In the past few years, Fitch has observed positive regulatory measures that cover products, investments, and capital rules to enhance insurers’ resilience. The Financial Supervisory Commission (FSC) has been tightening regulations to prepare life insurers for the eventual adoption of IFRS17 and migration to a new solvency framework.
On the product front, Fitch expects the favourable product mix to continue to shift from savings toward foreign currency. The FSC has introduced a smoothing mechanism for the declared rates of variable rate policies, imposed thresholds of minimum ratios between death benefits and policy values, and disallowed the sale of new policies with negative contract service margins. These changes have led to a decline in savings products. Meanwhile, the share of foreign currency has also increased.
In terms of investments, Fitch observes improved flexibility for insurers, lifers in particular, in asset/liability management as the FSC has broadened the scope of permissible investments. The FSC has strengthened risk management and aligned with global practice by requiring Taiwan’s insurers to manage their fixed income investments based on issue credit ratings where available. Moreover, the regulator now permits Taiwan’s insurers to invest in unlisted bonds privately placed by foreign listed companies and sukuk certificates issued by foreign issuers on the international bonds professional board.
As for capital rules, the FSC introduced net worth ratio requirement in April 2020 to help contain leverage and serve as an extra constraint to dissuade insurers from pursuing overly aggressive investment strategies. To enhance capital quality, the regulator no longer regards any perpetual bonds with step-ups or other early redemption incentives issued after May 2019 as available capital under the current risk-based capital (RBC) framework. Moreover, since 2012, Taiwan life insurers have started addressing potential capital gap early as they have been conducting liability adequacy tests at least annually to identify and reduce any shortfalls in insurance reserves.
Road map from here
In 2020, the FSC announced the timetable for the eventual adoption of IFRS17 and the new solvency framework from 2026 onwards. Fitch anticipates more updates from the Taiwan Insurance Institute (TII) and FSC to come through beginning in the latter part of 2021.
- On-site field testing phase (2020 – 2021)
- Parallel run phase (2022 – 2024)
- Preparatory phase (2025)
In the first phase, the TII will aid insurance companies in conducting on-site field testing to assess the impact from adoption. The TII is also scheduled to conclude various ICS research projects. These will help the FSC in drafting localised supervisory rules.
In the second phase, Fitch expects more details about potential impact from transitioning to new accounting standard and solvency regime to be quantified. Insurers will be required to submit to the FSC solvency ratios under the new regime annually for three years, alongside the current capital ratios.
The FSC will formulate transition plans, taking into consideration assessment outcomes under different scenarios, the long-term characteristics of policies of Taiwan’s insurance industry, as well as referencing the transitional measures under Solvency II implementation in the European Union and any transitional plans by ICS in the future. Consequently, the FSC will review existing local supervisory rules and propose corresponding regulatory amendments.
In the third phase, insurers will review all processes related to the new solvency regime implementation.
Sustainability moving up on the agenda
The FSC is also moving sustainability up on the regulatory agenda. Fitch expects green energy investments to grow gradually in Taiwan insurers’ investments.
The FSC first formulated Green Finance Action Plan 1.0 in 2017. In terms of investments, the FSC has gradually relaxed regulations and provided regulatory capital benefits, among other measures, to incentivise the insurance industry to invest in the green energy industry.
In terms of products, Fitch expects an increase in the breadth and depth of green insurance policies. The FSC has been encouraging non-life insurers to develop green insurance products, beginning from environmental liability insurance, to green building material upgrade endorsements, and offshore wind insurance and electronic equipment insurance for solar power plants.
In future, Fitch sees growing importance of sustainability in regulatory oversight and risk management. In 2020, the FSC launched Green Finance Action Plan 2.0. This has broadened the scope to cover social and governance factors. Apart from a broader scope of industries and instruments, insurers are encouraged to pay attention to climate change risk management.
As part of the supervisory stress test in 2021, Taiwan’s insurers need to include a climate change stress test scenario in the own risk and solvency assessment (ORSA) supervisory report to the FSC. The stress test scenario will assess whether insurers have sufficient risk absorption capacity in the face of typhoon-related losses. Non-life insurers and reinsurers are required to incorporate natural disaster risk into the risk capital used for calculating RBC ratios beginning from end-2020.
Continue to adapt and build resilience
In the coming years, Fitch expects regulations for Taiwan’s insurers to gradually converge to those faced by insurers in other markets. The preparation for and eventual adoption of IFRS17 and new solvency framework will help insurers to further build capital strength and improve the associated management of insurance and investment risks.
Along with stronger environment, social and governance (ESG) disclosures and incorporation of ESG factors and climate risks into governance, strategy and risk management, these will not only build the resilience of the Taiwan’s insurance industry ahead of the new accounting rules and solvency regime, but also contribute to enhancing the resilience of society and benefiting the environment in the face of climate change in the even longer term.
In parallel, Fitch believes Taiwan’s insurers will strengthen their ESG disclosures in the near term, and in the long term, they can better incorporate ESG factors in their investment processes and consequently make more significant and quantifiable impact.
ESG will play an increasingly important role for Taiwan’s insurers, given plans by the FSC to require financial institutions, including insurers, to comply with recommendations of the Task Force on Climate-related Financial Disclosures. In the long term, there will be more and better ESG disclosures by companies under the coordinated policy push by the FSC and other agencies, development of the sustainable bond market, and a clearer scope of sustainable finance taxonomies.
As for climate change risk management, Fitch also sees the potential for Taiwanese insurers to widen the scope and deepen the coverage from the typhoon physical risk assessment for ORSA. Fitch foresees that the board of directors and senior managers of insurers will have to gradually incorporate more and more elements of climate change risks in their governance, strategy, risk management and disclosures.
Taiwan insurers can expand the risk types to include both acute (such as typhoon) and chronic (including rising temperature, rising sea levels, etc.) physical risks and transition risks, including policy and legal, technology, market and reputation risks. A
Mr Anthony Lam is associate director, insurance ratings with Fitch Ratings.