Providing innovative solutions for everything from simplifying the purchasing process to providing new, more affordable options for protection to finding ways to expand coverage.
In an uncertain world, the insurance industry exists to enable better outcomes for 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 must stand ready to assume risks that individuals cannot.
We are thankful for the continuing commitment of the government – especially the Insurance Bureau (IB) and the National Development Council (NDC) – to work directly with us through quarterly Engagement Sessions. These sessions provide a valuable opportunity to hear the voices of global companies in an industry dominated by local companies.
Although progress was achieved in 2018, in 2019 the need for further improvement to enable the industry to better meet societal needs is clear and compelling. Below the Committee proposes specific, actionable suggestions for Taiwan policymakers and regulators in several key areas of focus. We look forward to addressing these 2019 White Paper objectives through our ongoing quarterly dialogue. Our objective is to provide consumers with more choice and increased security, as well as to assist the Financial Supervisory Commission (FSC) in its efforts to promote innovation.
Suggestion 1. Provide simple, innovative solutions to protect the Taiwanese people.
Consumer expectations are rising steadily, as is the need for financial innovation to support consumer demands. To meet these expectations, we seek to dramatically change Taiwan’s global position with respect to industry innovation. By taking action now on the objectives below, Taiwanese regulators and legislators can create an environment that increases the range of valuable product options available and makes possible a vastly improved experience for customers. Taiwan can become known as a leader in thoughtful innovation.
1.1 Allow Taiwanese consumers to pay Taiwan Dollars to purchase all types of insurance policies.
Current regulations do not permit Taiwanese consumers to use Taiwan dollars to purchase insurance policies that provide a guarantee in a foreign currency. Allowing such payment in Taiwan dollars would bring greater convenience since foreign currency exchange could be an integral part of the product design. It would also remove a barrier to competition for global companies without an affiliated bank.
1.2 Provide Taiwanese consumers with access to more affordable term insurance and longevity protection.
Taiwanese consumers are unable to purchase the most affordable term insurance or longevity insurance, since domestic regulation requires a forced savings component (represented as a Cash Surrender Value which insurers must reserve and price for). This is not the practice in most advanced countries. For example, Japan, Korea, and the U.S. allow term insurance with no cash surrender value if certain criteria are met. The U.S. also allows certain types of annuity products with no cash surrender value prior to the commencement of the annuity payment.
Revising the Insurance Law to enable pure term and longevity insurance options would be the most sensible first step to increase insurance protection for Taiwan’s consumers. It will also help the industry meet the goal set out by the FSC of increasing the amount of protection in Taiwan without exacerbating the investment risks that insurers assume to provide such protection.
Specifically we propose the following:
Amend Article 119 of the Insurance Act to allow insurance companies to develop more affordable, pure term life insurance (that is, without required cash surrender value).
Amend Article 135-1 of the Insurance Act to add a new annuity product type – exempt from Article 119 – called Deferred Income Annuity, to provide pure longevity insurance (that is, without required cash surrender value) to Taiwanese customers.
These changes will encourage consumer-oriented product innovation and strengthen Taiwan’s social safety net.
1.3 Relax the scope and limit of corporate tax deductions for group insurance defined in Article 83 of the “Regulations Governing Assessment of Profit-Seeking Enterprises.”
Current corporate tax rules limit the scope of tax deductions for group insurance to NT$2,000 per person per month. This limit is one of key factors in corporate decisions regarding the level of insurance offered to employees. Due to the low protection coverage in Taiwan, relaxing restrictions on the scope of tax deductions for group insurance would encourage enterprises to purchase appropriate levels of protection for employees. Expansion of the allowable limit would make Taiwan’s corporate tax treatment comparable to that of other countries, such as Japan and the U.S.
1.4 Ensure that risk control for reimbursement insurance coverage does not impact customer choices and needs.
To prevent the public from abusing reimbursement insurance products and gaining improper proceeds, the IB has asked insurance companies to study the feasibility of setting up risk controls for reimbursement products. In our view, as the total lifetime out-of-pocket expenses for medical treatment cannot be predetermined, customers tend to purchase more than one reimbursement insurance policy to cover their potential out-of-pocket medical expenses. If risk control for reimbursement products is set disproportionate to the prevention of claims abuse, customers are likely to be left insufficiently covered. We therefore recommend that customers be entitled to make their own determination of the extent of their policy coverage for reimbursement products.
