The Taiwan Banker

The Taiwan Banker

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Editor in Chief, The Taiwan Banker
Hank Huang (黃崇哲)
An Insurance Policy for Taiwan 2019.05 The Taiwan Banker NO.113

Major unrealized losses in the insurance industry starting last year have triggered wide concern about the profitability of the industry. The IFRS 17 accounting standards to be applied starting in 2025 will require insurers to re-examine their contractual liabilities. Once these standards, which have been called “the devil’s reporting standards,” are officially implemented, not only will the financial reports of all insurers need to be recalculated, but the spread loss caused by original high-interest policies will inevitably increase insurers’ current estimated liabilities. If their major shareholders fail to increase capital immediately to maintain these companies’ net worth, the companies could be adversely impacted.

The insurance industry is unquestionably important for Taiwan. It employs a large number of professionals, giving many women opportunities for second careers. It is also important for a financial system dominated by financial holding companies to be driven by both banks and insurers. In the current low-rate environment, savers' insurance has become the first choice in many countries for asset allocation, creating lucrative business for banks. In Taiwan in particular, it has become an important way for banks to increase their overall asset performance. However, due to the low returns on domestic funds, the excess savings attracted by these products are forced overseas in search of investment targets – otherwise, they may have trouble reaching the returns they promise.

This problem highlights the supply/demand imbalance of domestic funds. A manager of a financial holding company once asked, “Supposing the insurance industry didn’t bring in more than NTD 2 trillion a year, and send over NTD 1 trillion overseas – would domestic one-year deposits still maintain a 1% rate?” That is to say, the insurers have led Taiwanese funds to investment targets around the world, helping increase their returns while alleviating domestic volatility. We can say that insurance is making an important contribution to Taiwan’s financial markets. According to Keynes’ theory of liquidity demand, the present imbalance between the supply and demand of funds indicates that in addition to trading and risk-prevention motives, Taiwan also has important speculative demand that cannot be met, but rather can only be balanced through overseas investments by insurers.

If insurers undertake such responsibilities without proper care, the seemingly prosperous life insurance market will in fact link Taiwan’s fortunes closely to fluctuations in international financial markets. In addition to the hedging costs incurred, this investment strategy would expose Taiwan’s overall markets to global volatility.

The purpose of insurance in the first place is to spread risks, guaranteeing the welfare of all participants so that they can recover from unforeseen disasters. These roller-coaster revaluations are an excellent reminder that our risks are becoming too concentrated. To head off the impact of IFRS 17, in addition to full hedging, we must further consider the proper allocation of funds.

Looking at the big picture, a fundamental solution will involve gradually resolving the imbalance of funds. The government must work together with the industry to develop domestic funding demand. Looking at the situation of Japan, would now not be the best time to make full use of government and financial sector expertise? Considering Taiwan’s overall development, much infrastructure requires upgrade, but the debt ceiling imposed by the Public Debt Law has hindered the creation of investment opportunities.

Industry transformation combining effective government policy guarantees with flexible financial product design will allow resources from insurance to be utilized for construction projects, giving our society the tools to better face challenges like aging and climate change. In this way, the industry may be able to provide not just retirees, but Taiwan itself with its most important insurance policy.