The Financial Supervisory Commission (FSC) had issued adjustments to the new solvency framework with the aim to ease the burden on local Taiwanese insurers, said Fitch Ratings.
The adjustments include reduced risk weights and additional phase-in periods for equity and real-estate investments. This will supposedly give more time for companies to adjust their asset allocations and narrow potential gaps in their capital. They will also have 15 additional years to phase in the risk weights on the two asset categories after the implementation date.
Despite this, insurers are still burdened with the pressure to build capital in the near to medium term in order to meet the interest rate charges that come with the framework and a new standard for accounting.
Fitch Ratings estimated that for major insurers, the requirement will lead to interest-rate-related capital charges that are three to four times higher than the current regime. This increase is due to the savings-type products that had high guaranteed yields that were sold in the past.
Companies are expected to continue raising their capital through equity and subordinated debt as well as cut down on investment risks. This year, there were already several major life insurers that have announced the issuance of subordinated debt, which totaled TWD100 billion.
In the last decade, Taiwan insurers had been increasing their foreign investments in favor of better returns and also to support long-term liabilities while interest rates were still low. As a response to the current climate, as mandated by the FSC, insurers are now selling more policies in foreign currencies and setting aside foreign-exchange reserves to mitigate the risk that comes with it.
With that, the sector is set to adopt the IFRS17 by 2026. The IFRS17 is a new global accounting standard that includes evaluating insurance liabilities using the current interest rates instead of the initial rates. As this coincides with the tightened capital rules, the asset and liability mismatches at insurers will be accentuated. It will also include a wide currency mismatch among rising foreign-currency investments and obligations to local-currency insurance.
The IFRS17 is set to provide clarity regarding the profitability of insurers as insurance profit is separately reported from investment returns. This urges incentivized insurers to shift from savings-type products to protection-type products, which are considered to be much more profitable and generate a higher contractual service margin.
The FSC had also made moves to tighten the regulation over savings-type products in recent years, which has helped restrain the growth in the exposure of insurers to interest-rate risk.
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