Industry Attractiveness
The Taiwanese insurance industry grew at a CAGR of 6.4% in terms of gross written premium between 2008 and 2012, despite a low interest rate environment, and a decline in economic growth in 2009 due to the global financial crisis. The industry growth was achieved as a result of strong economic development in 2010 and 2011, insurance reforms, expansion of the bancassurance channel, and government efforts to make its financial services industry more accessible to global investors, especially from Mainland China.
The low interest rate environment in Taiwan affected the growth of fixed-income-related products such as annuity insurance, which registered a decline at a CAGR of -10.0% between 2008 and 2012. The industry’s written premium is expected to increase from TWN2.6 trillion (US$87.3 billion) in 2012 to TWN3.1 trillion (US$107.8 billion) in 2017, at a CAGR of 4.0%.
The structure and nature of the Taiwanese insurance industry varies significantly, depending on the segment. For example, life insurance is highly competitive with low profit margins, while the non-life and personal accident and health segments are less competitive and at earlier stages of development. Competition in the Taiwanese insurance industry increased significantly after the third phase of deregulation in 2009.
The penetration of the life insurance segment stood at 15.3% in 2012, which was significantly higher than other Asian countries such as Japan with 6.7% and Hong Kong with 10.5% in the same year. However, the non-life segment’s penetration stood at 0.75% in 2012, compared to Japan with 1.5% and Hong Kong with 0.9%. The penetration of personal accident and health insurance stood at 0.20% in 2012, compared with 0.38% in Japan and 0.57% in Hong Kong. This indicates that the Taiwanese life segment is highly mature and competitive, leaving little scope for new entrants. Consequently, multinationals such as Aviva, AIG and MetLife exited the segment to focus on core markets with higher returns. However, low penetration in the non-life and personal accident and health segments suggest that they offer better opportunities to new entrants.
The Taiwanese government, with the help of the Financial Supervisory Commission (FSC), has taken a number of actions to promote and improve the size of the financial services sector, including insurance. The FSC amended the Insurance Act in 2011 to improve the effectiveness of the industry, and safeguard insurers and other stakeholders in times of financial crisis. The government also entered into an agreement with Mainland China in 2011 to strengthen commercial links and trade. This provided support to the industry, especially the highly price-competitive life segment where profitability is low, and encouraged Taiwanese insurers to invest and expand in Mainland China with few regulatory restrictions.
Factors such as improving economic development in Taiwan and Mainland China, financial reforms, improving construction activity and improving exports are likely to support the growth of the overall Taiwanese insurance industry.
However, despite potential growth opportunities, the industry is expected to face a number of challenges, including the low interest rate environment which may depress demand for interest-sensitive annuity products. Fierce price competition and the dominance of domestic insurers may discourage overseas insurers from participating in the Taiwanese insurance industry.
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Segment Outlook
The Taiwanese life insurance segment grew at a CAGR of 6.6% in terms of gross written premium between 2008 and 2012, as a result of the strong performance of the individual life category which grew at a healthy CAGR of 9.7%. However, the segment’s growth was slowed by a decline in the general annuity category and low interest rates in the country. Fierce competition in the segment, which forced some multinationals to exit Taiwan, and the current low interest rate are projected to affect the overall growth of the life insurance segment. The segment is expected to post a CAGR of 3.7% up to 2017.
Despite concerns over low interest rates and fierce competition, the IMF projects stable economic growth for Taiwan. Taiwanese GDP at constant prices is expected to grow at annual rates of 3.6%, 3.3%, 4.0%, 4.1% and 4.2% during 2013-2017. This is expected to fuel demand for life insurance products and encourage global insurers to open branches in Taiwan. The positive economic trend is also expected to drive corporate spending on insurance. Improving business and economic conditions in Mainland China will also benefit Taiwanese insurers, as they look to grow beyond Taiwan due to low profit margins in the domestic market.
Life insurance providers in Taiwan benefited from low combined ratios, resulting in underwriting profits. The combined ratio in the life insurance segment was below 100.0%, and is expected to remain so, indicating that life insurance providers in Taiwan will remain profitable, and the financial position of life insurers will remain stable.
In 2011, the FSC amended the Insurance Act and provided greater flexibility to life insurers with regard to controlling and managing currency risks and costs. Additionally, life insurance providers involved in the foreign-currency-denominated business are now allowed to seek permission from concerned authorities to not take into account investments made in this type of business against their quota for total foreign investments. These initiatives by the regulator are likely to safeguard life insurers in times of currency fluctuations.
Favorable demographic factors, such as increased life expectancy and a rise in the population aged 65 years and above, are likely to accelerate demand for life insurance products. Life expectancy in Taiwan reached 78.5 years in 2012, while the population aged 65 years and above grew from 10.6% in 2008 to 11.3% of the total population in 2012. Favorable demographic factors will improve consumer confidence in life products such as individual life and annuity insurance. The FSC also enacted a new Financial Consumer Protection Act in June 2011, the key objectives of which are to educate people about financial products and handle consumer complaints against service providers. The act also aims at solving financial disputes fairly, quickly and professionally. This is likely to improve consumer confidence and encourage them to purchase insurance products.
Distribution Channels
The Taiwanese life insurance segment is over-serviced, with over 50 million policies sold annually through various distribution channels for a population of just 23.0 million. Life insurance providers in Taiwan employ various distribution channels such as agencies, bancassurance, and also sell directly to customers. The leading distribution channels for life insurance in Taiwan are bancassurance and agencies; these channels collectively accounted for 95.7% of the total commission by life insurance in 2012.
