Companies with appropriate business models have continued to be viable.

Most of the leading international companies that were once active in Taiwan’s life insurance industry have long since exited the market. The list includes Aegon, Aetna, ING, Manulife, MetLife, New York Life, and Winterthur.

Now it appears likely that one of the few remaining major foreign players, Prudential Financial of the U.S., will follow suit. Following media reports that Prudential was considering pulling out of both Taiwan and Korea, the company’s head office issued a two-sentence statement earlier this year: “Prudential Financial, Inc. confirms it is exploring strategic options for its Taiwan life insurance business, which may include a sale. As a company policy, we do not comment on the details of potential business trans- actions.”

The departure from Korea, however, is already confirmed. After negotiations with several potential buyers, Prudential last month announced an agreement to sell its Korean life insurance operations to the KB Financial Group Inc., a leading Korean financial services provider, for US$1.9 billion.

Prudential first entered the Taiwan market in 1990 as a branch, and in 2000 transformed the operation to a subsidiary in what it referred to at the time as a “demonstration of its commitment to the Taiwan market.” Over the years, the company has been repeatedly recognized for the quality of its service and its dedication to promoting protection products. It is the only insurance company to have been named a “Model Company” by the Financial Supervisory Commission (FSC) seven times, and the only privately owned life insurer in Taiwan to hold a twAAA rating from Taiwan Ratings.

According to the Prudential website, the Taiwan subsidiary maintains capitalization of nearly NT$5 billion (about US$167 million) and had asset value in 2018 of NT$165.5 billion (about US$5.5 billion).

Informed observers see Prudential’s probable departure as a reflection of expected challenges in the Taiwan market in the coming several years as the insurance industry prepares to adapt to a new set of accounting standards known as IFRS 17. The new International Financial Reporting Standard was adopted by the financial industry’s independent, inter- national standard-setting body in 2017, and after several delays is now scheduled to take effect on January 1, 2022. In Taiwan, the FSC is expected to wait until 2026 before adopting IFRS 17 as the new standard.

For life insurers in Taiwan, IFRS 17 seems bound to entail substantially larger capital commitments than are currently required. “The key issue will be equity cost,” explains Jennifer L. Wang, a professor of risk management and insurance at National Chengchi University and a former FSC chairperson during the Ma Ying-jeou administration.

“Because of changes in the RBC [risk- based capital] ratio, companies will need to inject more equity,” she says. “Every company will need to run a stress test to see how they will have to prepare.” At the same time, financial-service providers are facing considerable pressure to invest in new financial technologies (fintech) to stay competitive.

On the other hand, notes Wang, the development of fintech may eventually open opportunities for foreign insurance companies to serve markets such as Taiwan’s without having to maintain a domestic subsidiary or branch.

Even without the additional pressures posed by the pending upgrading to IFRS 17, foreign insurers in Taiwan historically have faced difficult challenges due to the stricter standards imposed on them by regulators in their home countries. Several of the companies that exited the Taiwan market in the past did so explicitly to reap a consequent huge windfall. With the closure of the Taiwan operation, the foreign company could gain access to a vast amount of cash that no longer had to be held as a reserve to meet the over- seas requirements.

Further, having to tie up more capital in reserves would add to a multinational insurance company’s costs, tending to make its products less competitive against those of local insurers.

In the low-interest rate environment that has lasted for many years, the problem was exacerbated by the “negative spread” – the gap between the cost of funding a company’s obligations to its policyholders and the yield it can obtain from its investments. “This is a problem particularly if you’re writing the traditional types of insurance with long-tail liabilities,” says Leo Seewald, a 10-year veteran of the financial services sector in Taiwan and former executive with BlackRock and Manulife. “For foreign companies that are under international accounting treatment, those liabilities can become very volatile because they need to be marked to market. The local companies aren’t in that situation because their reserve ratios are much less.”

If Taiwan adopts IFRS 17, however, “then local companies will be required to mark to market and they’ll have massive volatility swings.”

For the foreign life insurers in Taiwan, another issue has been the inability to maintain a proper match between assets and liabilities. The foreign companies tend to specialize in policies denominated in foreign currencies, and so would like to match those obligations with investments in those currencies to lessen foreign exchange risks. Although the restrictions have been loosened in recent years, Taiwan regulations have limited the pro- portion of investments that can be made overseas.

“The Taiwan regulators – especially FSC Chairman Wellington Koo – deserve a lot of credit for trying to tackle some of these difficult issues,” says Seewald. “There’s been significant if gradual progress. Perhaps the progress could be quicker, but I fully understand why it’s being done slowly – there’s a lot of money at stake and you don’t want to shock the market.”

In particular, Seewald credits Koo with calling attention to the over-emphasis in the Taiwan life insurance market on investment-linked products – and seeking to correct that tendency by encouraging the promotion of policies offering real protection.

Besides Prudential Financial, two other foreign companies operate in Taiwan as subsidiaries: Cigna and PCA (known in some markets as Prudential of the UK, but no relation to the U.S. Prudential).

As primarily a health-insurance provider, Cigna has not faced the challenge of long-term liabilities that Seewald referred to. In fact, Cigna notes that Taiwan has developed into its third largest market worldwide. Although Taiwan has universal healthcare coverage under its National Health Insurance pro- gram, many consumers prefer to maintain supplemental health insurance to expand their benefits. The aging of the Taiwan population has further increased the demand for insurance to cover retirement needs and health contingencies.

PCA explains its continued “deep commitment” to the Taiwan market by noting its more than 20 years of operation in Taiwan – and its nearly 100 years of involvement in Asia. In fact, PCA refers to Taiwan as a “champion” in that it has the highest sales volume for the company among the insurance growth markets in the Asian region.

Responding by email to questions from Taiwan Business TOPICS, PCA also stressed that its business strategy has coincided with that of the Taiwan government in recent years – “responding to the trend of an aging population and declining birthrates by actively promoting” protection-oriented policies and digital development. In Taiwan and other Asian markets, PCA has been emphasizing “participating (dividend-paying) policies,” which provide fundamental security coverage while also serving as a form of investment.

To enhance its competitiveness, PCA has adopted a number of innovations, including such digital platforms as the industry’s first e-commerce “Insurance Shopping Cart” for health and protection policies. It has also introduced user- friendly customer services on a variety of platforms, including LINE.

A Chronology

2011

The Chinatrust group (now CTBC) acquired the Taiwan operations of MetLife of the U.S., for a reported US$180 million, renaming it CTBC Life.

2014

• CTBC Life expanded by acquiring the Taiwan opera- tions of Canada’s Manulife for US$24 million.

• Yuanta Financial Holding entered the life insurance business by acquiring the Taiwan subsidiary of New York Life Insurance for US$3.3 million.