ENSURING TAIWAN INSURANCE

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 002163

SIPDIS

STATE PASS AIT/W AND USTR
STATE FOR EAP/RSP/TC, EAP/EP, EB/IFD/OIA
USTR FOR SCOTT KI
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE BOARD OF GOVERNORS,
AND SAN SRANCISCO FRB/TCURRAN

E.O. 12958: DECL: 04/19/2025
TAGS: ECON EFIN PINR TW
SUBJECT: ENSURING TAIWAN INSURANCE

REF: A. TAIPEI 1413


B. TAIPEI 1797

Classified By: AIT DIRECTOR DOUGLAS PAAL, REASON 1.5 B/D


1. (C) Summary: The challenges facing Taiwan's insurance
sector include high guaranteed benefits, low earnings on
investments, and intense competition. Downward pressure on
the Taiwan insurance sector's overall capital position is
made more worrisome by the lack of a market exit mechanism
and inexperienced regulators. The AmCham Insurance
Committee is dissatisfied with the method for certifying
insurance companies to offer pension plans under Taiwan's new
pension law. End Summary.


2. (C) At an AmCham Insurance Committee luncheon on April
29, several U.S. lawyers and insurance executives complained
that the top Taiwan insurance regulators lacked understanding
of insurance products. A few days before, the new Financial
Supervisory Commission (FSC) Insurance Bureau (IB) Director
General (Thomas) Huang Tien Mu had admitted to AIT that most
of his career experience was in banking and that he found the
insurance sector was "far, far more complex and difficult"
than banking. Dr. Huang was moved from his former position
as Secretary General of the FSC to his new position on March
16, replacing Mark Wei who left government to join a private
financial firm.


3. (C) DG Huang told AIT that Taiwan's insurance sector,
like its banking sector, has too many companies for Taiwan's
market size, including a number of financially unsound
companies that need help exiting the market. However, he
said, in contrast to the highly fragmented banking sector,
where only one or two banks have more than 10 percent market
share, the insurance sector has a few dominant players as
well as many small companies. The top five insurance
companies control over 50 percent of Taiwan's insurance
market. In all, 57 insurance companies, 29 life, 26
non-life, and two hazard insurance companies compete in the
Taiwan market. Huang said the problems in IB were more
difficult and complicated than what he had faced as Secretary
General of the Bureau of Monetary Affairs, and the amounts of
money involved in insurance were greater than commercial
banks normally handle. Several of the small insurance
companies each have less than one percent market share.
While the large insurance companies make good profits,
several of the small companies are in financial difficulty.
Huang complained that there are no mechanisms to help weak
insurance firms leave the market. The only insurance
company closure happened over 40 years ago, according to
Huang. The IB is currently trying to decide on mechanisms to
assist unsound insurance companies to leave the market and to
revise Taiwan's insurance law.


4. (SBU) In the six years prior to Taiwan's entry into the
WTO in January 2002, authorities greatly relaxed insurance
regulations to better conform with WTO commitments. One
result of the relaxation was that the number of companies
selling insurance increased from only 16 in 1986 to the
current 57. Falling interest rates in the late 1990s,
together with the limited investment opportunities in Taiwan
for large funds and restrictions on offshore investment led
to the emergence of a "negative spread" problem. Due to the
guaranteed benefit structure of most Taiwan insurance
policies, insurance companies earn less on their investments
than what they pay out in benefits to customers, putting
significant downward pressure on the capital position of
Taiwan insurance companies. The Taiwan government has tried
to improve financial sector efficiency by first allowing,
then urging the formation of financial holding corporations
(FHC) that can sell innovative products, including a
combination of insurance, banking, and securities products.
Of the 14 FHCs currently operating in Taiwan, three operate
in the life insurance sector. Over the past three years, the
Insurance Bureau (formerly in the Ministry of Finance and now
formed under the FSC) has urged insurance companies to sell
products where benefits are linked to investment vehicles
rather than guaranteed in advance.


5. (C) Dr. Huang noted how low domestic interest rates and
stagnant real estate prices were factors in the lack of
attractive investment targets within Taiwan for large funds.
The relatively small capitalization of Taiwan's stock market
and delayed introduction of innovative financial products are
other factors. Huang said the pressure on insurance
companies could be eased somewhat by a plan to raise the
limit on insurance firms, overseas investment from 35% of
total insurance capital to 50%. This would allow insurance
companies to put more of their capital into higher paying
financial products found in more developed financial markets,
and thus help deal with the issue of negative spread and
deteriorating capital positions.
Taiwan Insurance Leads Banks in China
-------------- ---


6. (C) Dr. Huang contrasted Taiwan's success in establishing
insurance operations in China with the failure of banking
operations to establish a foothold there. (Note: Cathay
(GuoTai) Life Insurance Company of Taiwan set up a joint
venture in Shanghai with the Oriental Airlines Company of
China which began selling insurance products earlier this
year. The venture currently sells 10 types of life insurance
products, and is seeking to expand its business to bank
insurance, and group insurance, targeting China-based Taiwan
enterprises and local Chinese companies. End note.) Four
other Taiwan insurance companies have applied to set up
branches in China and are currently awaiting approval.
According to Huang, the reason insurance companies can
operate in China while banks cannot is that the world
governing organization for insurance, the International
Association of Insurance Supervisors, does not require a
Memorandum of Understanding between insurance regulators in
different countries for a branch to be established, whereas
the international convention on banking does require this.
No insurance companies from China have requested approval to
enter Taiwan's market. Huang indicated that Vietnam was the
current overseas target of choice for Taiwan life insurance
companies.

Impact of New Pension Law
--------------


7. (C) Huang said the IB has continued liberalizing
regulations, and no longer requires advance permission for
issuance of standardized new products. The IB is currently
working to revise Taiwan's insurance laws to further
liberalize them and to deal with issues raised by Taiwan's
new pension law, such as labor insurance, defined benefits,
voluntary contributions, and upgraded death/injury
compensation. Taiwan's new pension law is scheduled to take
effect starting July 1, 2005. However, the bill establishing
the "Labor Pension Fund Supervisory Committee" has still not
been passed by the legislature.


8. (C) One of the main issues of concern in the AmCham
Insurance Committee is how to become a "certified" company
eligible to offer pension plans under the new pension law.
Currently there are two local and six foreign firms that have
been certified. According to the Council of Labor Affairs,
an insurance company's Taiwan operations must be rated "A" by
a recognized rating company, or the overseas parent company
must be rated "A" and provide a guarantee for the Taiwan
operations. AmCham has complained that an "A" from an
international rating company is much more difficult to obtain
than an "A" rating by a local Taiwan rating company, and has
requested that this difference be taken into account in
determining eligibility to sell pension products. The IB has
not yet made a decision on this request.
PAAL