In an uncertain world, the insurance industry exists to enable better outcomes for members of society. Many individuals are simply unable to weather severe financial challenges on their own, and even the strongest and most financially capable families can benefit from the protection of insurance. So that society can be stronger as a whole, insurance companies doing business in Taiwan stand ready to assume risks that individuals cannot.
Each time a person purchases insurance, he or she expresses faith in that company’s ability to pay claims – in full and without delay. Sound regulation promotes trust, and ensures that all insurance companies uphold a set of minimum standards that protect the reputation of the industry as a whole. As a result, strong engagement among policymakers, regulators, and insurers is required to ensure that the industry delivers strong societal outcomes.
In Taiwan, the pace of societal change is extraordinary, given the rapid aging of the population, huge technological advances, and continued evolution in capital markets. In this environment, insurers and policymakers alike must focus on creating ever-better outcomes to help Taiwanese families prepare for and address fundamental risks. These include the risk of dying too soon, the risk of living longer than expected, and the risk of being under-insured throughout life.
To address these risks, wise regulation is required to enable the insurance industry to serve its core purpose – protecting individuals from risks they cannot face alone. We must therefore have the courage to embrace change and be willing to create an environment that promotes innovation so that individuals have access to a wider array of attractive alternatives to help them manage their risks. We must be willing to reduce the barriers to new product development. We must be willing to evolve to provide Taiwanese customers with a truly outstanding customer experience. And we must be willing to provide attractively priced products within a sound risk framework. Strong engagement between industry and policymakers is critical to reaching these consumer-oriented goals.
As an industry, we are committed to working closely with the Insurance Bureau (IB) and the Financial Supervisory Commission (FSC). And we appreciate the clear desire of the IB and FSC to reciprocate. To make progress, we believe it is important to set out key long-term goals and priorities that we all embrace, and then to define short-term objectives that we can work toward together.
Why is this important? Because the insurance industry itself is important. At nearly 20%, Taiwan’s insurance penetration ratio is among the world’s highest. But despite this world-leading reliance on insurance, Taiwanese people remain under-protected.
With approximately NT$1 billion of new sales premiums flowing into the life insurance sector each year, Taiwan citizens are purchasing only NT$2 billion of protection, while other developed markets are achieving rates of protection at least four times higher. Although the protection gap can be measured in many different ways, the fact is that the savings-oriented nature of insurance in Taiwan masks the true need for further protecting Taiwan citizens.
Many Taiwanese do purchase annuities, but in terms of lifetime income, only a very small percentage of people annuitize. In view of the aging of society, the lack of guaranteed lifetime income will leave many people exposed to significant longevity risk.
The need to continue to evolve our industry to better meet societal needs is clear and compelling. In this regard, we believe 5 Key Areas of focus are most important:
1) Addressing the Risks of Dying Too Soon
2) Addressing the Risks of Living Too Long
3) Addressing the Risks of Being Underinsured Throughout Life
4) Actively enabling and ensuring Customer Experience and Product Innovation
If we are successful in making progress in each of these five areas, Taiwanese citizens will benefit directly. And in each of these areas, industry and government together can drive meaningful progress. To align our efforts to achieve a bright future, we should aim high, setting out important long-term goals (a 3-5 year timeframe). And we should seek to make progress continually, seeking to meet short term objectives where progress can be achieved within 3-18 months. Of course, accomplishment of short-term objectives will bring us closer to achieving our longer-term goals.
Instead of the traditional White Paper format of making highly specific recommendations, the Committee has chosen to outline long-term goals and short-term objectives in each of the five areas of focus. We would also like to express our appreciation to the IB for agreeing to discuss these topics with our representatives in quarterly engagement sessions over the coming year. These sessions will provide an opportunity for AmCham Taipei members and the IB to work together to find the right way forward to promote the short-term objectives and build the foundation for progress against the longer-term goals.
This kind of openness and genuine desire to make progress together promises a better way to help meet the insurance needs of the Taiwanese people.
Suggestion 1: Address the Risks of Dying Too Soon.
Providing adequate Death Protection is the root of every healthy insurance industry. None of us knows how long we will be on this planet. And ensuring that everyone has sufficient protection to take care of their family in case of disaster is important not only for each family, but also for society as a whole.
