Next part of Taiwan’s life insurance interest rate change phased in

The market, which was rated bearish earlier this year, is now expected to see more growth due to changes, with rollout cautiously phased in.

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Taiwanese regulator announces latest phase of changes to financial systems to help life insurers.

The Taiwanese insurance regulator will implement the latest adjustments and transitional measures around interest-rate risk changes announced earlier this year.

The changes were designed to ease negative spread pressure on life insurers in Taiwan, according to international ratings agencies.

Taiwan’s insurance industry has struggled through the past few years, especially with investment returns.

The changes will help life insurers manage asset-liability duration gaps under the localised Insurance Capital Standards (TW-ICS) and IFRS 17, according to a report from Fitch Ratings.

The new measures were designed to give the industry more time to adjust products and investment strategies to meet the more stringent capital requirements under the new standards, which were due to be implemented in 2026.

Wider regional pressures

In August this year, a new solvency framework was announced ‘ready for implementation’, but observers said it would have little improvement on the market due to current bearish market conditions in Taiwan and other East Asian markets.

The new framework was set to encompass a Solvency II-style three-pillar regime, which is in the process of being rolled out in other East Asian developed markets.

“The non-life segment suffered a huge net loss of TWD $173 billion due to the pandemic, which outstripped the cumulative earnings of the last decade."

Taiwan was set to adopt a modified version of the International Capital Standard (ICS), K-ICS. The changes were similar to those enacted in South Korea and Japan, which are also installing regimes.

Hong Kong is following suit too, while other Asian markets, such as Indonesia's, are shaking up their solvency systems to make them more cohesive and attractive to international markets.

However, the moves came as Taiwan’s insurance industry struggled with profitability. While the effects will be felt on life insurers, in October this year, AM Best gave a continued negative outlook for Taiwan’s non-life insurance segment, which emphasised that the bearish outlook applied to all sectors of the industry.

It even highlighted investment prospects as a particular weak area. “The non-life segment suffered a huge net loss of TWD $173 billion (£4.35 billion) in 2022 due to the pandemic, which outstripped the cumulative earnings of the last decade,” it said. “In addition, insurers needed to sell off investments to pay pandemic-related claims, and saw total investments shrink nearly 20% in 2022.”

What are the new measures doing?

In regard to the new changes, Fitch said it expected the second phase of adjustments around IFRS 17 to make it “less urgent for insurers to raise debt or equity to replenish capital after transitional measures for asset risks were announced in July 2023”.

“Many life insurers face negative spread burdens, especially major ones with long operating histories and sizable legacy books.”

On 23 November 2023, Taiwan’s Financial Supervisory Commission (FSC) announced three measures to help smooth insurers' transition to the new solvency framework over a 15-year phase-in period:

  • A 50-basis point illiquidity premium is given to liability discount rates on legacy insurance policies with guaranteed rates above 6%
  • A linear rise in target capital requirements for interest-rate risk from 50% to 100%
  • Allowing the phasing in of net fair value impacts from assets and liabilities within the period

Fitch said the illiquidity premium adjustment could be crucial to the viability of the broader changes and help to relieve the pressure that companies felt. “The illiquidity premium in liability discount rates benefits the valuation of policies sold before 2004 that had more than 6% of guaranteed yield,” said Fitch. “This will relieve reserve pressure on life insurers’ mark-to-market insurance liability valuation under the new solvency standard and comply with IFRS 17, compared with the lock-in approach now.”

Taiwan’s current policy rate is only 1.88%.

“Many life insurers face negative spread burdens, especially major ones with long operating histories and sizable legacy books, although they have been selling more long-term protection products and generating steady mortality and morbidity gains,” said Fitch on why the changes had been deemed necessary.

It added that health insurance represented 19% of total life premiums in Taiwan in the first nine months of 2023, compared to just 13% in 2021.

Interest-rate risk was another key challenge for life insurers. Fitch said, “[we estimate] that, for major insurers, the more stringent requirement will translate into interest-rate-related capital charges that are three to four times that under the current regime, due to the savings-type products with high guaranteed yields they sold in the past.”

The regulator currently allows insurers to raise interest-rate risk provisions from the initial target of 50% under the TW-ICS requirement to 100% in 15 years from 2026, it added. “This gives life insurers time to adjust and replenish their equity bases,” it said.

What will happen next?

Fitch said the relaxation of recognising net fair value impact on capital will help insurers maintain a lower level of solvency sensitivity and ease imminent capital needs, as driven by interest-rate movements. “Adoption of IFRS 17, evaluating insurance liabilities at current market rates, and the tighter capital rules in 2026, will accentuate insurers' asset and liability mismatches,” it said. “The longer duration of their liabilities compared with assets will put greater pressure on insurers' capitalisation.”

"The shift in business mix towards profitable protection-type products and a cautious investment strategy will drive life insurers' stable surplus growth.”

The FSC also said on 30 November that life insurance liability reserve interest rates for foreign-currency new business in 2024 will increase, except for new policies denominated in Chinese yuan. For US dollar-denominated policies, which form the bulk of the life industry’s foreign-currency policies, interest rates will rise by 75 basis points for policies with liability duration of less than six years (inclusive), 50 basis points for six-to-20 years, and 25 basis points for longer than 20 years (inclusive).

Fitch added that it believed “stronger asset-liability management, the shift in business mix towards profitable protection-type products, and a cautious investment strategy with proactive foreign-currency risk management, will drive life insurers' stable surplus growth”.

“This will aid them as they move to new capital standards,” it said. “The life industry's profit before tax fell by 38.4% [year-on-year from January to 31 October 2023]. We expect life insurers to boost capital adequacy through debt issuance or equity injections in the coming years, in light of continued financial-market volatility.”

Macro conditions worsening or improving?

Whilst the industry shows signs of new beginnings after the pain of the pandemic, other areas are still expected to hammer the economy despite the IFRS 17 changes.

Taiwan’s insurance industry was rated bearish in mid-2023, but was expected to see a strong 2024 when assessed earlier this year by both Fitch and AM Best. With these changes afoot, that outlook will likely continue.

However, some complications have arisen. Taiwan’s financial sector is heavily exposed to investments in Israel, according to local media. In the run-up to the Israel/Hamas war, local exposure exceeded NT$172 billion (£4.32 billion) as of the end of August, with the insurance sector accounting for about 98% of the total exposure, according to the FSC.

But other geopolitical risks were being downplayed, which could tempt further investment. Taiwan’s President, Tsai Ing-wen, recently said that the risk of invasion is low due to China’s domestic problems, despite sabre-rattling over the past several years.

This could mean that Taiwan’s rosier outlook for 2024 is more likely.