The Financial Supervisory Commission has in the past few years suspended key executives at local life insurance companies and levied harsher punishments against offenders. In just the past four months, it has penalized 56 life insurance firms, a rate of about one company every two to three days. Although this shows that the regulator is trying to meet its vow to maintain financial discipline, it also shows that life insurance companies lack proper risk management amid a challenging business environment.
Earlier this month, the commission fined Shin Kong Life Insurance NT$27.6 million (US$942,752), capped the company’s overseas investment and suspended its chairman Eugene Wu (吳東進) until the end of his term. The penalty is the second-highest in a single case after Nan Shan Life Insurance was in September last year fined NT$30 million, and ordered to defer sales of investment-linked products and suspend chairman Du Ying-tzyong (杜英宗).
Unlike Nan Shan, which had incurred regulatory penalties due to its failure to fix flaws in its information technology system for nearly a year, Shin Kong was fined for reckless investment practices that continued for several years, endangered its solvency and harmed shareholder interests. The company had also given too much power over investment decisions to an asset and liability management committee, without any checks from the board of directors, raising concerns about its poor corporate governance.
The disciplinary action against Shin Kong serves as a reminder to insurance companies to abide by the law when making investments. The commission’s regulations on such companies are likely to become stricter as insurers have a bigger influence on capital markets. Insurance companies also need to improve their risk management, auditing and internal controls, otherwise they will continue to breach the nation’s laws and regulations.
The life insurance industry has seen weakening business momentum following stiffer regulatory controls on sales of savings-type insurance policies and commission payouts. Protection policies remain a hard sell as customers favor investment products, adding pressure on insurance firms to obtain higher yields, while a low interest rate environment, the fallout from the COVID-19 pandemic and the capital requirements for implementing International Financial Reporting Standard 17 increase the financial burden on companies.
The central bank has said that the fundamental issue facing life insurance companies is the long-term inconsistency between their assets and liabilities, which is primarily due to the firms’ unwillingness to employ long-term investment tools in the domestic market. If market prices experience larger fluctuations, the mismatch could increase the risk of losses, pushing insurers to favor overseas investments.
However, as life insurance companies heavily invest in overseas financial products, they face growing risks and heavy foreign-exchange losses as global interest rates move lower or even hit zero. Thus, insurers are trapped in a vicious cycle.
The commission’s disciplinary actions deserve applause, but apart from severe penalties, improvements to the insurance industry’s difficult business environment is equally important.
In the past four years, the commission has penalized chairmen at four life insurance companies, which demonstrates the industry’s long-standing problems. Removing chairmen is not sufficient to address those problems. The regulator must put on a brave face and a show of force, and the industry must establish a sense of legal compliance to rebuild public trust, while the nation must ensure a viable business environment for insurance companies.
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