savings plus a little bit for protection. You can always question whether this is the main business for insurance companies. And there are different schools debating this.”
But Fubon’s financials are up and insurance is a big part of its business. Over half of its profits come from insurance. If there are worries, they lean to the need to do investments in bond and stock markets and to a lesser degree in the real estate market, where Fubon, like other Taiwan insurers, goes to help generate the revenue needed to pay out policyholders’ returns and draw new ones in.
 “We will be affected by the performance of all of these financial markets,” Harn admits. “[But] we try to be balanced. Actually, between markets there is a stabilizing effect.
“We have a very comprehensive and extensive network of risk management for different entities like insurance, securities and banks,” he explains.
“We just have to make sure from the holding company’s perspective we measure for the big one, and leave the execution and compliance to the companies below us.”
Harn indicates that the whole industry should focus on stability. “If you manage risk well, you will survive in the long term. And financial business is for the long term.”
Weird industry
Normally banks are supposed to grow around liquidity risk,
but there is no such risk in Taiwan’s flooded market, Daniel Wu, president of CTBC Financial Holding, explains.
Some market observers say that the bond market is shallow and some local insurers cannot support their liabilities. “This is a very difficult insurance industry we have in Taiwan,” he says. “It’s not a money-making business.”
“Therefore, 50% of the portfolio has to go to investing in overseas [markets], and the US and the Taiwan [treasury yield] curves have been terribly flat and the net interest margin very, very low.”
With this kind of investment behaviour, something will be distorted.
“You take higher risks on emerging market bonds or on something else because you need to cover your liabilities,” he says.
The central bank has published a low-interest rate policy. “The government’s 10-year treasury bond is at 0.7%,” Wu says. The policy makes it hard to generate high returns.
“This can’t go on forever, but it’s been like this [for a while],” Wu says. “Luckily we don’t have this so-called legacy interest rate in our portfolio [like other insurers].”
And now the FSC has just realized there is an unstable situation, Wu points out. “So they ask for more capital and also want to try to apply IFRS 17, which will go international in 2021, but they have already said they are going to postpone it for three years.”
The FSC is promoting the implementation of International Financial Reporting Standards 17 for insurers. These new accounting rules, the commission hopes, will reduce insurers’ exposure to foreign-exchange risks.
Given that the banks are reluctant to offer higher interest rates to attract deposits, the money has been sucked up by the insurance sector.
To fix the problem, Wu notes, the FSC has stopped all these high-return saving policies, which are basically just another type of CD (certificate of deposit).
“Yes, you have time, but major traditional insurance companies have this legacy problem of [high guaranteed rates leading to high average liability costs], and the only way is to grow out of the problem instead of having measures to cure it,” he says.
This means insurers must try to do low-rated policies and, then once the rate goes up, they will be better off, Wu mentions.
CTBC only got into the insurance sector after numerous foreign firms withdrew from it seven years ago. “Now CTBC’s insurance arm, Taiwan Life, is ranked number five in terms of AUM, and its AUM went from 0 to NT$1.9 trillion (around US$62 billion) in seven years,” Wu notes.
“In general, we are doing very well avoiding all of these problems,” he concludes.
New products needed
Chang-Ken Lee, president of Cathay Financial Holding, feels that with so much liquidity the FSC needs to loosen its control over the design of financial products.
“In Taiwan, the regulator has a very tight control on the people [investors] and on the product,” Lee explains.
“You can only control one side, not both.”
Lee feels the regulator should have strict control of investors to vet them and eliminate any money-laundering concerns, while financial institutions should have more freedom over product design, allowing them to concentrate on getting the risk assessment right and improving the variety of products on offer.
For instance, the recent yuan-based target redemption forwards (TRFs) dispute between banks and their clients caused turbulence in Taiwan with investors claiming they weren’t adequately informed of the risks and petitioning the FSC to push the banks for refunds.
Lee contends the investors were professionals and well aware of the risk, and adds that the TRFs were sold in Hong Kong and Singapore, and there was no outcry or dispute in these jurisdictions when the future market fell and investors booked losses.
A more open approach to financial products, along the lines of the approaches employed in Hong Kong and Singapore, he argues, would get more products out to the right investors and soak up liquidity.
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