The prevailing low interest rates and intense competition could constrain earnings growth for Taiwan’s insurance companies this year after an unprecedented premium decline last year amid product adjustments, Taiwan Ratings Corp (中華信評) said yesterday.
Life insurers could face further difficulties growing their premiums once the policy of lower assumed rates — the interest rates on insurers’ required reserves — takes effect in July, raising costs on some insurance policies, Serene Hsieh (謝雅瑛), a credit analyst at the local arm of Standard & Poor’s, said by telephone.
The life insurance sector’s overall premiums contracted for the first time last year by nearly 10 percent as companies reduced sales of interest-sensitive annuity products as required by the Financial Supervisory Commission.
The commission has since late 2010 asked life insurers to place more emphasis on longer-tenor insurance products to avoid a potential mass liquidity drain once the central bank reverses its monetary policy, leading customers to terminate shorter-tenor policies.
Taiwanese tend to use shorter-tenor insurance products as savings tools, because they offer higher interest yields than banks’ savings accounts.
Interest-sensitive annuity products accounted for NT$113 billion (US$3.83 billion) of first-year premiums last year, slumping 70 percent from NT$370 billion in 2010, the ratings agency’s report showed.
The sector’s increasing emphasis on profitability over market share also contributed to the decline of interest-sensitive annuity products because they generate a low profit margin, Hsieh said.
“The product adjustment is positive for the industry, but it will take some time for the benefit to become evident,” she said.
While Taiwan Ratings does not expect a repeat of a premium decline this year, a strong recovery is unlikely as lingering concerns over global economic uncertainty will limit insurers’ ability to expand their premium bases, Hsieh said.
The central bank is widely expected to keep interest rates at their current low levels through the year, making protection insurance products less attractive to buyers, the analyst said.
The trend is set to deepen after the implementation of lower assumed rates in July, but rush sales beforehand might help cushion some of the negative impact, Hsieh said.
Furthermore, low protection coverage and strong demand among Taiwanese for savings products mean there is still satisfactory room for growth in certain insurance products, the analyst said.
Despite the lackluster earnings outlook, Taiwan Ratings does not expect the credit profile of its rated insurers to weaken in the coming year.
“We believe local life insurers’ sufficient liquidity, continued new business flows and adequate investment asset quality will help protect their credit profiles from modest volatility,” Hsieh said.
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