Today, Taiwanese people only have TW$560,000 in death protection from life insurance on average, which is less than the average annual income of Taiwanese people. The protection gap reveals Taiwanese people’s inadequate understanding of core protection needs.
Long-Term Goal: Significantly increase the level of death protection for Taiwanese people.
While there are many ways to gauge the level of protection, the easiest is to measure the amount of protection policyholders receive for the premiums they pay. While the ratio of sum assured to premium is about 2.0 for the Taiwan life insurance industry, the ratio for other mature markets such as Singapore and Hong Kong is 8.0 or greater.
We look forward to further discussion of Taiwan’s protection gap so we can jointly define the right objectives for our industry. Doing so will allow us to more clearly define our goals and ultimately provide an effective social safety net that brings us closer to global norms for protection in developed countries.
1) Promote greater societal understanding of the true protection-oriented role of insurance and the value of protection to families.
2) Encourage consumers to purchase appropriate levels of protection – through targeted tax incentives for protection-oriented products and other means.
Promoting targeted Tax Incentives is an aggressive goal for short-term action, and we understand that it cannot be achieved without strong cooperation across many levels of government. Still, we believe it is a powerful lever for rewarding the right kinds of behaviors among consumers and as such should be pursued without delay. This proposition is equally true for both the risks of dying too soon and the risks of living longer than expected, which we discuss next.
Suggestion 2: Address the Risks of Living Longer than expected.
Taiwan is among the most rapidly aging countries in the world. In 1992, Taiwan had 9.9 working age people supporting each senior citizen. Now, 5.2 people support each individual aged 65 or above, and by 2060 only 1.3 people will be supporting each senior citizen island-wide.
In the public pension system, the proportion of conversions to lifetime protection is virtually zero, with 99.98% of those under the new Labor Pension System cashing out a lump-sum benefit. In the private market, we even lack the public data and metrics to fully gauge the true amount of lifetime income protection supporting our society.
Long-Term Goal: Increase consumers’ understanding of the need for lifetime income in retirement and increase the amount of longevity protection for Taiwanese people. Ensuring that individuals use Lifetime Income as the foundation for their retirement will provide clarity to the coming wave of retirees. It will also strengthen society as a whole.
1) Promote greater societal understanding around longevity risk and the need for protection against increased longevity through Lifetime Income products.
2) Encourage consumers to purchase appropriate levels of longevity protection – through targeted tax incentives for Lifetime Income products and other means.
Suggestion 3: Address the Risks of Being Under-insured through Life.
Ensuring that citizens have appropriate protection for their possessions and obligations throughout their lifetime is an important part of a holistic financial plan.
Long-Term Goal:Ensure that citizens have adequate cover – more closely approaching the levels of coverage in other developed countries – to protect them from a range of perils that could jeopardize their financial security. Over the long-term, Taiwan should increase the level of required protection in such areas as professional and third party liability insurance, moving toward developed country averages.
Short-Term Objectives: Recognizing the financial challenges posed by the long-term goal, our short- term objective is more modest.
1) Help businesses do business more easily with other businesses (e.g., waive the wet signature requirement).
Suggestion 4: Actively enhance the customer experience and enable and encourage product innovation.
Consumer expectations are steadily rising, as is the need for financial innovation to support consumer demands. This trend translates into a need for continuous innovation both in terms of the consumer’s digital experience as well as the product innovation process.
Long-Term Goal: Dramatically change Taiwan’s global position with respect to industry innovation by promoting measures that enhance the customer’s product choice and experience – providing greater speed, flexibility, and regulatory certainty around the new-product development process.
Meeting this long-term goal will enable Taiwan to provide consumers with a better overall experience with insurance and increase the range of product options available.
Short-Term Objectives: To support the long-term goal, the following short-term objectives are important.
1) Create a dedicated team within the Insurance Bureau, supported with sufficient resources, to encourage product innovation by providing more flexibility in product pricing and the filing process.
2) Embrace new technology to provide consumers with a more convenient process for both purchasing and service.
