Seeking Investment in Public Projects by Insurance Funds

Photo: Matthew Fulco

The Taiwan government is encouraging the country’s insurance companies to tap into their NT$23 trillion (US$767 billion) in insurance funds to help support national infrastructure and development projects.

At the top of the list is the green energy portion of the government’s “5+2” key innovative industry program. With the ruling Democratic Progressive Party (DPP) committed to ending the use of nuclear power and reducing reliance on fossil fuels, the only way to avoid major power outages in the years ahead will be dramatic expansion of renewable energy facilities for electricity generation. A sizeable power blackout last August highlighted the vulnerability of the national grid.

Other elements of the “5+2” plan, aimed at injecting fresh momentum into Taiwan’s economy, include industries related to the Internet of Things, biomedicine, defense, smart machinery, advanced agriculture, and a circular economy.

Besides its inclusion in the “5+2” industries, green energy is also one of the eight major components of the government’s Forward-looking Infrastructure Development Program, designed to lay the groundwork for the nation’s development over the next three decades. It is estimated that the goal of creating 20 gigawatts (GW) of installed solar photovoltaic (PV) capacity by 2025 will require some NT$1.2 trillion in investment, while another NT$1.4 trillion would be needed by 2030 to build and operate 4GW of offshore wind power facilities.

In addition to seeking investment from the insurance sector, the government has been encouraging banks to offer loans to the green energy industry. Promotion of this “green finance” is being overseen by a task force under the Executive Yuan. During a meeting last August, the Executive Yuan resolved to expand the total cumulative volume of green finance – including investment, loans, and the issuance of “green bonds” (for investment in green energy) – to NT$1.1 trillion in 2018, up from NT$1.02 trillion as of the end of 2017. That goal has been listed as a KPI (key performance indicator) for the Cabinet for 2018.

So far, four life insurance firms – Cathay, Fubon, Shin Kong, and Taiwan Life – have invested NT$5.6 billion in six solar power projects. Taiwan Life and Fubon Life, for instance, have each invested NT$300 million in Setex Solar, an affiliate of AU Optronics. With initial paid-in capital of NT$1 billion, Setex currently has 43 megawatts (MW) of installed PV power capacity. Taiwan Life also plans to invest NT$327 million to increase the capitalization of a PV power subsidiary of Gigastorage Corp., which already has over 30MW in PV power capacity.

In March 2017, the Financial Supervisory Commission (FSC) began approving – on a case-by-case basis – the use of insurance funds for investment in green energy and other “5+2” industry projects. In late September, it launched a two-year program to actively encourage such investment, setting a goal of NT$30 billion in investment for the first phase, scheduled to end on August 31 this year. The amount for the second phase will be determined based on the first-phase performance.

Insurers are now allowed to invest, without the need for prior FSC approval, in special “5+2” industry funds set up by a newly established national investment company, Taiwania Capital Management Corp. Consideration is being given to extending that privilege to private equity (PE) funds for investing in green energy and infrastructure projects raised by investment trust firms. The FSC is also studying the provision of incentives for insurance firms to invest in “5+2” industries, such as permission for them to engage in more new innovative businesses and payment of a decreased premium for the insurance stabilization fund.

In response, Cathay, Fubon, and Taiwan Life have announced investments of NT$300 million, NT$400 million, and NT$400 million respectively in the NT$4 billion Taishan Waterloo Fund floated by Taiwania Capital Management.

In addition to the “5+2” industries, the government hopes to channel insurance funds to other major infrastructure projects, such as the development of industrial land, in order to facilitate private investment. Two major targets are the third phase of the Changhua coastal industrial zone, with a projected area of 1,000 hectares, and the 32-hectare first phase of the Tainan technological industry zone. Each calls for an initial investment of NT$10 billion. The government plans to carry out the two projects using the BOT (build-operate-transfer) model, giving developers a 40-year management franchise for collection of stable income from rentals.

Previous attempts to promote investment in public projects by insurance funds were disappointing. Industry sources note that for investments by insurance funds, which is essentially money owed the insured, the risk must be controllable and returns sufficiently attractive. Kuei Hsien-nung, chairman of the Taiwan Insurance Institute, explains that given the long-term nature of their financial obligations, insurance firms tend to be unwilling to invest unless there is adequate liquidity and a return on investment of at least 3% or 4% annually.

“Take offshore wind power, for instance,” says an insurance company executive. “Should a typhoon destroy a set of wind turbines, the loss will be hundreds of millions of NT dollars,” pointing to the need for government guarantees or other protection mechanisms for insurance firms investing in such projects.

To address these concern, FSC chairman Wellington L. Koo proposes to securitize long-term returns for public projects such as PV power plants and offshore wind-power facilities.

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