Life insurance premiums could improve soon: Fitch
Fitch Ratings predicts that the decline in life insurance premiums may soon improve due to a low comparison base, as well as insurers adapting to regulatory changes and economic uncertainty. The first half of this year saw a slower premium retreat of 11%, compared to a 21% decrease in the previous year. Fitch predicts an increase in health insurance policies, which could serve as sustainable and profitable growth drivers in the long term. However, Fitch also warns that local insurers may face higher interest-rate charges under the upcoming Insurance Capital Standard framework, which will increase capital requirements on asset and interest-rate risks. This could lead to three to four times higher interest-rate-related capital charges than current levels.
Current State of Life Insurance Premiums
Premium decline in the life insurance industry
According to Fitch Ratings, the life insurance industry has experienced a decline in premiums, which is expected to moderate over the next 12 to 18 months. This decline has been primarily attributed to a low comparison base, as well as the impact of regulatory tightening and economic uncertainty.
Reasons for the decline in premiums
One of the reasons for the decline in premiums is the global economic outlook, which has been uncertain and muddy. This has led to a shift away from unprofitable savings-type products as insurers adapt to stricter regulations. Financial market volatility and regulatory restrictions have also contributed to the decline in investment-type products.
Moderation in premium decline expected
Despite the decline in premiums, Fitch Ratings anticipates that the rate of decline will slow down in the coming months. This is due to several factors, including the adaptation of local insurers to regulatory tightening and economic uncertainty. As insurers adjust their strategies and offerings, the decline in premiums is expected to moderate.
Impact of Regulatory Tightening and Economic Uncertainty
How local insurers are adapting to regulatory tightening
Local insurers have been actively adapting to regulatory tightening measures in order to comply with stricter regulations. This has involved a shift away from unprofitable savings-type products and a focus on other lines of insurance, such as health insurance. Insurers are also refining their risk management practices to meet the new regulatory requirements.
The effect of economic uncertainty on premiums
Economic uncertainty has had a significant impact on premiums in the life insurance industry. Financial market volatility and an unclear global economic outlook have led to a decline in investment-type products. Insurers have had to adjust their product offerings to align with the changing economic landscape and to mitigate risk.
Changes in sales of savings products
As a result of regulatory tightening and economic uncertainty, there has been a decline in the sales of savings products, including traditional annuity and interest variable life policies. Insurers have had to shift their focus to other lines of insurance, such as health insurance, which offer more sustainable and profitable growth opportunities.
Increase in Health Insurance Policies
Health insurance as a sustainable and profitable growth driver
Fitch Ratings predicts that health insurance will be a key driver of sustainable and profitable growth in the life insurance industry. This is attributed to several factors, including an aging society, rising awareness of health risks, and increased healthcare needs. As the population ages and the demand for healthcare services grows, the demand for health insurance is expected to increase.
Factors contributing to the increase in health insurance policies
There are several factors contributing to the increase in health insurance policies. First, an aging society is leading to a greater need for healthcare services and coverage. Second, there is a growing awareness of health risks and the importance of insurance protection. Finally, authorities in Taiwan have encouraged the sales of protection insurance policies to strengthen the nation’s social safety net.
Aging Society and its Impact on Insurance
Taiwan’s projected super-aged society status
Taiwan is projected to become a super-aged society by 2025, with people aged 65 or older exceeding 20 percent of the population. This demographic shift will have a significant impact on the insurance industry, particularly in terms of the types of products and coverage needed to cater to the needs of an aging population.
Encouragement of protection insurance policies
To address the challenges posed by an aging society, authorities in Taiwan have encouraged the sales of protection insurance policies. These policies aim to provide financial protection and support to individuals and families in the event of illness, disability, or other unforeseen circumstances. The goal is to strengthen the nation’s social safety net and ensure the well-being of its aging population.
Implications for the life insurance industry
The aging society in Taiwan has significant implications for the life insurance industry. Insurers will need to develop and offer products that cater to the specific needs of an aging population, such as long-term care insurance and retirement income solutions. Additionally, insurers will need to adapt their business strategies to meet the changing demands and preferences of this demographic group.
Higher Interest-Rate Charges under the Insurance Capital Standard Framework
Implementation of the Insurance Capital Standard framework
The Insurance Capital Standard (ICS) framework is set to be implemented in 2026, in line with international accounting rule changes. This framework will set higher capital requirements on asset and interest-rate risks for insurers. It aims to ensure the financial stability of insurers and protect policyholders’ interests.
Expected impact on local insurers
Fitch Ratings expects local insurers to face higher interest-rate charges under the ICS framework. This is because the savings-type products sold by local insurers in the past offer high guaranteed yields, which can result in higher capital charges under the new framework. Insurers will need to carefully manage their interest-rate risks and adjust their business strategies accordingly.
Reasons for higher interest-rate charges
The higher interest-rate charges under the ICS framework are a result of the new accounting rules and the need to align with international standards. By setting higher capital requirements for interest-rate risks, the framework aims to enhance the resilience of insurers and ensure the adequacy of their capital reserves. This aligns with the broader goal of protecting policyholders and maintaining the stability of the insurance industry.
