Credit pressures highlighted for Taiwanese insurers

Taiwan’s insurance industry will face increasing credit pressure over the next year-and-a-half because of a shift towards riskier assets, increasing competition and weak profitability, says Moody’s Investors Service.

The low-interest-rate environment, coupled with recent regulatory changes allowing for overseas investment, will encourage Taiwanese insurers to seek alternative areas to put their money. This includes real estate and high-yield securities, both of which are illiquid and carry high risk.

Stella Ng, assistant vice-president and analyst at Moody’s, says most insurers are already “highly leveraged”, and as such views the industry’s overall balance sheet as weak. Investing in what Moody’s deems risky assets, such as real estate, could leave the Taiwanese insurance industry “vulnerable to price corrections”, particularly in lieu of rising house prices, Ng argues.

Taiwan’s life insurance market, already very competitive – there are 30 insurers in the country with the top five representing nearly 70% of the industry’s total premium income in 2012 – is becoming increasingly so.

Moody’s notes that more “bank centric holding companies have been tapping, or increasing their participation in, the life insurance business through acquisitions” – CTBC Financial Holding purchased Manulife in July 2013 and MetLife in March 2011, while Yuanta Financial Holding took full ownership of New York Life this June.

Financial holdings groups acquiring life insurers will create “new competitive dimensions”, allowing insurance companies to diversify their distribution structures to non-bancassurance channels. As such, life insurers with low distribution diversity will face challenges, Moody’s argues.

Weak profits will also have a negative near-term impact, and despite Moody’s forecasts that Taiwan’s GDP growth will hit 2.5-3% in 2013 and 3-4% in 2014, up from 1.3% last year, it will not be sufficient to improve the economic profits and balance sheets of insurers.

Moody’ s says the growth in Taiwanese household income will remain weak owing to high household debt and limited real wages growth, which will restrict discretionary spending on insurance.

As such, the country's insurers suffer from subdued new business growth. While insurance demand in Taiwan is structurally constrained because of a high penetration rate, demand will be hampered by the recent policy reserve rate cut in January this year, which makes insurance policies more expensive.

Taiwanese insurers have responded by increasing their sales of RMB-denominated insurance projects after Taiwan’s Financial Supervisory Commission (FSC) permitted these sales in February 2013.

Yet Moody’s says demand for these products has been lower than expected, mostly as the limited offerings of the investment-linked products means policyholders have to bear most of the investment risk. As such, the contribution of RMB-denominated insurance products to insurers’ new business is small.