Advances in technology and communications have led to increasing market globalization. To keep pace with the rapidly changes occurring in this international digital age, Taiwan needs to continue to modernize its processes and practices for acquiring and servicing insurance products. In this year’s paper, the Committee continues to focus on narrowing the protection insurance gap, strengthening the financial stability of the industry, reviewing and improving the legacy norms and practices, and adopting a more risk-based approach in governance.
Taiwan is in a tremendous position to make significant strides in these areas, firmly establishing itself as a regional or even global leader. Doing so would provide a more stable and consumer-oriented market in Taiwan, enabling all participants to thrive. We must therefore have the courage to embrace change and be willing to create an environment that promotes innovation and also helps to manage the risks. Strong engagement between industry and government is critical to reaching these goals. When setting up new rules to supervise the insurance/reinsurance industry, we should also observe international market practices, creating a healthier market environment without deviating significantly from such practices.
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 priorities that we can all embrace, and then to define short-term objectives that we can work toward together. The Committee is thankful for the continuing commitment the government has demonstrated to work directly with us, especially the IB, FSC and the National Development Council (NDC) through quarterly engagement meetings. We very much look forward to working with the government to realize the suggestions put forward in this year’s White Paper.
There was substantial progress in 2019. The work that remains is outlined in our 2020 Priorities below.
Suggestion 1. Provide simple, innovative solutions to protect the Taiwanese people.
1.1 Provide consumers with access to more affordable term insurance. Taiwanese consumers are unable to purchase the most affordable term insurance, since domestic regulations require 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.
Revising the Insurance Act to enable pure term 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 FSC’s goal of increasing the amount of protection in Taiwan without exacerbating the investment risks that insurers assume to provide such protection.
Specifically, we propose amending Article 119 of the Insurance Act to allow insurance companies to develop more affordable, pure term life insurance (that is, without a required cash surrender value). This change will encourage consumer-oriented product innovation and strengthen Taiwan’s social safety net.
1.2 Allow long-term premium payment accident & health (A&H) riders on investment-link products (ILPs). Under prevailing market practice, all riders attached to ILPs are in the form of one-year renewable term (YRT) A&H riders, even though the regulations do not clearly set forth such a restriction (see Article 150 of the “Notice Items of Product Inspection for the Life Insurance Industry”). Such practice is not in the best interests of either consumers or insurance companies considering that long-term A&H riders can better serve the target customers’ needs and better help the insurance companies to increase the persistency rate and incentivize sales than can 1 YRT A&H riders. We recommend that the government encourage insurers to adopt long-term A&H riders for the following reasons:
Customers must pay higher and higher premiums each year for 1 YRT riders, which is clearly not an ideal choice for retirement plans.
Taiwanese customers prefer to pay off premiums as soon as possible to get long-term or even whole-life protection.
Longer-term or even lifetime protection helps to increase the persistency rate.
The commission structure for long-term premium payment A&H riders helps to incentivize sales, which again should lead to better policy persistency.
At the same time, the following conditions must also apply in order to promote long-term premium payment A&H riders:
To increase customer’s protection coverage, traditional long-term savings-type riders should no longer be allowed.
Variable annuities should be excluded because VAs have no medical underwriting requirements.
Long-term A&H riders should be in the form of “extra premium payments” instead of “COI (cost of insurance) deduction from assets under management (AUM)” because extra premium payments will help to keep VUL (variable universal life insurance) in force longer, providing a reliable source of retirement income.
1.3 Increase online insurance health-product types and relax online claims requirements. Under current e-commerce regulations for health products, only one-year reimbursement products can be sold online, and end-to-end online claims processing is available only for death benefits. To meet customers’ diverse insurance needs as well as to prevent moral hazard, health products with no death benefits, such as short-term surgical insurance and cancer insurance with fixed or low sum 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 an insurance company’s risk controls are in place.
Suggestion 2: Promote sound asset/liability & investment management practices and safeguard industry solvency.
Promoting sound asset/liability and investment and risk management practices is crucial to ensuring the soundness of the insurance industry as a whole by enabling well-thought-out and carefully managed investment and risk-management strategies. We believe that Taiwan-regulated insurers should have the same access to and benefits from more advanced regulation of investment, hedging, and risk management capabilities as is available in other modern insurance markets. We hope to see more progress toward this end in the coming year.
2.1 Permit insurance enterprises to exclude all foreign investments backing foreign-currency-denominated traditional products from calculation of the limit on the total amount of foreign investment.
