Taiwan’s insurance industry is in a crisis.
Some say that there is nothing sure about insurance in Taiwan, Singfor Life Insurance has little to sing for and even the government’s Taiwan Insurance Guaranty Fund (TIGF) is no guarantee of anything.
The cracks started appearing 15 years ago, and some officials saw the problems coming some time back, but they preferred to leave the time bomb ticking for their successors to defuse.
Then-Financial Supervisory Commission (FSC) chairman Sean Chen (陳?) had the TIGF take Kuo Hua Life Insurance Co into receivership in 2009. However, the fund, which had NT$15.5 billion (US$518 million) available to bail out life insurers at that time, was too small to cover the company’s liabilities of NT$57.9 billion. The TIGF ended up spending NT$88.37 billion on the matter and had to organize a NT$57 billion syndicated loan last year.
FSC Chairman William Tseng (曾銘宗) announced his intention to place Singfor and Global Life Insurance Co under government receivership last month, planning to find buyers for the two insurers through public sell-offs within two years. However, together, the two insurers have a total liability of NT$49.1 billion, and how much the TIGF will need to pay the winning bidders of the two insurers remains unknown. As a result, the fund is taking the business taxes on non-banking financial services as its financial sources, while adopting differential insurance rates with six levels categorized by capital adequacy ratio and operating performance assessment. The first-year premium ranges between 0.113 and 0.175 percent, and it is expected to increase gradually in the future.
The problem is that because troubled insurers are required to pay higher premiums under the new system, will this propel them into bankruptcy? Such issues do occur when foreign deposit insurance corporations adopt differential insurance rates. Since most of the insurers in Taiwan are relatively unhealthy, it is debatable whether the timing for adoption of the new system is entirely appropriate.
When Japan’s economic bubble burst in 1989 and the economy flatlined, the Bank of Japan launched a zero-interest rate stimulus policy, but this proved ineffective. This zero-interest environment spelled doom for the insurance industry — and especially for life insurance companies. According to the law of large numbers — that the results of a large number of trials should, on average, produce the expected results — the sector was previously able to attract long-term life insurance capital to cover dividends and payments of claims, and to profit from long-term capital operations. However, when the interest rate dropped to zero, insurers still had to pay for long-term policies, despite their incomes having drastically declined, while losses gradually accrued as a result of different interest rates. The sector found the situation unsustainable over the long term.
Originally, Japan implemented a “convoy system” during its Lost Decade, pushing larger insurers to take over smaller ones that went bankrupt due to poor management. This was regarded as a good option, for it meant that the government was able to protect insurants’ rights and avoid the potential socal ramifications, but did not have to pay directly and merely had to provide some administrative preferential treatment to maintain the stability of the insurance industry. However, in the end, the whole industry was unable to stay afloat, regardless of what the government did. In 2000, the government finally abandoned the convoy system, and a total of 18 life insurers went bankrupt. Insurants’ rights were hurt as the insurers merged with one another, while the industry tried to survive through restructuring.
Today, Taiwan’s insurance industry is suffering the same illness as Japan. The commission is following the model of the Financial Restructuring Fund of the government’s Central Deposit Insurance Corp, trying to cover some insurers’ losses with taxpayers’ business taxes for financial services. To reduce the amount of money that the TIGF has to pay to winning bidders for troubled insurers under government receivership, it offers incentives to the former and tolerates the latter.
The problem is, the low-interest-rate environment in Taiwan has remained unchanged for almost 15 years. When the government relaxed the restrictions on local insurers’ investment overseas in 2007, most of them were hit by the financial tsunami. As a consequence, many of them are now finding it difficult to survive.
How much money does the government have to spend taking them all into receivership? Apart from Kuo Hua, Singfor and Global, several other insurers are also suffering net losses, and even more insurers suffer losses every year. As the government continues to suppress housing prices, the real-estate bubble may soon burst. By that time, insurers with a number of properties will really feel the heat.
Given that situation, Taiwan’s insurance market and the mechanisms concerned need to be overhauled and restructured. Any delay now will only exacerbate the problem, and make the solution more difficult. Global had net losses of only NT$8.3 billion in 2009, but the figure jumped to a net liability of NT$25.2 billion this year.
There may be more ticking time bombs out there, and time waits for no man. The authorities must do something, and soon. They should certainly not leave the time bombs for their successors to defuse.
Norman Yin is a professor of financial studies at National Chengchi University.
Translated by Eddy Chang
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