The prospects for Taiwan’s life insurance industry are strong over the next three years – boosted by stable GDP growth, an aging population and new regulations, according to a Timetric report Life Insurance in Taiwan, Key Trends and Opportunities to 2018, which is available at the Insurance Intelligence Center
The Timetric report explains that the Taiwanese life insurance segment grew at a compound annual growth rate (CAGR) of 6.6% during 2009-2013, due to a strong regulatory environment, aging population and economic recovery.
In terms of precise figures, the gross written premium of the Taiwanese life segment increased from TWD 1.7trn ($52.1bn) in 2009 to TWD 2.2trn in 2013.
The life gross written premium is expected to increase from TWD 2.2trn in 2013 to TWD 3trn in 2018, at a projected CAGR of 5.8% between 2013 and 2018. Key factors expected to drive growth in Taiwan’s life insurance market including:
- An aging population
- Stable GDP growth
- New regulations
Aging population: Life expectancy in Taiwan increased from 79.1 years in 2009 to 79.7 years in 2013.
The demographic shift towards an aging population challenges the public pension system in the provision of adequate compensation. This has increased the demand for private life insurance policy to support policyholders’ post-retirement livelihood
Stable GDP growth: Taiwanese GDP growth was stable during 2009-2013, except in 2009 when it declined by -5.6% due to the global financial crisis. GDP at current prices increased from US$377.5bn in 2009 to US$487.9 billion in 2013.
According to the IMF, Taiwan’s economic growth will outpace that of Hong Kong and Singapore over the forecast period. Stable economic growth and high individual savings are likely to encour¬age consumers to invest in life insurance.
New regulations: Several new regulations are likely to impact Tai¬wan’s life insurance sector.
For example, in 2014, a new labour pension system came into force in Taiwan. According to the scheme, any business entities employing a minimum of 200 workers shall decide through their respective labour unions whether to adopt an annuity insurance programme.
If there are no labour unions then through general consensus between labour-management and the Ministry of Labour, compa¬nies may take out an annuity insurance in addition to the manda¬tory public pension. This will give opportunity to private insurers to grow their general annuity business.
Furthermore, in August 2014, the FSC passed a regulation that allowed non-investment-linked life insurance policyholders in Tai¬wan to switch to other policies such as health insurance, long-term care insurance and annuities, according to their requirements.
This is likely to encourage policyholders to utilise the benefits instead of their beneficiaries, and create more opportunities for insurance companies.
Furthermore, in May 2013, the FSC made several amendment regarding foreign investments by insurance companies. This gave more flexibility to the insurance companies to optimise their investments.
Under the new regulation, life insurers can now invest in foreign currency-denominated listed or over-the-counter certificates of foreign stocks or bonds; this includes stocks, initial public offerings of stocks, corporate bonds and
depositary receipts, convert¬ible bonds and warrant bonds issued by companies overseas.
There are also several challenges facing the Taiwanese life insurance market. These include:
- Low interest rates
- An economic slowdown in China
- Investment in higher risk assets
Low interest rates: In 2009 the Central Bank of the Republic of China (Taiwan) (CBC) reduced the benchmark interest rate to 1.88%considerably lower than the average rate of 2.08% registered during 2000-2014.
The low interest rate had a negative influence on the earnings of life insurers and affected the growth of fixed-income-related products, such as annuity insurance, during the review period. With improving exports, the central bank is expected to raise the interest rate by September 2015.
Economic slowdown in China: An A.M. Best report published in August 2015 says Taiwan’s economic growth will be led by firmer external demand.
However, the ratings agency says the medium-term economic outlook remains uncertain due to diminished public support for deeper market integration with mainland China.
A.M. Best says weaker global demand, driven mainly by the economic slowdown in China, will also weigh on growth prospects. Gross domestic product (GDP) is expected at 3.5% for 2015 and is forecasted to be in the 3.5-4.0% range in the near term.
The A.M. Best report says: "China is Taiwan’s key exporting destination. Slowing economic expansion in China could be a headwind to Taiwan’s economic growth near-term as demand slows."
Investment in higher risk assets: Fitch Ratings warned in July 2015 that Taiwanese life insurers have been investing in higher-risk assets for better yields, leaving their capitalisation vulnerable to unfavourable capital and currency market movements.
The ratings agency said Taiwanese life insurers have increased overseas investments (mostly fixed-income) since the early 2000s, and have shifted their portfolio from treasuries and agency bonds issued by developed countries to the corporate bonds, financial debentures and sovereign bonds of emerging markets.
It said overseas investments accounted for 52.9% of invested assets at end-May 2015 compared to 37.7% at end-2011. Domestic equities and property investments also increased to 7.3% and 6.4% of invested assets
Individual whole life insurance products dominate the Taiwanese life insurance segment. In volume terms, they had 82.9% of the market’s total gross written premiums in 2013, at a value of TWD1.9trn.
General annuity, the second largest category, recorded gross written premium of TWD377.4bn in 2013.
