In recent months, Taiwan has seen an
exodus of foreign insurers. These included Asian-market orientated
UK insurer Prudential which, in June 2009, sold its agency
distribution business to Taiwanese insurer China Life Insurance
Company of Taiwan for a nominal amount of T$1 ($0.03).
Hard on its heels was Dutch insurer Aegon,
which ended its 16-year presence in Taiwan in August 2009 with the
closing of the sale of its loss-making unit to a local consortium
for an undisclosed sum. Still awaiting regulatory approval is
American International Group’s (AIG) sale of it Taiwan unit Nan
Shan Life to Hong Kong-based investment firm Primus Financial and
Chinese investment company China Strategic Holdings for $2.15bn.
AIG has stated it will realise a $1.4bn loss on the sale.
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A key reason that foreign insurers are beating
a path to the exit door are different accounting standards applied
in Taiwan and in the home foreign insurers’ home countries,
according to Moody’s Investors Service senior analyst Sally
Yim.
Specifically, the difference between domestic
and foreign players relate to interest rate assumptions used to
estimate policy reserves.
Yim explained that regulation in Taiwan permits
Taiwanese life insurers to use a relatively high interest rate in
estimating their reserves for policies which are often offered at a
high guaranteed interest rate.
“By contrast, and in accordance with accounting
rules in their home countries, foreign insurers use more current
investment return/valuation rate assumptions for their high
guarantee policies sold by their Taiwanese branches or
subsidiaries,” said Yim.
“Some foreign insurers also adopt a more
stringent reserving policy and hence hold more economic capital for
these policies.”
She continued that because of low investment
yields achieved in the Taiwanese market and the high cost of
guarantee policy liabilities, many foreign life insurers have
viewed the returns on allocated capital available in Taiwan as
being weak.
“With Taiwan typically comprising a very modest
proportion of their overall business — in contrast to the domestic
players – foreign insurers seeking to bolster their risk-based
capital have increasingly sought to exit the market,” Yim said.
By selling their Taiwan operations she added
that foreign insurers have freed up large amounts of capital which
had been set aside for their Taiwanese businesses.
Indicative of the benefit, Prudential
reported that although it will incur a one-off IFRS negative impact
of £595m ($860m) as a result of the sale of its Taiwan unit, its
economic capital as defined by the European Union Insurance Group
Directive increased by £800m and its embedded value under European
Embedded Value principles increased by £90m.
However, Yim noted that the accounting
difference between Taiwan and other countries is likely to
disappear as Taiwan’s accounting standards converge with
international standards and recognise their insurance liabilities
at fulfillment value using a risk-free rate.
She said that, while the adoption date is still
uncertain, ultimately, should Taiwanese life insurers have to use a
much lower risk-free rate to estimate their reserves, it is likely
that they will have to significantly increase their reserves thus
putting pressure on reported capital.
Though a gradual adoption of more stringent
accounting standard for Taiwanese is likely, she noted that Moody’s
still expects that life insurers will have to raise capital to meet
the new requirement.
Yim stressed that Taiwan’se life insurance
market remains attractive to some newcomers, including some foreign
insurers. This is because newcomers are not burdened by the
negative spread between current low interest rates and high
guaranteed returns.
In addition, Yim said Taiwan’s high saving
rate and its aging population still make the life market attractive
for new players.
