Ang Sock Sun
PartnerAssurance +65 6236 3638
Woo Shea Leen
PartnerAssurance/Market Entry +65 6236 3908
Yip Yoke Har
PartnerTax
+65 6236 3938
Stuart Last
Associate Director Transactions +65 6236 728097
Legislative and regulatory framework
The Taiwan insurance industry’s main business is divided into the life and general insurance sectors.
Reinsurance companies and insurance agents and brokers are peripheral businesses that have developed out of support for the main insurance industry. The insurance companies who pursue to be engaged and registered in the insurance business shall get permission from the competent authority, the Insurance Bureau. The Insurance Bureau, which belongs to the Financial Supervisory Commission (FSC), oversees that the two sectors act in accordance with the Insurance Act and is responsible for
maintaining financial stability, ensuring continuing as going concern, and protecting rights of the insured. One precautionary measure in place is a minimal RBC ratio, and if a company’s ratio was to fall below 200%, governing authority will enforce actions deemed necessary to bring it back to optimal condition (such as capital injection, ownership transfer, etc.).
The Taiwan Insurance Guaranty Fund (TIGF) is a separate stabilization fund sponsored by both life and general insurance companies, with the aim being to safeguard interests of insured parties and maintain financial stability. Life insurance firms usually pay a membership fee equivalent to 0.2% of gross premium income while general insurance firms pay a fee equivalent to 0.1% of total premium revenue; however the fee is adjusted accordingly taking into consideration the condition of the economy, the state of development of the financial industry, and the ability of insurance firms to pay. TIGF may provide loans to firms experiencing financial distress and works in conjunction with the FSC, which is the governing authority of TIGF. When the amount of funds accumulated in a stabilization fund is insufficient to safeguard the interests of insured parties and there is a likelihood of serious threat to financial stability, the fund may seek permission to borrow funds from financial institutions.
Consumer protection and market integrity are upheld through the Life Insurance Association and the Non-Life Insurance Association. Both associations are not
government-affiliated, rather self-governing
organizations composed of members from the industry.
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Financial reporting, capital and taxation
Financial reporting requirements
Companies prepare their financial report in line the Taiwan Generally Accepted Accounting Principles (GAAP) and Commercial Accountings Act and Rules for the Preparation of Financial Reports by Insurance Institutions.
In 2011, Taiwan adopted the Statement of Financial Accounting Standards NO.40 which mirrors International Financial Reporting Standards (IFRS) 4 (phase 1). In 2013, insurance companies will apply IFRS and commence Republic of China GAAP in parallel. TIFRS is implemented based on IFRS standards translated and announced by the Financial Supervisory Commission (FSC). However, IFRS4 phase 2 implementation schedules have yet to be finalized.
Insurance companies must present annual and interim financial statements and risk-based capital (RBC) reports.
Taxation
In accordance with regulations set forth by the National Taxation Bureau, insurance companies, for both life and general, assume a corporate tax rate of 17% under regular income tax regime. An additional 10% undistributed retained earning tax is levied on any retained earnings not distributed (not applicable to branch). Such tax paid by enterprise is available as an imputation tax credit to resident enterprise or individual shareholders against their income tax liabilities. It is also available as a tax offset to foreign shareholders who are taxed on dividends received subject to certain tax limit.
In addition to above regular income tax regime, the Income Basic Tax, also known as the alternative minimum tax (“AMT”), at the current rate of 10% but will increase to 12% in 2013. The AMT payable is calculated as follows:
Exempt income includes trading of securities and futures, etc. Where the regular income tax payable is greater than or equal to the income basic tax calculated, the regular income tax payable shall be paid. If the income basic tax is greater than the regular income tax payable, income basic tax shall be paid.
Financial institutions engaged in insurance are regarded as non-VAT entity (also known as gross business receipt tax entity “GBRT entity”). For GBRT entities, 2% GBRT applies to insurance premiums, and 1% GBRT applies to
reinsurance premiums, which are non-creditable nor refundable.
Income Basic Tax=[(taxable income + certain exempt income)-TWD 2,000,000]*Applicable tax rate AMT Income Tax
Products and the market
Products
Life insurance products offers life, accidental, health, annuity, and investment-linked insurance, of which the latter two are only offered to individuals and the first three, are offered to both individuals and groups. The main channels of distribution in this sector are agents and brokers, bancassurance, and the company’s own sales force. Bancassurance is especially advantageous for the big players, as most are owned by financial holding companies, and can easily partner up with banks owned by the same financial holding company. Yet the
importance of the company’s own sales force cannot be overlooked, as it still accounts for a large proportion of gross premium revenue. From 2010-2012, life insurance companies’ own sales force made 32%, 41%, and 39% of gross premium revenue while bancassurance made 65%, 55%, and 57% of gross premium revenue.
General insurance premiums mainly stem from sales of automobile, fire, and accidental insurance products, with the remaining distributed among marine, aircraft, contractor, credit and guarantee, and liability insurance.
Due to the nature of the products, less prevalent standing in the industry compared to life insurance, and the smaller-scale sales force, general insurance firms are relatively keener upon finding alternatives to the traditional sales channels. In addition to alliances with automobile dealers, general insurance firms have gradually begun to explore internet, mobile, and television channels of distribution.
