Cathay Life, Taiwan’s biggest insurance firm by assets, is calling for the local regulator to lower the capital charge for holding certain types of equities to encourage more investment in the local stock market.

This is understood to reflect the thinking of other industry players, such as Shin Kong Life, but there are concerns that such a move could further reduce local insurers' already-low capitalisation ratios.

The Financial Supervisory Commission (FSC) has been urged to assign a risk-based capital (RBC) ratio's risk coefficient lower than the current 21.65% to equities that are held for the medium to long term, as well as equities that are bond-like in nature and have good environmental, social and governance (ESG) elements. 

Lowering the RBC's risk charge for domestic equities would help retain insurance funds in Taiwan and "energise" the domestic capital market, a spokesman for Cathay Life told AsianInvestor.

Debt-like equities have qualities similar to bonds in that they pay dividends regularly and have low volatility. They can be seen as replacements for fixed-income assets, as the bond market in Taiwan is not big enough to absorb sufficient capital from insurers, said the spokesman.

Cathay Life also advocates reducing the RBC's risk coefficient for shares of companies with a strong ESG credentials, to give insurance companies a greater incentive in invest in such stocks.

Assets perceived as higher risk are assigned higher charges to ensure that bigger capital are held against them. The formula for calculating RBC is reviewed annually to reasonably reflect insurers’ operational risk. The items under review will be announced by the end of this month, a spokesman for the FSC’s insurance bureau told AsianInvestor. He declined to say whether the regulator plans to reduce the RBC's risk coefficient for equities.

Wellington Koo, FSC

However, FSC chairman Wellington Koo told a local newspaper last week that lowering the coefficient for long-term stocks with high dividends and strong ESG elements is something that “can be considered”, although the regulator “does not particularly want to encourage the insurance industry to substantially increase investments in Taiwan stocks”.

Koo also said insurance firms should invest onshore rather than overseas if comparable assets are available domestically. Indeed, the FSC unveiled a scheme in June aimed at channelling more money into domestic economic development.

Taiwanese insurers had 7% of their overall NT$25.89 trillion ($840 billion) in AUM invested in domestic equities and 10.41% in local bonds as of end-June, a drop from 2014 allocations of 7.53% and 22.11%, respectively. Yet over the same period their overseas investment allocation rose from 50.34% to 67.51%, according to the Taiwan Insurance Institute. 

HIGHER RISK

However, some argue that even if stocks are held for the long term or have bond-like qualities, they still carry equity-like risk and so should attract a higher capital charge.

If insurers invest more in equities as a result of a lower capital charge, “we are concerned that their capitalisation will go down”, said Serene Hsieh, Taipei-based director for financial services ratings at S&P Global Ratings. This would not be a positive outcome, she told AsianInvestor, as Taiwan insurers’ capitalisation – or RBC ratio – is already lower than the global average.

Many Taiwanese life insurers allocate to a substantial amount of high-risk assets in search of higher returns. Such investments accounted for around 160% of total adjusted capital (TAC) for the five major rated insurers as of the end of 2015, versus the global average of less than 100%, according to estimates in a S&P Global report in 2016. (TAC refers to the sum of equity and near-equity instruments adjusted by their equity content, according to Investopedia.) 

Equities and real estate accounted for the majority of these high-risk assets, with the rest made up of speculative or unrated bonds and alternative investments, the Hsieh-authored reports shows.

The situation has shown little sign of improvement over the last two years and Taiwanese insurers’ capitalisation remains weak, Hsieh said.

S&P has its own system and standards for calculating the RBC ratio of insurers, which would not change even if the FSC decided to reduce the coefficient for certain equities, she added.

Various other jurisdictions are introducing new or tighter RBC rules for insurers, some of which –including several in Thailand – would also like to see equity investments receive a lower capital charge.

Meamwhile, Europe’s Solvency II regime has contributed to “significant disinvestment” from equities, noted Andries Hoekema, global head of insurance at HSBC Global Asset Management. Moreover, some industry players see private equity as being treated particularly punitively under the European regulations.

An in-depth feature on Asian insurance company allocation trends appears in the latest (August/September) issue of AsianInvestor magazine.