Key Takeaways
- The impending implementation of a new capital-adequacy regime and insurance accounting standards will likely lead to greater capital volatility for Taiwan life insurers.
- In our view, the entities' ability to maintain a stable risk-adjusted capital buffer will be tested as they recalibrate the total adjusted capital component, recategorize bond portfolios, and revisit their dividend policies.
- Insurers will need to bolster their asset-liability management to manage the likely increase of capital sensitivity to interest rates and actuarial assumptions under IFRS 17.
New accounting and regulatory standards will test Taiwan life insurers. The frameworks will introduce greater capital volatility, we assume. The new rules will also give investors greater transparency about insurers' technical performance, and may increase demands for dividends.
Entities will likely scrutinize their capital and asset-liability management to address the rigorous frameworks, which kick in next year.
Taiwan insurers will adopt in 2026 the International Financial Reporting Standards (IFRS) 17 and the Taiwan Insurance Capital Standard (TW-ICS).
Taiwan's Life Insurers Have Been Preparing For The New Regime
We assume that most of Taiwan's life insurers will meet the more stringent capital requirements that are about to take effect under TW-ICS. A number of large insurers projected confidence about this in earnings calls in 2025 that we find credible.
Rated life insurers are well placed to adopt the new frameworks. Regulators have been implementing reforms of life insurance products since 2017. Many insurers issued high volumes of Tier-2 debt over 2023-2024 to beef up regulatory capital. The sector generated healthy earnings in fiscal 2024 (ending Dec. 31, 2024).
Taiwan's Insurance Bureau of Financial Supervisory Commission has also helped position the sector for the changes. Its most recent initiative was the so-called fourth-phase transitional measure, which it announced in December 2024. The measure will be implemented when the new frameworks start next year.
Taiwan's Life Insurers Will Be More Careful About Capital Conservation
The measures underscore regulators' focus on maintaining system stability, with an eye on the sector's characteristics. These initiatives will ease the capital pressures faced by Taiwan's life insurers as they adapt to new solvency standards, in our view. We believe the insurers are adopting strategies that will be essential for fostering a stable operating environment as they navigate this regulatory shift.
The insurers have conserved capital to prepare for this transition. For example, they have sought slower growth than in previous years, capped their high-risk investments, and restricted earnings distribution, as per the regulatory guidance.
We estimate the industry's product margin as measured by the value of new business (VNB) as a ratio to the first-year premium (FYP) improved to around 27% in 2024, from 18% in 2017. At the same time, the industry's five-year average asset growth slowed to around 5% as of 2024 from 11% as of 2017.
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Entities Will Face Increased Capital Volatility
The new standards will test the resilience of life insurers' risk-adjusted capital buffers. This is according to adjustments using our insurance capital analysis. While many entities will likely start the transition with adequate regulatory capital ratios, the implementation of new accounting standards and capital regimes may lead to shifts in their risk appetite, financial policies and strategic direction.
The recalibration of the insurers' total adjusted capital (TAC) components will introduce additional capital uncertainty. A key issue for entities is a potential decline in TAC if the contractual service margin (CSM) plus risk adjustment before tax falls significantly below the value of in-force (VIF), before accounting for the cost of capital.
CSM represents an insurer's anticipated earnings over its duration of an insurance contract.
Risk adjustment accounts for the uncertainty in future cash flows due to nonfinancial risks. It compensates the insurer for taking on that risk.
Our scenario underscores the importance of reasonably reconciling and articulating accounting differences during the transition. Our risk-adjusted capital analysis has incorporated VIF (before cost of capital) as a critical element of a life insurer's TAC.
Starting in 2026, this component will likely be recalibrated as the combination of CSM and risk adjustment. The recalibration of such a significant TAC component underscores insurers' need to navigate these complexities effectively.
More Disclosure And More Volatility
Insurers may face increased pressure from shareholders seeking returns, particularly as confidence in regulatory capital levels grows.
Many life insurers have refrained from making regular dividend payments for years, to preserve capital for the new regime. However, insurers may face increased demand from shareholders for dividends following increased disclosure on distributable earnings; this enhanced disclosure will come under the new accounting framework.
Insurers are likely to face increased capital volatility as they move to IFRS 17. The standard will require insurance liabilities to be measured using market-consistent interest rates and actuarial assumptions, moving away from the current practice of referencing a fixed rate.
The change may result in a decline in reported net worth. This is particularly as insurers recategorize and mark to market some of their bond investments--most of which are now amortized at cost.
The increased capital volatility underscores the critical need for insurers to have effective asset-liability management and adequate capital management to navigate this new era.
The Dual-Edged Nature Of A High Reliance On Capital Gains
In our view, capitalization has been a relative credit weakness for many life insurers in Taiwan. In 2023-2024, capital buffers increased, largely due to strong unrealized gains from stock markets.
However, challenges to capital growth may arise. Insurers' earnings heavily depend on capital gains and shareholders' equity on unrealized valuation gains from their share investments. This reliance motivates the insurers to increase equity risk-taking, which could require more capital. Such a reliance on share markets could result in modest declines of profit and capital amid adverse market conditions.
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Insurers' credit profiles may come under pressure. In our downside scenario, entities could encounter a material erosion in capital and earnings stemming from losses from investments (realized and unrealized).
Related Criteria
- Insurer Risk-Based Capital Adequacy--Methodology And Assumptions, Nov. 15, 2023
- Insurers Rating Methodology, July 1, 2019
Related Research
- Insurance Industry And Country Risk Assessment: Taiwan Life, Aug. 20, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Serene Y Hsieh, CPA, FRM, Taipei +886-2-2175-6820; serene.hsieh@spglobal.com |
| Secondary Contact: | Patty Wang, Taipei +886-2-2175-6823; patty.wang@spglobal.com |
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