The Taiwan insurance sector’s long-term sustainability – and its ability to maintain the confidence of the public whose financial welfare it serves – depends on the degree of discipline exercised by both insurers and regulators in ensuring proper risk management. That discipline has already been tested several times in recent years when domestic life insurance companies found themselves unable to maintain the required level of Risk Based Capital (RBC), rendering them technically insolvent as their net worth after meeting the capital requirement would have been negative.
The government’s practice has been to seek to ensure the continued protection of policyholders by first taking the distressed company under receivership, and then conducting a reverse auction in which bidders compete according to the amount of payment they would expect to receive from the government to subsidize the takeover of the failed company’s business. Once all competitors have passed due diligence to assure their financial reliability and business expertise, the bidder asking for the lowest amount of payment wins.
In the most heavily publicized such case, Kuo Hua Life Insurance, which had been in receivership since 2009, was taken over by TransGlobe Life in 2013 following the latter’s low bid of NT$88.37 billion (nearly US$3 billion). In the most recent example, in March this year two troubled insurers, Singfor Life Insurance and Global Life Insurance, were acquired by the Cathay Financial Holding Co. Ltd., one of Taiwan’s most prominent financial groups and one of the largest players in the insurance sector, with a total bid of NT$30.3 billion.
The subsidy to the auction winners comes from the Taiwan Insurance Guaranty Fund (TIGF), whose funding depends partly on Value Added Tax revenue and partly on contributions from members of the insurance industry based on a stipulated percentage of their premium income. However, the bailout cases already carried out have not only depleted the fund, but have forced the TIGF to go into debt by borrowing from banks.
According to media reports, the experience has led the leadership of the Financial Supervisory Commission to vow to prevent any further bailouts of troubled insurers. Some lessons on how to address the problem may be drawn from the experience of neighboring Japan, where seven insurers representing about 10% of the entire Japanese insurance industry failed in the four years between 1997 and 2001. A study by Nobuyasu Uemura, a former senior specialist for enterprise risk management in Japan’s Financial Services Agency, concluded that in large part the problem derived from a lack of market self-discipline by insurers, particularly in their handling of asset and liability risk management and in emphasizing asset growth over financial strength. He also faulted government regulations that permitted use of latent unrealized capital gains to support paying policyholder dividends rather than creating additional policy reserves to offset growing deficiencies caused by locking in reserve assumptions based on the interest rates when a policy was written.
Uemura also stressed that in its handling of failed companies, Japan has required policyholders to bear part of the burden, with customers having their policy interest rates reduced to reflect a more sustainable market rate. Troubled companies faced the threat of bankruptcy instead of being assured of a government rescue.
Recommending a similar approach in Taiwan, the AmCham Taipei Insurance Committee’s position paper in the 2015 Taiwan White Paper calls for amendments to the Insurance Act authorizing the regulator, in handling cases of the liquidation and reorganization of an insurer, to adjust the rates of compensation to policyholders. According to the White Paper, this provision would reduce the moral hazard of consumers chasing high returns without regard for the financial stability of the insurer, reward insurers who maintain strong risk management practices, and reduce the potential tax burden on the general public and the insurance industry (either directly or through additional requirements for funding the TIGF).
The Committee also urged continued efforts to strengthen reserve requirements and liability adequacy test requirements to ensure that insurers are increasing their reserves against continued adverse economic conditions. It further encouraged greater disclosure of the stress test results in order to provide consumers with information pertinent to their insurance-purchasing decisions.
Ted Liang, president of the Taiwan Insurance Institute, credits the regulator with the adoption of a new mechanism, to take effect starting next year, to head off problems with insurers before they reach the crisis stage. Under this system, if a company’s RBC ratio falls below 50%, it would trigger “Prompt Corrective Action,” meaning the company has 90 days to make improvement or else face government takeover. The object is to compel insurers to pay greater attention to their financial condition.
In addition, Liang echoes the Committee’s call for more public disclosure and financial transparency. “A thorough disclosure providing sufficient and relevant information will facilitate stakeholders’ ability to supervise insurers’ operations and financial condition,” he notes.
Part 7 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).