1.5 Increase product types for online health insurance and relax online claims requirements.
Under current e-commerce regulations for health products, only one-year reimbursement products can be sold online, and an end-to-end online claims process is available only for death benefits. To meet customers’ diverse insurance needs and at the same time prevent moral hazard, health products with no death benefits – such as short-term surgical insurance and cancer insurance with fixed or low sums assured – should be available online. In addition, to facilitate the claims process, we recommend that the end-to-end online claims process should also be applicable to low-sum assured applications when insurance companies have appropriate risk controls in place.
1.6 Maintain current customer due-diligence procedures, refraining from adding a requirement for keeping copies of customer IDs.
To strengthen Anti-Money Laundering/Countering Terrorism Financing (AML/CTF) controls, the IB has asked the Life Insurance Association to study the process and timing for a requirement that insurers keep a copy of all customers’ IDs for Customer Due Diligence (CDD) purposes. This proposal would greatly impact current sales practices and cause inconvenience to customers. The current Insurance Act and AML/CTF-related laws and regulations do not require insurance companies to keep copies of customers’ IDs, and nothing in the law spells out the legal consequences of not keeping copies of customers’ IDs. In addition, the “40 Recommendations” and “Guidance for a Risk-Based Approach for the Life Insurance Sector” from the Financial Action Task Force (FATF) require insurance companies to identify and verify a customer’s identity but do not require the insurers to keep copies of the customers’ IDs. The existing witness-signature procedure and keeping ID copies of high-risk customers should suffice to meet the FATF 40 Recommendations. In our opinion, adding this new requirement would be unnecessary.
1.7 Allow variable and convenient payment methods, including digital (electronic and third-party) mechanisms.
With Denmark, Sweden, and the U.K. well on their way to becoming cashless societies, the advantages of digital payment are clear: flexibility, efficiency, and security, plus cost savings for the government in not having to issue and manage paper money and coins. The FSC’s May 12, 2016 White Paper on Fintech Development Strategies already emphasized the goal of popularizing electronic payments nationwide. Now the need for digital payment for insurance in Taiwan can no longer be ignored. We therefore urge the government to open up digital (including electronic and third-party) payment mechanisms for the insurance industry. Let consumers have the flexibility to choose from any electronic or third-party payment vendors to pay their insurance premiums without a ceiling.
Suggestion 2. Promote sound, globally oriented investment and risk-management practices.
Promoting proper asset/liability and investment and risk-management practices is crucial to ensuring the soundness of the insurance industry as a whole. Taiwan’s regulation of insurance company investment includes numerous provisions that make it more difficult to access appropriate investments to support insurance liabilities. The unintended consequence is to incentivize insurers to invest in risk assets that are less appropriate for insurance asset/liability management, but are permitted under current regulations (for example, foreign currency assets supporting TWD guarantees).
Taiwan should expand the investable universe and relieve administrative burdens by lifting or modifying constraints that need not apply to sophisticated institutional investors. Our 2019 objectives seek more progress toward this end.
2.1 Adopt a risk-based approach to risk management and audit requirements similar to that governing banks.
The “three lines of defense” model in the COSO internal-control framework is designed to encourage enterprises to place a high value on the importance of risk management. It mandates that three lines of defense within the company should each take its own responsibility in managing various types of risks. Thanks to FSC’s foresight, the Taiwan financial industry for years has been regulated to implement this model to ensure that a comprehensive internal-control mechanism is in place. For companies that have deployed a formal, structured, routine, and competent risk-management framework within the first and second lines of defense, internal audit should represent the third line, with the function of evaluating how well the first and second lines of defense execute their responsibilities.
Unlike the sweeping “full-aspects auditing” stipulated in Article 18 of the “Regulations Governing Implementation of Internal Controls and Auditing Systems of Insurance Enterprises,” a focused “risk-based audit” can help sharpen and enhance the internal-control mechanism. This approach has become increasingly popular across the world since 1999 and leads to an effective diagnosis in cases where 1) double handling takes place; 2) unnecessary steps are included; 3) critical steps are missed; 4) equipment and machinery are not operating as they should; 5) operators have not been fully inducted, briefed, or trained; 6) work instructions are inadequate, and 7) vital inspection and test activities have been missed out, or are failing to do what is required of them. Today, a “risk-based audit” is already a part of ISO 31000.
