Taiwan Insurance Firm Ordered Closed

UNCLAS SECTION 01 OF 02 TAIPEI 004739

SIPDIS


STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP

USTR FOR WINTER AND WINELAND

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan Insurance Firm Ordered Closed


1. Summary: Taiwan's Financial Supervisory Commission
(FSC) has ordered Kuo Hua Insurance to cease operations due
to insolvency and has requested the state-owned Taiwan
Insurance Institute (TII) to liquidate Kuo Hua. Outstanding
claims against Kuo Hua may exhaust Taiwan's Insurance
Stabilization Fund (ISF). End Summary.

Liquidation of Insurance Firm for the First Time
-------------- ---


2. On November 18, the FSC ordered Kuo Hua Insurance (not
the similarly named Kuo Hua Life Insurance Company) to
suspend operations due to insolvency. The FSC also
suspended Kuo Hua's board of directors and all board
members. According to the FSC order, Kuo Hua may no longer
sell insurance products. Meanwhile, the FSC instructed the
TII to prepare Kuo Hua for liquidation. In response, TII
has assumed control of Kuo Hua's headquarters and eight
branch offices and has begun reviewing outstanding policies,
claims, and personnel data.

Insolvency
--------------


3. According to the FSC Insurance Bureau (IB),Kuo Hua
suffered a pretax loss of NT$1,073 million last year,
sending its net worth to negative NT$515.8 million. In its
audit last year, the IB detected problems in Kuo Hua's
financial status and ordered it to increase its capital
reserves. However, Kuo Hua failed to meet the IB directive,
and in September the FSC referred Kuo Hua Chairman Wang Jing-
biao to the prosecutor's office for accounting fraud.

Market Stabilization
--------------


4. The FSC has assured Kuo Hua customers that their
interests will be protected and has urged them not to cancel
their insurance contracts, which would result in only
partial refunds. There are about 1.02 million outstanding
Kuo Hua insurance policies, including 660,000 compulsory
automobile liability insurance policies, 19,000 earthquake
insurance policies, and 130,000 other kinds of insurance
policies, such as fire, marine, credit, and discretionary
automobile liability insurance. The insurance company-
funded ISF will pay 100% of claims for automobile liability
insurance and earthquake insurance and 90% of claims on
other kinds of policies. The IB told AIT/T that the ISF has
NT$2.68 billion on hand, which would probably be sufficient
to meet the payment obligations.

Likely Acquisition
--------------


5. Both local and foreign non-life insurance companies are
interested in Kuo Hua because of its extensive market
network. FSC officials told AIT that payments to acquire
the Kuo Hua network and clients are expected to offset part
of the liquidation cost.

COMMENT
--------------


6. No Taiwan insurance company has previously ceased
operation. The FSC-ordered suspension of Kuo Hua's
operations tests a market retreat mechanism for insurance
firms and is a reassuring sign of the FSC's commitment to
improving the health of Taiwan's financial sector. However,
the ISF may be unable to fund any additional insolvency
cases unless the Taiwan government injects funds to
supplement insurance companies' contributions or raises the
contribution amount.

PAAL