Taiwanese insurance industry have more time to adjust investment strategies

The Taiwanese regulator’s latest adjustments and transitional measures for interest-rate risk will ease the negative spread pressure on life insurers and help them to manage asset-liability duration gaps under the localised Insurance Capital Standards (TW-ICS) and IFRS 17, according to Fitch Ratings.

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

Fitch expects the second phase of adjustments 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.

On 23 November 2023, the 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 bp illiquidity premium is given to liability discount rates on legacy insurance policies with guarantee rates above 6%;
  • A linear rise in target capital requirements for interest-rate risk from 50% to 100%; and
  • Allowing the phasing in of net fair value impacts from assets and liabilities within the period.
Taiwanese insurance industry have more time to adjust investment strategies

The illiquidity premium in liability discount rates benefits the valuation of policies sold before 2004 that had more than 6% of guaranteed yield.

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. Health insurance represented 19% of total life premiums in 9M2023 (2021: 13%).

Interest-rate risk is the key challenge for life insurers. Fitch estimates 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 now 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. This gives life insurers time to adjust and replenish their equity bases.

The relaxation of recognising net fair value impact on capital helps insurers to maintain a lower level of solvency sensitivity and ease imminent capital needs, 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. The longer duration of their liabilities compared with assets will put greater pressure on insurers’ capitalisation.

Taiwanese insurance industry have more time to adjust investment strategies

The FSC 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 75bp for policies with liability duration of less than 6 years (inclusive), 50bp for 6 to 20 years and 25bp for longer than 20 years (inclusive).

Fitch believes 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. The life industry’s profit before tax fell by 38.4% yoy in 10M23.

Fitch expect life insurers to boost capital adequacy through debt issuance or equity injections in the coming years, in light of continued financial-market volatility.

Nataly Kramer   by Nataly Kramer