FSC introduced the concept in 2016 as Article 15-1 of the “Implementation Rules of Internal Audits and Internal Control Systems of Financial Holding Companies and Banking Industries.” Banks are allowed to opt for a “risk-based audit” rather than the traditional full-aspects auditing. To provide inducements for insurance companies to enhance the efficiency and effectiveness of the internal-audit function, the Committee recommends incorporating the “risk-based audit” concept into insurance regulations.
2.2 Remove the local rating requirement for private placements when a credible rating is available and recognized in the insurance group’s home country.
Foreign private debt can be an efficient and diversifying tool in an insurer’s general account. The private placement market in the U.S. and Europe offers:
Protection through debt covenants providing credit enhancement relative to unsecured public debt,
Lower realized loss experience due to additional structural protection for lenders, and
Additional credit spread relative to public bonds to compensate lenders for lower liquidity compared with public markets.
Most private placements in the U.S. do not have NRSRO (nationally recognized statistical rating organization) ratings. The insurance regulator in the U.S., the National Association of Insurance Commissioners (NAIC), allows insurers to use ratings from NAIC’s securities valuation office (SVO).
Insurance companies should be given the ability to invest in private placements using the SVO rating. We urge modification of the “Regulations Governing Foreign Investments by Insurance Companies” to eliminate the requirement for NRSRO ratings.
2.3 Apply the 10% limit on investment in any single fund to each distinct investment strategy within a well-diversified fund of funds, rather than the well-diversified fund itself.
Current Taiwan insurance regulations prohibit investment in any single fund equal to 10% or more of the fund’s total assets. We believe the purpose of the limit is to ensure sufficient portfolio diversification and avoid the risk of over-concentration in asset managers’ funds. We fully support the objective of this regulation. However, we see a need for flexibility related to investments in funds of funds (FoFs).
Specifically, we believe the 10% limit should apply only to single manager funds. FoFs should be exempt because:
They are vehicles created for institutional investors to build a well-diversified portfolio of assets in a very efficient manner, which by design fulfills the regulation’s objective.
Given the limited number of FoF providers, the current regulation may have the unintended consequence of causing insurers to move into less optimal investment opportunities when sufficient diversification already exists within the FoF itself.
We propose to apply the 10% ownership limit to the underlying funds within the FoF and not to the FoF itself.
Suggestion 3. Cover the non-life-insurance risks that Taiwanese companies and individuals face.
Ensuring that citizens have appropriate protection for their possessions and obligations throughout their lifetime is an important part of a holistic financial plan. We believe Taiwan should increase the level of required protection in such areas as professional and third-party liability insurance, moving toward developed-country averages.
3.1 Allow insurance brokers to limit their liability when dealing with professional corporate customers.
Article 6 of the Financial Consumer Protection Act (FCPA) states that a financial service provider’s liabilities to the financial consumer shall not be capped or relinquished by prior agreement. Although the FCPA intends to exclude professional corporate customers who have a required level of financial capability or professional expertise, the exclusion is conditional. It may take effect when 1) the criteria of professional corporate customers are prescribed in the regulations governing the respective financial product /service/business, and (2) such regulations are explicitly specified in the FCPA ruling on the exclusion criteria (for example, the regulations governing offshore structure notes or the regulations governing banks’ conducting derivatives business).
As long as the regulations governing their product/service/business do not fulfill the above two conditions, the financial services providers will not be able to cap or relinquish their liabilities to corporate customers by prior agreement even if the customers have more than adequate financial capability or professional expertise.
In the case of insurance brokers in particular, some additional factors need to be taken into consideration:
In many cases, the corporate customers of insurance brokers are stronger financially than the brokers or have professional knowledge and experience in insurance.
In practice, an insurer’s liabilities are limited in that it pays out benefits only in accordance with the insured amount under the insurance policy. Insurance brokers, who are intermediaries, are not able to limit their liabilities in the same way.
The concern that financial consumers are in a disadvantaged position in negotiating contract terms and conditions does not exist for the corporate customers who are financially stronger and have professional expertise. Hence, it is unnecessary to prohibit insurance brokers from entering into agreement with any corporate clients to limit or waive the liability.
In summary, the FCPA and related rulings should be amended to (1) exclude corporate customers who have high levels of financial capability or professional expertise, and (2) remove the restriction on limiting or waiving the liability by prior agreement.