The strong social credibility and familiarity of Taiwanese banks as financial institutions aided the selling of annuities and unit-linked products in recent years. Partnerships between banks and insurance companies supported the growth of the bancassurance channel. For instance, HSBC has signed an exclusive 10-year agreement with Allianz Taiwan to market its products in Taiwan and other countries such as Malaysia, Indonesia, Australia, China, Sri Lanka, Brunei and the Philippines.
The contribution of bancassurance to the life segment grew between 2008 and 2012; the number of policies sold through the channel increased from 3.8 million in 2008 to 4.7 million in 2012, and is expected to reach 8.8 million in 2017. The channel’s share increased from 47.8% in 2008 to 58.7%, and is projected to reach 62.9% in 2012 of the total market commissions. The FSC has introduced a number of reforms in both the banking and insurance sectors that are likely to strengthen the relationship between insurers and banks.
Agencies play an important role in the growth of the Taiwanese life insurance segment. The large network and efficient sales force of the agencies channel provide support for customers when purchasing insurance. Due to consolidation in the domestic life insurance segment, the number of agencies fell between 2008 and 2012 from 63,459 in 2008 to 45,442 in 2012. Meanwhile, the number of policies sold through agencies declined from 3.8 million in 2008 to 2.9 million in 2012. The primary reason for this decline was the growing preference for purchasing insurance policies through bancassurance. However, the number of policies sold through agencies is expected to increase from 2.9 million in 2012 to 3.6 million in 2017. The channel offers insurance companies a large client base, strong brand reputation and an existing sales force at a relatively low cost.
The share of insurance brokers increased from 3.0% in 2008 to 3.3% in 2012 of the total market commissions. The rise in brokers for life insurance products in Taiwan can be attributed to the growing popularity of web-based services, and spending by brokers to distribute products via the internet. The number of policies sold through brokers increased from 233,700 in 2008 to 262,500 in 2012. Meanwhile, policies sold directly to customers declined from 84,000 in 2008 to 77,400 in 2012. The number of policies sold through e-commerce increased marginally from 2,300 in 2008 to 2,400 in 2012.
The latest amendment to the Insurance Act is expected to improve the effectiveness of the Taiwanese life insurance distribution network. Brokers and agencies are now required to establish internal audit and control systems if the size of the business crosses a certain limit. This should enhance transparency levels and scale-up the size of the distribution market. Financial sector reforms and the new consumer protection act are likely to improve consumer confidence and generate business.
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By GlobalDataPorter’s Five Forces Analysis
The Taiwanese life insurance segment is competitive and concentrated. The 10 leading life insurance firms accounted for 85.3% of the total life insurance written premiums in 2012. As the domestic market is mature, with a penetration rate of 15.3% in 2012, insurers are exploring foreign destinations to accelerate growth, especially in Mainland China. The Taiwanese government has established a trade services agreement with Mainland China which allows insurers operating in Taiwan to invest in Mainland China. This attracts both domestic and overseas insurers to Taiwan and to explore business opportunities in Mainland China.
Bargaining power of supplier: Low to medium
Capital providers such as banks, reinsurance firms and financial institutions are the main suppliers to the country’s life insurance companies. Over the past few years, a number of multinational banks withdrew from Taiwan, which reduced financing options for Taiwanese life insurers and subsequently increased supplier bargaining power. However, large domestic life insurance companies, which possess enough capital reserves to finance expansion strategies without having to rely on banks and financial institutions, reduce the bargaining power of suppliers. In a matured life insurance market, Taiwanese insurers are in the process of expanding outside the country, especially in Mainland China, after the cross-strait trade services agreement. To do so, smaller firms depend on capital providers. Overall, the bargaining power of suppliers in the Taiwanese life insurance segment is assessed as low to medium.
Bargaining power of buyer: Medium to high
Individual buyers tend to have lower bargaining power than institutional buyers. However, in a mature market environment, life insurers are now providing offers and deals to attract consumer attention. Demand for corporate and group-life insurance is expected to increase slowly in line with the country’s economic growth, which is expected to remain positive. To capture a newly developed consumer base, Taiwanese life insurers are expected to compromise on policy prices and features, which will increase buyer bargaining power. Consequently, the bargaining power of buyers in the Taiwanese life insurance segment is assessed as medium to high.
Barriers to entry: Medium
The barriers to entry in the Taiwanese life insurance segment are assessed as medium. The government applies no barriers to enter the segment. The government’s commercial link with Mainland China also reduced entry barriers, encouraging Chinese insurers to look for potential Taiwanese ventures. However, the highly concentrated and mature life insurance segment creates a threat for any insurer in terms of economies of scale. Existing insurers are facing strong price competition, low earnings and largely homogeneous product offerings, increasing the barriers to entry. In a country such as Taiwan where domestic firms are looking to expand into new regions due to the mature nature of the domestic market, the barriers to entry are increasing.
Intensity of rivalry: high
The intensity of rivalry in the Taiwanese life insurance segment is assessed as high. The segment has a balance of dominant and medium-sized life insurance companies, creating a highly competitive environment. In a matured life insurance segment such as Taiwan’s, life insurers have very little scope to increase market share. In 2012, the five leading life insurers accounted for 68.5% of the segment, leaving little scope for the remaining companies to develop, without intense levels of competition for small market gains. In addition, existing insurers are facing strong competition in terms of price and product innovation. Consequently, multinationals such as Aviva, AIG and MetLife exited the market between 2008 and 2012.
Threat of substitutes: Low
The threat of substitution for life insurance products in Taiwan is assessed as low, as there are no substitutes available for life products such as general annuity and group life insurance. Furthermore, increasing levels of competition within the segment have changed consumer behavior towards products with low premium costs. This change is expected to create a threat to high-cost life policies as firms undercut each other to gain market share.
