Taipei Times: People have said that you were selected to take your post because of your success in launching variable annuities in Japan. Is that true?
Lee Wood: [Laughs] It is just a rumor. That was not the only thing I worked on in Japan ... Really the ING philosophy is what we call integrated financial services and we wanted to provide customers products and services they find attractive and meet their needs. So we're not looking to push one product design. The variable annuity happens to be a good product that is sold very well through different channels.
ING is a leading variable annuity company in the US and we have over US$35 billion worth of assets there. The sales turnover of variable annuity products for ING Japan in 2002 exceeded US$1 billion. But really what brought me here wasn't specifically the variable annuities but the ability to better interface within the ING group, to bring the best ideas and the best practices from all over the world whatever they are.
PHOTO: SEAN CHAO, TAIPEI TIMES
TT: What are variable annuities? Do you or other life insurers have this kind of product on offer in Taiwan?
Wood: In general in an annuity, basically a company promises to provide a regular income payout over either a certain period or even for the rest of a person's life. It basically guarantees that you will not outlive your planned savings. In fact, there are two phases to variable annuities -- one is the accumulation phase and the other is the payout phase.
Variable annuities are for long-term investors. The biggest advantage the newer variable annuities offers is that they offer a minimum guaranteed death benefit during the accumulation phase. In other words, life insurers will guarantee investors their principle will not be lost. So it's a nice promise to customers, to say they can invest where they like and have no risk losing their principle.
There are many kinds of annuities already in the market, but most are of the fixed type. There are no variable annuities with a minimum guaranteed death benefit feature.
Currently no insurers offer that kind of product in Taiwan. But I expect there are several companies looking at variable annuities in this marketplace and certainly we are not the only one. I think it may be a product of the future. But managing this type of investment risk is actually very complicated and difficult. Indeed, we are not sure we will attempt to launch it here until we can be certain to properly manage the product. I would not expect it anytime soon. It might be too risky for a company to undertake.
TT: Creativity is a very important factor in any competitive market. What's your view about the attitude of regulators here towards innovative products?
Wood: Yes, insurers need to always be thinking of how to produce better products that meet customer needs. And that is why I think we need to be a leader in new product development. Obviously, that puts a lot of stress on regulators to keep up with the pace of innovation. While I think that has been a challenge, let's be clear that the pace of product innovation has been relatively fast compared to say the US, where things evolved over a longer period of time.
Indeed, I think you see here an attempt to leap to best-in-class products very quickly. I think they are allowing innovation and we look forward to working with them through the life insurance industry to make sure we find ways to make sure innovation continues to allow world class products to be developed here.
TT: Do you think the government is over-regulating the insurance sector?
Wood: I think the authorities want to support the insurance industry while making sure they are protecting customers. That's why the government is involved to help regulate the market. Though the government may need more staff and more expertise to be able to move more quickly, I do believe they are working to strike the right balance of support for the industry and protection for the customer.
On the other hand, insurance companies need to make sure that they can handle the product properly. And that's why we have not approached the Ministry of Finance on this new product [variable annuities] so far, because we are still in the process of making sure that particular product is well-suited for us to be able to manage.
TT: As interest rates continue to fall, life insurers have committed less to unrealistically high payout rates on long-term policies and have focused instead on investment related products in recent years. Have customers been well informed of the risks involved in investment-linked products?
Wood: There are usually two issues when insurers are dealing with investment-related products such as unit linked or variable products -- how the product is designed and does the customer really understand what risk he or she is taking?
Companies need to make sure their sales agents selling the product have helped the customer recognize whether he or she needs this or needs a different type of products. We have specific-needs analysis tools to assist in this process. The whole key is how well you train the people who sell it.
TT: But aren't life insurers also facing significant challenges in selling investment-linked products to a market used to capital guaran-teed policies?
Woods: Traditionally in Taiwan, a lot of whole life products have been sort of savings opportunities as well as protection. As the market continues to open up with new investment opportunities, we also need to change to be able to repackage products which meet both the savings and protection needs of the customer. We also want to educate customers on the value of asset allocation, diversification and professional money management. For instance, people sometimes don't understand that they can actually reduce risks through diversification. They think they are being conservative and taking a safer approach, but in fact they are probably taking more risks for low return.
TT: What are the other challenges facing you now?
Wood: Challenges here are obviously the steep decline in interest rates. Many traditional products are becoming difficult to sell in a low- interest-rate environment. There will be a shift as customers are starting to look for other ways to maximize their investment performance and they are looking at different blends. Because of the competition here, margins are thinner.
But we have to grow as a profitable company in order to make sure we meet the promises made to our customers. We want to do that by winning customers and offering them better solutions. We are not out there creating products just to create products.
The market is maturing in that there is a high level of insurance ownership, however, there's a lot of room to grow in this market and there will be a lot of change.
The unit-linked is a perfect example and a good product for many customers who want to have a higher potential or alternative, willing to accept a little bit more investment risk. The product really changes the way we do business. Participating products will also be popular as they will allow customers to share in the company profits.
TT: Fitch Ratings last month gave a negative outlook for Taiwanese life insurers due to continuing negative spreads facing them now, notwithstanding the regulator's remedial measures introduced this year. What is your outlook for the sector?
Wood: Of course, the low interest rates and economic downturn have had an impact and have made us rethink our business. But I think that this will actually strengthen the industry in the long run. And even in these difficult times, the overall GDP growth rate of Taiwan, while lower than in the past, is and will continue to outperform most parts of the world. This is positive for the people and for ING Antai and our agents who are committed to helping our customers reach their life goals.
TT: Taiwan is proposing allowing insurers to take part in the management of the nation's labor pension program. Any early signs for that process?
Wood: From what I understand, there's a discussion ongoing right now to figure out where exactly insurance companies can operate. Insurers have traditionally played a vital role globally in the involvement of pension management. For ING Antai, we actually have some pension experts in Hong Kong and we have sent some materials to the American Chamber [of Commerce in Taipei] to give them the information for the government and for the labor union which is also very interested in the subject.
My understanding is that the government wants to make a decision for 2004, which is very quick. While the legislation is sort of a big picture for that process, the rule-writing and how that is actually being implemented are also very important.
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