Compared with TWD-denominated traditional products, foreign-currency-denominated products are more ALM (asset-liability management)-friendly to life insurance companies because there is no foreign-exchange risk and a much wider range of investment options is available in the market with decent quality and sufficient liquidity for matching insurers’ liabilities. Nevertheless, insurers’ capacity of offering foreign-currency-denominated traditional products is severely constrained by current regulations governing foreign investments. We believe the removal of this constraint could largely enhance the ALM adequacy of life insurance companies.
Apart from the positive impact on the insurers’ ALM capability, product innovation in the life-insurance industry would be encouraged if insurance companies are allowed to participate in mature, diverse, and liquid foreign-capital markets, without worrying about the foreign investment cap, when introducing creative, new products to the market.
2.2 Further relax foreign investment limits on a foreign insurer’s Taiwan branch or subsidiary. Foreign insurers have distinctive investment policies, asset allocation strategies, and global risk exposure compared to local insurers. Particularly, foreign insurers operating in Taiwan tend to focus on selling life insurance products denominated in foreign currencies in which they have a competitive advantage, and therefore need corresponding foreign investment assets/foreign currencies to support the relevant liabilities. To mitigate foreign insurers’ currency risk exposure as well as to align with their respective group’s global investment policies and asset allocation strategies, we propose that the government further relax foreign investment restrictions such as the following:
Amend Paragraph II of Article 146-4 of the Insurance Act to exclude foreign insurers from applying the 45% ceiling on the foreign investment ratio.
Amend Sub-Paragraph 1, Paragraph II of Article 146-4 of the Insurance Law to remove the requirement for obtaining the regulator’s prior approval before a foreign insurer can exclude foreign investments backing traditional life products denominated in foreign currencies from its calculation of the foreign investment ratio.
Suggestion 3: Adopt different management and control policies according to the sales channel and type of company.
3.1 Differentiate regulations and surveillance standards in accordance with the size of the insurer. Foreign insurers generally maintain a relatively smaller scale of operations (in the form of either a subsidiary or a branch), while local insurance companies have significantly greater size. Disregarding such differences, the regulator tends to impose similar compliance obligations on both groups and apply the same penalty (NT$600,000) for each violation. The undifferentiated regulation and surveillance standards hamper fair competition in the Taiwan insurance market and place undue burdens on foreign insurers. As an initiative to level the playing field, we propose that the regulator consider setting differentiated standards in assessing penalties and adjust the “customer complaint ratio rankings” in proportion to the insurer’s size, capital, total number of policyholders, and other quantitative factors relating to its operations in Taiwan. Life insurers could accordingly be classified into two or three groups.
Specifically, we propose amending the relevant regulations as follows:
Add a paragraph III to Article 172-2 of the Insurance Act to state that the regulator should consider each insurer’s capital, size of operating funds, number of policyholders, and other quantitative factors relating to domestic insurance market in exercising discretion on the amount of fine to be imposed on an insurer for any breach of its compliance obligation.
Amend the “Customer Complaint Ratio Assessment Standards” to rank the customer complaint ratio of insurance companies below a certain size in a different category or by a different set of standards.
3.2 Differentiate sales channels through proper rules. Different sales channels pose difference levels of risks to insurance companies. Frequent misconduct in one sales channel, such as misappropriation of customers’ funds or unauthorized transactions for customers in the face-to-face channel, may very well not be equally risky in other channels like telemarketing or e-commerce. Requesting insurance companies to set up the same strength of internal control mechanism for all sales channels is impractical considering the different level of risks they face. In fact, applying stringent internal controls to less risky sales would adversely increase the company’s compliance cost, obstruct the sound development of business, and in turn cause inconvenience for customers in securing timely insurance protection.
We propose that insurance companies be authorized to apply internal control rules corresponding to the risks they face in different sales channels.
Suggestion 4: Adopt a risk-based approach for regulation and governance.
Risk-Based Supervision (RBS) is gradually becoming the dominant approach to regulatory supervision of financial institutions around the world. RBS adopts a regulatory emphasis of “focusing on what matters” – assessing the degree of risk in the company’s business operations and determining how to reduce the risk as required. In the 2015 Financial Action Task Force (FATF) Guidance for a risk-based approach, it is recommended that financial institutions assessed by supervisors as having higher risk for ML/TF (money laundering/terrorist financing) should be subject to closer supervision. Likewise, insurance companies assessed as having higher risk in terms of market conduct or business models should be subject to higher supervision and inspection.
To achieve effective supervision, we recommend that regulations for internal controls be imposed through a risk-based approach, allowing insurance companies to take corresponding mitigating action based on the risks they face and allowing the regulator to conduct risk-based supervision and inspection.