Taiwan's Financial Supervisory Commission (FSC) has recently introduced measures designed to assist life insurers in coping with the challenges posed by interest-rate risks, with these changes part of the transitional arrangements for the upcoming implementation of the localised Insurance Capital Standards (TW-ICS) and IFRS 17.
In its latest report, Fitch Ratings has indicated that these adjustments will help alleviate the negative spread pressure experienced by life insurers and enable them to manage asset-liability duration gaps more effectively.
In November, the FSC announced a set of three measures to facilitate a smoother transition for insurers to the new solvency framework over a 15-year period. These measures include the application of a 50 basis points (bp) illiquidity premium to the liability discount rates for legacy insurance policies with guarantee rates above 6%.
Additionally, there will be a gradual increase in target capital requirements for interest-rate risk from 50% to 100%. The FSC also plans to allow the phasing in of net fair value impacts from assets and liabilities within this period.
This illiquidity premium adjustment is particularly beneficial for policies sold before 2004, which offered more than 6% of guaranteed yield. It will ease the reserve pressure on life insurers under the new solvency standards and align with the requirements of IFRS 17. This is a significant development, given Taiwan's current policy rate of 1.88%.
Many life insurers, especially those with long operating histories and substantial legacy books, are grappling with negative spread burdens. The shift in business mix towards long-term protection products and steady gains in mortality and morbidity are notable, with health insurance accounting for 19% of total life premiums in the first nine months of 2023, up from 13% in 2021.
Interest-rate risk remains a major challenge for life insurers. Fitch estimates that, for major insurers, the stricter requirements under the new regime could result in interest-rate-related capital charges that are three to four times higher than those under the current system. The FSC's decision to allow a gradual increase in interest-rate risk provisions from 50% to 100% over 15 years from 2026 offers life insurers time to adjust and strengthen their equity bases.
The flexibility in recognising the net fair value impact on capital is expected to help insurers maintain lower solvency sensitivity and mitigate immediate capital needs driven by interest-rate movements. The adoption of IFRS 17 and tighter capital rules in 2026 will highlight the mismatches between insurers' assets and liabilities, especially considering the longer duration of liabilities compared to assets.
The FSC also announced that life insurance liability reserve interest rates for foreign-currency new business in 2024 would increase, except for policies denominated in Chinese yuan. For US dollar-denominated policies, which constitute a significant portion of the life industry’s foreign-currency policies, interest rates will rise by varying degrees based on the liability duration.
Fitch believes that life insurers will maintain stable surplus growth through stronger asset-liability management, a shift towards more profitable protection-type products, and cautious investment strategies, including proactive foreign-currency risk management. This approach will support them as they transition to new capital standards.
Notably, the life industry's profit before tax decreased by 38.4% year-on-year in the first 10 months of 2023. Fitch anticipates that life insurers will seek to enhance their capital adequacy in the coming years, possibly through debt issuance or equity injections, in response to continued financial market volatility.
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