Taipei Times: The Ministry of Finance recently gave the first-ever license for an investment-related life insurance policy to Manulife. Could you explain the nature of this policy?
Henry Cheng: Investment-related life insurance policies have been popular in Western countries for years, but Taiwan has never had such a product. Specifically, the policy is a kind of index-linked annuity product invested in indices such as the S&P 500 and the NASDAQ Index and US zero-coupon government bonds.
The policy is a mix of a fixed-amount insurance policy and a variable-amount insurance policy.
PHOTO: CHIANG YING-YING, TAIPEI TIMES
TT: What's the difference between fixed-amount and variable policies?
Cheng: A fixed-amount policy is a policy that pays a fixed amount when the policy expires, while the variable-amount policy pays according to the policy's investment return when it expires.
TT: Why is this new insurance product significant?
Cheng: This is the first step in deregulating Taiwan's insurance market in anticipation of its entry into the WTO. In the last five decades or so, Taiwan has been conservative in the type of life insurance products it has allowed.
In order to raise the competitiveness of Taiwan's life insurance industry, the ministry has decided to deregulate the market. We expect the move will trigger a flood of new life insurance products into Taiwan's market.
It will bring a lot more choices for Taiwan's consumers in the next few years.
TT: What are the advantages of the new product?
Cheng: The major advantage of an investment-related policy is that it normally has a higher investment return than other life insurance policies. A fixed-amount policy will normally generate an annual return of less than an ordinary savings account, with interest of say 4 or 5 percent.
But Manulife's index-linked policy may generate an annual return of more than 10 percent -- provided the policy is held for the long term -- over the course of 10 to 20 years. Of course, the return is based on the performance of the indices during the holding period.
TT: What are the percentages that will be invested in the various indices?
Cheng: In the first 10 years, the policy will invest a small percentage in stock indices and the majority of the investment in the bond market. Specifically, 17.5 percent will go into the S&P 500 and NASDAQ Index, respectively, and 65 percent will be invested in zero-coupon bonds for the first 10 years.
After that, the percentage in stocks is 22.5 percent for the two stock indices respectively between 10 and 15 years, and 27.5 percent between 15 and 20 years. The percentage in the bond market would be lowered to 55 percent and 45 percent accordingly.
The concept behind this is that over a long period of time, investment in stocks will generate a better return while minimizing the policy's exposure to stock market volatility. Manulife guarantees the safety of the policy's principal, in case of any losses in the investment process.
TT: When do you expect to launch the product?
Cheng: With the market opening up the ministry has also changed its regulations regarding insurance agents, who now must be certified by an independent organization before they can actually begin selling the policy.
We had more than 200 Manulife agents take the qualification test held by ROC Insurance Industry Development Center earlier this month. A total of 164 passed the test, and only those who passed the test can sell the product, which we began offering to the public last week.
TT: Since your firm is the first to obtain official approval to offer this type of product, doesn't that put you in a highly competitive position?
Cheng: Local insurance companies have been surprised by the ministry's move to grant Manulife permission to begin selling the new product.
We can only say that we have been trying very hard to promote deregulation in the life insurance industry for years, and our efforts have paid off.
TT: Since you are pegged to lead your company's Greater China estate planning team in the near future, could you tell us about the prospects of China's market?
Cheng: Manulife set up a joint venture in China at the end of 1996. Originally, we anticipated that it would take seven to eight years for our operations to reach the break-even point. But the growth in the China market has gone far beyond our expectations and has posted faster growth than our Taiwan branch.
In about four years, our China operation is close to breaking even. The huge population and China's high economic growth rates have created a vast market for life insurance companies, and I think it could continue for the years to come.
TT: Recently there have been a number of local financial service companies, including banks and insurance companies, planning or have already set up operations in China. From your experience, what is the best way to utilize resources in Greater China?
Cheng: From our company's point of view, we have found that from a linguistic and cultural background, Taiwan is most suitable to be used as a stepping stone to areas such as Shanghai, Beijing and Fuchan Province, while Hong Kong is suitable for Canton.
Therefore, we send experienced managers from these two places to various locations in China to train our China staff and supervise daily operations.
Financial services are unlike manufacturing in that we require a minimum amount of equipment and facilities to launch operations. Therefore, as long as the strategy is correct, top management doesn't always have to be tied up in China. Regular visits there will suffice.
TT: With WTO entry imminent, what changes will membership in the trade organization bring to Taiwan's financial services sector?
Cheng: Merger and acquisition activities have already begun. For example, UK's Prudential Insurance Group has acquired Chinfon Life Insurance (
The local securities industry has gone through massive consolidation since 1990. Recently the ministry has told foreign bankers that they are eligible to acquire local banks. I think Bank Sinopac (華信銀行) and E. Sun Bank (玉山銀行) would be the first targets for them.
The state-owned banks and other private banks will also participate in the consolidation. The most important point is that, after further deregulation and consolidation takes place in the financial services sector, a more efficient and more competitive financial market for Taiwan is the long-term result.
Liberalization is a must to modernize the financial sector. The government has to revamp its financial service regulatory agencies. The recent proposal to create a Financial Supervisory Board (金融監理委員會) is in the right direction. Taiwan really needs a modernized regulatory agency with international standards to cope with entry into the WTO.
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