Clarity on Insurers’ Profitability Outlook
Role of new accounting rules
The introduction of new accounting rules will provide greater clarity on insurers’ profitability outlook. These rules will better reveal the movement of contractual service margins, allowing stakeholders to have a more accurate understanding of insurers’ financial performance. This increased transparency will contribute to a more informed assessment of insurers’ profitability.
Revealing movement of contractual service margins
The movement of contractual service margins has a direct impact on insurers’ profitability. By disclosing this information more clearly, the new accounting rules will enable stakeholders to assess insurers’ financial health and identify potential areas of improvement. This will contribute to more accurate projections of insurers’ future profitability.
Expected impact on local insurers’ profitability outlook
Fitch Ratings expects the new accounting rules to have a noticeable impact on local insurers’ profitability outlook. The increased transparency and clarity provided by these rules will enable stakeholders to better assess insurers’ financial performance and profitability. This, in turn, will inform market expectations and contribute to more accurate forecasts of insurers’ future profitability.
Localized Adjustments and Transitional Measures
Financial regulator’s likely actions
Fitch Ratings anticipates that the financial regulator in Taiwan will take localized adjustments and transitional measures to address interest-rate risks. These measures will be tailored to suit the local business characteristics and conditions, ensuring that insurers can effectively manage their interest-rate exposures while complying with international standards.
Adapting to interest-rate risks
Insurers in Taiwan will need to adapt their risk management practices to effectively address interest-rate risks. This may involve adjusting their investment portfolios, hedging interest-rate exposures, and reviewing the pricing and design of their products. By actively managing interest-rate risks, insurers can enhance their resilience and protect their profitability.
Suitability to local business characteristics
The localized adjustments and transitional measures implemented by the financial regulator will be specifically designed to suit the local business characteristics in Taiwan. This recognition of the unique aspects of the insurance industry in Taiwan will ensure that the measures are effective and practical, enabling insurers to navigate the challenges posed by interest-rate risks while continuing to serve their customers effectively.
Capital-Raising Strategies for Life Insurers
Equity and subordinated debt as sources of capital
Life insurers have been utilizing equity and subordinated debt as sources of capital to meet their financial requirements. These capital-raising strategies provide insurers with additional funds to support their business operations, enhance their capital adequacy, and strengthen their financial position.
Examples of major life insurers raising capital
Several major life insurers in Taiwan have already taken steps to raise capital. Through the issuance of subordinated debt, these insurers have raised significant amounts of funds to support their growth and expansion plans. This demonstrates their commitment to maintaining their financial strength and capital adequacy in a challenging business environment.
Expected trend in capital-raising activities
Fitch Ratings expects life insurers to continue raising capital through equity and subordinated debt. The need to comply with regulatory requirements and strengthen their financial position in the face of economic uncertainty and evolving market conditions will drive insurers to explore various capital-raising strategies. This trend is expected to continue in the coming years.
Industry Forecast and Outlook
Overall outlook for life insurance premiums
Despite the decline in premiums, Fitch Ratings expects the overall outlook for life insurance premiums to improve in the future. This improvement will be driven by factors such as the moderation of premium decline, the increase in health insurance policies, and the adaptation of insurers to regulatory tightening. These factors are expected to contribute to a more positive premium growth trajectory.
Factors that may influence future premium improvements
Several factors may influence future premium improvements in the life insurance industry. These include economic stability, regulatory measures, changes in consumer preferences and behavior, and advancements in technology. Insurers that are able to effectively navigate these factors and adapt their strategies accordingly will be well-positioned to capitalize on premium growth opportunities.
Long-term sustainability of premium growth
The long-term sustainability of premium growth in the life insurance industry will depend on insurers’ ability to adapt to changing market dynamics and meet the evolving needs of consumers. This will require a focus on customer-centricity, innovation, and risk management. Insurers that can effectively address these challenges and provide value-added products and services will be better positioned for long-term success in the industry.
In conclusion, the current state of life insurance premiums reflects a decline in the industry, primarily attributed to regulatory tightening and economic uncertainty. However, there are promising signs of improvement, such as the moderation of premium decline, the increase in health insurance policies, and the adaptation of insurers to regulatory changes. The aging society in Taiwan presents both challenges and opportunities for the industry, and insurers will need to adjust their strategies to cater to the needs of an aging population. The implementation of the Insurance Capital Standard framework and new accounting rules will provide greater clarity on insurers’ profitability outlook and contribute to a more informed assessment of their financial performance. Localized adjustments and transitional measures will help insurers manage interest-rate risks while complying with international standards. Capital-raising strategies will continue to be important for insurers to strengthen their financial position and meet regulatory requirements. Overall, the future outlook for life insurance premiums is expected to improve, driven by various factors including economic stability, regulatory measures, and advancements in technology. Insurers that can adapt to these changes and provide value-added products and services will be well-positioned for long-term sustainability and growth in the industry.