Product Innovation: Creating the above-mentioned dedicated innovation team within the IB would make possible deeper research, greater speed, and more flexibility to support the introduction of new products. Working together with existing units in the IB, such a team could assess and promote regulatory changes that provide insurers with more flexibility on the pricing, repricing, and filing of new insurance products so as to increase consumer choice. Health management insurance products are a significant trend both locally and around the world. An easy-to-use insurance product that conveniently includes healthcare services – such as health/medical consultation, second-opinion diagnosis, and personal health/medical assistance – could help people build a healthier life and happier society. The biggest challenge for product development is the pricing/repricing and speed of localization.
Convenient purchasing and better service process: While recognizing the importance of a well-developed personal identification and consent process, we believe that the requirements in such aspects as the “purchaser identification of e-commerce process,” “witness and signature of Telemarketing,” and “telephone re-confirmation process” could be modernized to provide customers with a more convenient purchasing experience.
We appreciate the regulators’ efforts and progress-to-date in support of e-commerce innovation. As the industry continues to innovate on behalf of consumers, we hope to that the regulatory environment will evolve to enable us to provide further flexibility and simplicity both for the purchasing of new products and the servicing of products once sold. We hope that changes in regulations will enable us to offer more types of products on-line and expand our online servicing offering.
Suggestion 5: Promote sound asset/liability & investment management practices and safeguard industry solvency.
Promoting sound asset/liability and investment management practices is crucial to ensuring that consumers can gain access to attractive products that are supported by well-thought-out and carefully managed investment strategies.
Insurers need access to a robust assortment of investment vehicles to manage the risk inherent in the liabilities they accept through insurance policy sales. Insurers invest the premium collected from policyholders to safely pay the policyholder benefits when they become due. Depending on the type of insurance product and benefits offered, the liability of the insurance contract can vary, for example, by length of policy duration or by the amount of targeted risk/return. Hence the selection of assets required to finance the liabilities must also vary –and having access to a robust selection of investment vehicles is essential to manage the increasing needs and expectations of the market.
As a primary objective of portfolio management, assets are purchased with consideration to the net exposure (assets minus liabilities) under a variety of lenses such as accounting, statutory solvency, and internal economic views. Optimizing investment return is also a primary objective, while the investable asset universe is defined by the assets available in the market and any regulatory constraints.
Constraints play a significant role to protect the consumer from undue or unknown risk. Conversely, constraints limit the “toolbox” of the insurance investment professionals in their pursuit of asset/liability management and optimizing returns.
We observe that Taiwan’s investment management regulation of insurance companies is more constrained than other modern markets. There are opportunities to expand the investable universe and relieve administrative burdens by lifting or modifying constraints that need not apply to sophisticated institutional investors and no longer serve the original intended purpose, or may not do so by the best possible means.
While we encourage short-term efforts to thoughtfully lift investment management constraints, a more critical, longer-term objective is to address the systemic risk presented by inadequate attention to asset/liability management in the Taiwan life industry. The question is not only the capital requirements for insurers, but also the way in which that regulation incentivizes (or disincentivizes) insurers to increase the already troublesome level of interest rate risk in the system.
Long-Term Goal: Provide Taiwan-regulated insurers the same access to and benefits from more advanced regulation of investment, hedging, and risk management capabilities – as is done in other modern insurance markets – to promote sound asset and liability management practices and to safeguard industry solvency.
Short-Term Objectives: To ensure that the long-term goals are met, we should focus on expanding the investable universe and relieving administrative burdens by lifting or modifying constraints that no longer serve the original intended purpose, or may not do so by the best possible means. More specifically:
1) Remove the minimum issuer rating for foreign corporate bonds and financials (which assesses the wrong entity) and replace it with the more widely used and meaningful minimum issue rating.
2) Refine the requirement that limits exposure from stock, corporate bond, loan and financial investment based on the issuing company’s shareholder equity
3) Permit insurance enterprises to conduct “overseas securities investment fund” transactions with interested parties by granting the relevant management department a general authorization from the company Board to execute such trades according to the established internal operating procedures.
4) Permit insurance enterprises to exclude all foreign investments backing foreign-currency-denominated traditional products from the calculation of the limit on the total amount of foreign investment.
We look forward to discussing specific ideas concerning how to promote each of these short-term objectives on behalf of Taiwanese, as well as to further engagement on the long-term objectives.