As life and general insurance premiums plateau, both sectors have reached the maturity stage of the product life cycle. The life and general insurance sectors have high penetration rates of 13.9% (2011) and 3.1% (2011) respectively (a combined 17% for 2011), ranking number one worldwide; saturation levels for life and general insurance sectors are USD$2,757 (2011) and
USD$614(2011) per capita (a combined USD$3,371 for 2011), ranking number seventeen worldwide.
Headline market statistics and commentary
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Life insurance General insurance
Life insurance market in Taiwan faced challenges associated with slowing economic conditions and volatility in investment markets for 2011. However, there appeared to be a rebound trend in 2012 that turned the loss in 2011 to a profit. Additionally, the revisions of the Insurance Act in 2012 allowed increasing the overseas portion of the investment portfolio, raising foreign investment profit.
Both the implementation of a new life table in July 2012 and a lowered assumed interested rate on insurer’s required reserves is anticipated to raise costs, which would consequently result in higher premiums.
Under this expectation, the sales of traditional life, accidental, and health insurance policies have grown.
As Taiwan faced relatively fewer catastrophes in 2011 compared with others in the region, the local general insurance sector encountered fewer catastrophe claims, which helped with averting a decline in the sector’s profits.
In 2011, the average retention ratio of general insurance market is 64% while net claim ratio is 55% and net expense ratio is 39%; net combined ratio is 94%.However, the sector’s vulnerability to catastrophes stresses the sector’s need to employ sound capital buffers and enterprise risk management.
Taiwan’s slow but sure economic growth in 2012 assisted with premium growth. To maintain a steady growth in future fiscal years, an improvement in pricing discipline is inevitable. Since the liberalization of non-life insurance premium in 2009, the sector has undergone fierce pricing competition, hurting the sector’s underwriting results.
However it is believed insurers will begin to selectively re-price products with higher loss experience over the next few quarters.
Potential barriers to entry
Life insurance General insurance
The FSC is open to new licence applications, but given current market conditions, the FSC exercises careful scrutiny in the approval process. Due to the number of small and mid-sized companies, it is more encouraged to enter the life insurance sector by means of consolidation or acquisition. Given the majority of dominant
incumbents are backed by financial holding resources and brand-name, it will be a difficult feat for new entrants to gain sizeable market share in a saturated market.
The FSC is open to new licence application, but given Taiwan’s small general insurance market and high level of competition, intent to enter is low. Additionally, the shrinking margin resulting from liberalization of non-life insurance premium and long-time standing of
incumbents discourages new firms in entering the mature market.
Key developments and future outlook
Key issues
Life insurance General insurance
One of the most critical problems the sector faces is duration mismatch. This mismatch results from the absence of long-term investment instruments in Taiwan, creating an imbalance where long-term liabilities’
proportion in total liabilities is perpetually higher than long-term assets’ ratio in total assets. When market prices undergo larger oscillation, there is a higher risk of loss.
Also, owing to the global economic trend of falling interest rates, the actuarial assumption interest rate of legacy insurance policies are almost always higher than the current rates of investment, leading to a negative interest rate spread.
The combination of a monumental decline in return on investment resulting from the worldwide financial crisis in 2008 and operating losses led to an overall decrease in RBC ratio. As of June 2012, six companies still fall short of the 200% RBC ratio, necessitating an increase of capital to meet required RBC level.
In addition to low rates of return in the Taiwanese economy, implementation of IFRS4 abroad is another factor in the exiting of foreign firms. As IFRS4 increases reserve requirements, many foreign companies are withdrawing capital from peripheral markets and focusing on main businesses in the States or Europe.
As the general insurance sector explores new sales channels, the FSC will need to establish regulations and means of monitoring that protect the rights of the insured parties.
The Taiwanese general insurance sector has reached a saturated state, with few firms entering or leaving. It is important governing authorities find a way to maintain this balance. Regarding the price war issues, a pricing discipline will have to be designed to ensure the stable condition continues on.
Future outlook
Growth in the local market is limited given the already saturated Taiwanese market.
Since Taiwan is located advantageously beside China and familiar with Chinese culture, both sectors are looking to expand into the Chinese market with better terms of business. As of last count, six Taiwanese life insurance companies (branch offices, joint subsidiaries, and equity participation) and ten Taiwanese general insurance companies (majority only being granted permission for branch offices) have extended their reach into the Chinese market.
In the face of economic uncertainty, oscillating government policies, aging population, and gradual increase of catastrophes, it is expected both sectors will come up with new products to match the needs of customers.
Unsurety regarding whether Taiwan’s national health insurance and labour insurance will cease to exist may prompt an increase in purchase of health, life, and investment-linked insurance.
If the rate of return in Taiwan continually remains significantly low with no signs of improvement, the government could consider loosening the cap for foreign investments.
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Key players and competition
Competitive environment
Life Insurance General Insurance
The life insurance industry is considered to have a higher level of concentration. 70% of market share in terms of gross premium are dominated in the top five players.
Apart from Nanshan, the big-name firms in the industry all belong to local financial holding companies.
As several foreign insurance firms exit the Taiwanese market, smaller companies fight for redistribution of market share and resources, creating a competitive environment.
The general insurance industry maintains a higher level of concentration. When the third stage in liberalization of non-life insurance premium took place in 2009, premiums (with the exception of compulsory auto insurance, home fire insurance) were no longer regulated but instead set by a combination of market mechanism and companies themselves. Big companies, with their concentrated resources, could afford to start a price war, which consequently shrank profit margin.
Key players