Taiwan insurers may have to adopt a new capital structure as part of the regulator’s scheme to overhaul its solvency regime, and as a result will become more prudent in their investment decisions.

The Financial Supervisory Commission (FSC) has commissioned the Taiwan Insurance Institute (TII) to study a proposal to introduce a tiering structure in domestic insurers’ capital, in order to strengthen their capital positions.

Chang Chuang-chang

“Banks have tier 1 and tier 2 [in their capital structure but] it’s mixed together for insurers. So [we] move towards the direction of tiering in the future,” Chang Chuang-chang, vice chairman of the Financial Supervisory Commission, told AsianInvestor in an exclusive interview. “But now it’s still in the deliberation stage … It won’t be [implemented] too soon.”

The overall direction will be to divide insurers’ capital into core and supplementary and then decide what the proportions should be. Clearer details will come next year after the study by TII, Wang Li-hui, deputy director general at the Insurance Bureau of the FSC, also said during the interview.

She declined to elaborate on how that might affect insurers’ investment portfolios, saying that it is too early to tell.

The proposal was revealed in a meeting AsianInvestor held last week with a delegation of top regulatory officials in Taipei. Sherri Chuang, deputy director general of the Banking Bureau, and Sam Chang, deputy director general of the Securities and Futures Bureau, were also in the meeting to discuss regulatory directions in their respective remits.

Capital tiering is an international capital standard and is adopted by most global insurers. The tiering plan can be seen as part of the project to enhance the risk-based capital (RBC) framework for Taiwan insurers, Serene Hsieh, director for financial services ratings at S&P Global Ratings, told AsianInvestor.

When asked about an example to illustrate the change in capital structure, Hsieh said that insurers’ subordinated debentures are now qualified as regulatory capital as long as their scale is within a certain limit. But when tiering is implemented, some fixed-interest payment instruments that do not have any options to defer interest payments may be recognised as tier 2 capital, she said.

The change in capital structure will indirectly make their investment behaviour more cautious, as more stringent capital requirement will increase the cost of capital, she said.

But Hsieh agreed that it is now too early to tell whether insurers may favour or shun any particular type of assets as the regulator is mulling to introduce risk capital charges based on different scenarios instead of fixed charges.  

NEW METRIC

The regulator is trying to introduce multiple changes to improve its solvency regime, as insurer capitalisation levels in Taiwan are weaker than elsewhere in the region, while their equity investments are higher.

“Taiwan insurers’ capital positions are indeed weaker than other peers in the region, so we are rectifying it,” Chang said.

Part of the rectification plan is to add the ratio of net assets over total assets to gauge insurers’ capital strength. The new metric, to be introduced by end of the year, will be used together with the existing RBC ratio. Insurers will be required to strengthen their capital base if their net assets to total assets ratio falls below 3% for two consecutive six-month periods.

If an insurer fails to meet the threshold it is required to propose a financial plan to improve the metric or has to raise capital. The ratio will help to better capture insurers’ risk profiles and give insurers additional pressure to improve their capitalisation levels, Chang said.

The new metric can evaluate insurers’ capabilities to bear market risks in short-term volatile conditions, improve the health of insurers’ financial structures and show shareholders’ determination for long-term operations, Cathay Life told AsianInvestor in a written reply.

Cathay Life’s ratio of net assets over total assets stood at 9% as of end of June.

FSC’s Chang said the ratio for the industry was on average 4.46% at the end last year because of market fluctuations and the China-US trade war. But it went up to 6.74% as of July, showing that the numbers are susceptible to changes in market conditions.

He declined to comment on how many of Taiwan's insurers are below the stipulated 3% at the moment and whether that should further lifted to make the requirement more stringent.

Many market participants already reflect that they are feeling the pinch at this level. The regulator has been careful not to set a level that cannot be accepted by most players, he said.