Increasing the protection-oriented insurance vital for an aging society

Taiwan has one of the largest life insurance markets in the world, but does that mean the society is among the best protected?

Unfortunately not, as both insurers and government regulators agree. In fact, according to experts, Taiwan faces numerous social challenges that are insufficiently met by the types of insurance currently in demand by the market. They consider that the nation needs stronger insurance protection to cover the mounting risk of an aging society in an uncertain economic climate.

The demographics of Taiwan’s population are changing rapidly. Already an “aging society,” Taiwan will officially become an “aged society” – defined as one in which at least 14% of the people are 65 years old and above – as soon as 2018. And with fertility rates hovering around 1.19 per woman, up from a low of 0.9 in 2011 but still well below the replacement rate of 2.1 per woman, Taiwan has one of the fastest-aging societies in the world. It is projected to reach the level of a “superaged” society – with a quarter or more of the population above 65 years old – as early as 2025.

An aging population will result in fewer working age people supporting greater numbers of dependents. Currently, around 100 working age people support some 35 dependents, either children or the elderly, but by 2060 the number of dependents per 100 workers will rise to 99.

The challenge to the National Health Insurance (NHI) program and pension funds will be immense. In order to mitigate these pressures, Taiwan needs to undertake a number of initiatives – including concerted efforts to increase the proportion of protection-oriented insurance products owned by its citizens.

Although Taiwanese tend to hold numerous life insurance policies, most of these products are endowment or savings-oriented products that charge significantly higher premiums than term or even whole-life insurance but offer lower benefits. The reason why consumers prefer such products can be attributed to the low-interest environment, says Bill Chang, professor of Risk Management and Insurance at National Cheng-chi University and a former official of the Financial Supervisory Commission. “People usually don’t have a lot of investment vehicles in Taiwan because the capital market here is very limited and the stock market is quite volatile,” he explains. “Insurance should be about protection, but because the interest rate is really low, people use insurance instead of deposits in the bank as a safe investment product.”

According to Ted Liang, president of the non-profit Taiwan Insurance Institute (TII), an industry research and advocacy association, the average life insurance policy sold in Taiwan offers no more than NT$1.5 million to beneficiaries, scarcely enough to cover five years of living costs.

Insurers recommend that Taiwan encourage the promotion of protection-oriented products that will provide comprehensive protection at an affordable premium for consumers. Protection-insurance products span a wide range, including products that offer income protection in the case of unexpected job loss or accident, as well as critical illness coverage that expands on the amount of care available under NHI, and even mortgage-payment protection insurance in light of Taiwan’s high housing costs.

The need for supplementary health insurance protection products will also likely rise as the population ages, and also as the NHI’s efforts to control costs leads to restrictions on the availability of new and innovative pharmaceuticals and medical devices. Patients opting for certain healthcare technologies would then need to pay all or part of the cost out of pocket. Supplementary health-insurance products can help bridge the gap, enabling patients to receive better care and more advanced treatments, while also providing income-replacement coverage for those who must leave their jobs while receiving treatment.

Stimulating the market for protection-oriented products will likely require a multi-pronged approach. TII recommends raising the permitted number of Prior Approval products for companies whose protection-oriented products have been well-developed, as well encouraging insurance companies to develop “preferred life insurance which is more affordable than other life insurance to promote a healthy lifestyle.” It also holds “Outstanding Insurance Awards” for companies to incentivize them to provide more protection-oriented products.

On the consumer side, TII’s Liang suggests that the industry be proactive in hosting seminars around Taiwan to educate consumers about their realistic insurance protection requirements and how to buy the products that will best protect themselves and their loved ones. Perhaps the most straightforward way to encourage the purchase of protection insurance is to simply raise the personal income-tax deduction allowed for insurance products. Taiwan has maintained the amount eligible for tax deduction at the same level – NT$24,000 per person – for decades.

“Government incentives such as raising the tax exemption ceiling for protection-oriented insurance would go a long way in creating a better protected society,” says Joseph Day, Country President of Ace Tempest Life Reinsurance Taiwan Branch and a co-chair of the AmCham Taipei Insurance Committee. “It would encourage insurers to proactively develop more protection-oriented products, and would enable policyholders to increase their protection insurance density at relatively low cost. The result would be a win-win situation — establishing a better protected society without incurring high social cost.”

Part 3 of 7 in a Special Report on  the Taiwan Insurance Industry, produced by the Insurance Committee of the American Chamber of Commerce in Taipei and sponsored by Ace Life, AIG Taiwan Insurance, Allianz Taiwan Life, Cigna Taiwan Life, PCA Life, Prudential Life, and Zurich Insurance (Taiwan).