Life insurance companies could face a liquidity test over the next few quarters if their growth in premiums fails to catch up with rising payouts, Taiwan Ratings Corp (中華信評), the local arm of Standard & Poor’s, said on Wednesday.
The sector’s high — and rising — benefits payments, including maturities, claims, surrenders, annuities and bonuses on policies, are likely to persist this year, while premium volume will remain flat, financial services ratings director Andy Chang (張書評) said at a media briefing.
“The trend increases risks that premiums may be insufficient to cover benefits payments for the first time in the industry’s history,” Chang said.
First-year premiums are estimated to total NT$2 trillion (US$67 billion) this year, steady from the level last year, while payouts amount to NT$1.5 trillion, he said.
A liquidity shortfall could materialize if payouts increase 40 percent and premiums drop 30 percent, Chang said.
“The scenario is not unlikely seeing as payouts jumped 40 percent last year from a year earlier and will remain high for the coming three years when short-term interest annuity and endowment policies are due to mature,” he added.
While the agency rates that life insurers have adequate cash flow from investments to avoid liquidity stress during the sector’s most likely performance scenario this year, the risk of heightened pressure remains real, especially for smaller life insurers suffering from stagnant growth in premiums and weak asset-liability management, Chang said.
Taiwan Ratings does not expect the sector’s total premiums to drop significantly in the second half of the year after modest growth in the first half driven by expectations of higher policy costs, associate financial services director Chris Lee (李明泰) said.
Insurers have to raise policy costs to reflect the Financial Supervisory Commission’s revisions to Taiwanese life expectancy and assumed interest rates, which will take effect on July 1.
Total life insurance premiums saw a near 10 percent decline last year, reversing six consecutive years of expansion, as insurers shifted their focus away from short-term policies to longer-tenure products.
The restructuring aims to help the sector maintain financial stability and meet retirement needs for Taiwan’s rapidly ageing population as required by the commission.