The key factors encouraging insurers to expand their product portfolios are the growing population, a high insurance penetration rate and raising consumer awareness. Increased life expectancy is also creating growing demand for post-retirement insurance products.
In terms of product areas, life insurers in Taiwan have focused strongly on microinsurance in recent years.
As of 31 December 2014, FSC approved the launch of 17 micro insurance products, with insurers having sold micro insurance to a cumulative total of 53,000 policyholders, and this figure is expected to grow rapidly.
The Taiwanese life segment is over-serviced, with over 58m poli¬cies sold in 2013 through various distribution channels for a population of just 23.3m.
Bancassurance was the leading distribution channel with a seg¬ment share of 50.9% of the gross written premium from new business in 2013, followed by insurance agents with 44.8%, and the direct marketing channel with 3.3% respectively.
The strong social credibility, image and familiarity of Taiwanese banks as financial institutions has also aided the selling of life insurance products..
Partnerships between banks and insurance companies support¬ed the growth of the bancassurance channel.
On July 1, 2014, Standard Chartered and Prudential entered a 15 year agreement, under which Prudential’s life insurance portfolio will be exclusively distributed through Standard Chartered branches in nine countries such as Hong Kong, Singapore, Indonesia, Thailand, Malaysia, the Philippines, Vietnam, India and Taiwan.
The growing popularity of ecommerce meant the number of policies sold through bancassurance declined from 3.03m in 2009 to 2.6m.
The FSC subsequently introduced a financial product develop¬ment training program for Bank employees in 2013, in both the banking and insurance sectors.
This is likely to strengthen the relationship between insurers and banks over the forecast period.
Agencies also play an important role in the Taiwanese life segment. Due to consolidation in the domestic life segment, the num¬ber of agencies fell during the review period from 58,680 in 2009 to 57,976 in 2013.
However, the number of policies sold through agencies increased from 1.6m in 2009 to 2.4m in 2013. Over 2013 and 2018, the agency channel’s gross written premium is expected to grow at CAGR of 4.3% to reach TWD705.7bn in 2018.
The number of life insurance policies sold through brokers increased from 143,676 in 2009 to 179,802 in 2013.
Brokers’ rise can be attributed to their highly customised ser¬vices, and promoting their products through the internet.
The growth of internet penetration, which grew at CAGR 3.4% during the review period, has also facilitated the sale of policies through e-commerce.
Taiwan’s life insurance distribution network is expected to benefit from the latest amendment to the Insurance Act as brokers and agencies are now required to establish internal audit and control systems.
Such a move will enhance transparency levels and scale-up the size of the distribution market.
Financial sector reforms and the new consumer protection act are also likely to improve consumer confidence and generate business.
The Insurance Bureau (IB), under the Financial Supervisory Com¬mission (FSC), is the government body responsible for regulating and supervising the Taiwanese insurance industry.
The IB, which was established on July 1 2004, is responsible for the prudential supervision of the industry, and issues licences to insurers, reinsurers and intermediaries.
The Taiwanese life segment is highly competitive with the presence of both domestic and foreign insurers.
The segment is dominated by domestic insurers such as Cathay Life, Fubon Life and Nan Shan Life. At the end of 2013, there were 24 domestic insurers and six foreign insurers (operating through branch offices) in the Taiwanese life segment.
The segment is concentrated, with the ten leading insurers accounting for 85% of the segment’s gross written premium in 2013.
Cathay Life was the leading insurer in the sector and accounted for a 20.7% of the market’s gross written premium share in 2013.
The five leading companies – Cathay Life, Fubon Life, Nan Shan Life, China Life and Chunghwa Post – collectively accounted for 66.1% of the segment’s gross written premium in 2013.
The number of foreign life insurance companies with branch offices in Taiwan fell from 12 in 2001 to six in 2013.
Taiwan’s life segment is characterised by price wars, undifferentiated product offerings and thin margins, and this has triggered the withdrawal of many foreign insurers from the segment.
For example, AIG sold its Taiwan-based life insurer Nan Shan Life Insurance Co to Ruen Chen Invest Holding Co in 2011.
MetLife Group also sold its MetLife Taiwan Insurance Com¬pany Ltd subsidiary to Chinatrust Financial Holding Co (CTBC Holding) in 2011. Then in January 2013, CTBC acquired the Manulife Financial Life insurance businesses of Taiwan.
Speaking to Life Insurance International, senior insurance executives say consumers use life insurance as savings product, because they get a higher interest rate- of about 2% – on money invested into an insurance product compared to an ordinary bank savings account which typically has an interest rate of approximately 1.5%.
They note the difficulty for foreign or domestic insurers to grow in Taiwan because the population is ageing rapidly.
International life insurers, if not already established in Taiwan, are therefore likely to focus on other, higher growth markets in Asia with larger populations of young people and less competition from established players.
Although Taiwan’s insurance regulator is supportive of the global insurance community, it is also perceived as very protective of the domestic industry. This means Taiwan is not considered as open or transparent as Singapore or Hong Kong.