Cathay Life readies portfolio for looming solvency rules

Taiwan's biggest insurer braces for challenges as it increases its exposure to foreign bonds and dividend-yielding stocks ahead of the upcoming new capital regime.
Cathay Life readies portfolio for looming solvency rules

Cathay Life, like other insurers in Taiwan and elsewhere in Asia, is moving to change its asset allocation and build stronger capital positions in light of forthcoming solvency rules aimed at aligning local practices with international standards.

The country's Insurance Capital Standard 2 aims to strengthen insurers’ solvency, or the ability to pay their debts, by better reflecting the risks of their investments and insurance businesses. It will come into effect in 2026.

ICS 2 is coming in alongside new International Financial Reporting Standard 9, which is already in force in Taiwan, and 17, which is currently expected to take effect in 2026. Both accounting rules are also set to have an impact on insurance firms' investment portfolios, and in some cases are already.

The ICS 2 regime will force Taiwan's insurers to pay more attention to asset-liability management, especially the match between cash flows on both sides, as it means assets and liabilities will be marked to market, a spokesman for Cathay Life told AsianInvestor.

As part of its preparation for the change, the life insurer, which had NT$6.26 trillion ($209 billion) in assets at the end of 2019, will continue to increase its allocation to overseas long-duration bonds with strong ratings. Bonds issued in the domestic capital market lack liquidity tend to have short durations, but Cathay Life is mainly selling long-term insurance policies, he said.

The insurer will also select quality stocks with high and stable dividends to reduce the impact brought about by the regime change, the spokesman said.

Assets will be valued and liabilities discounted using market interest rates, or the fair value method. In contrast, average price and amortised cost methods are now used for calculating the price of equities and bonds and historical lock-in rates are applied for insurance policies.

Kelvin Kwok, Moody's

This means that under ICS 2, market volatility will be reflected in Taiwanese insurers’ capital adequacy ratios. Their risk capital charge will also partly depend on how well they match their assets and liabilities. Insurers will be forced to attach more importance to risk management, the Financial Supervisory Commission told AsianInvestor.

While the new rules will be implemented in 2026, the island’s insurers will have to calculate their new solvency ratios on a trial basis in the first preparation phrase, which encompasses this year and next. Testing will then be carried out in the next phase, from 2022 to 2024. The institutions must then review their relevant operations in the last phase in 2025.


In addition, insurers need to divide their capital into core and comprehensive tiers under the new rules, and they will begin to use scenario testing primarily to derive the risk capital charge, instead of the current method of using only risk coefficients.

When calculating the risk capital charge, regulators will look at how much loss an insurer incurs on its investment portfolio, if, for example, the market index were to fall 30%. It works in a similar manner to the Solvency II framework in Europe, Kelvin Kwok, analyst for Asia financial institutions group at rating agency Moody’s, told AsianInvestor.

Insurers in Taiwan will likely have to change the structure of their liabilities and increase their capital. Most of them will favour US dollar long-dated bonds and some of them may reduce equity exposure – particularly volatile stocks – to reduce the risk capital charge, Kwok said.

Cathay Life is positive about the new system as it applies international standards. The spokesman said the new regime could also enhance the transparency of Taiwanese insurers’ accounting treatment and financial status.

That said, Cathay has a huge portfolio and is selling some complex insurance products. It will need time to adjust its strategies and make them gradually compatible with the new system, he added.


The new solvency regime will be a significant change for the island’s insurers, who will need to make changes on multiple fronts to prepare for the implementation, Alan Yip, head of portfolio solutions for Asia Pacific at US asset manager Neuberger Berman, told AsianInvestor.

Raising capital can be challenging for smaller insurers, he said. While insurers are encouraged to change their business profile to focus on less capital-intensive products, such as unit-linked insurance policies, the success will be partly driven by the appetite of the public, who may favour long-dated policies with guaranteed rates. Such products are more capital intensive, Yip noted.

Taiwanese insurance firms will probably continue to buy a major amount of overseas assets, including long-dated US dollar bonds and private equity, as they continue to search for yield and diversification benefits relative to their local capital market investment opportunities, Yip added.

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