S&P: Taiwan's Life Insurers Transitioning to TIS System, Potential Value Far Exceeds Short-Term Gains

Taiwan's life insurance industry is set to adopt the new generation Solvency II regime (TIS) this year. According to a report by S&P Global Ratings, although regulators have provided a 15-year transition period, companies are making thorough preparations to avoid potential risks. By emphasizing Asset-Liability Management (ALM), some life insurers may see a reduction in short-term capital gains opportunities, but S&P Global Ratings assesses that the potential value significantly outweighs short-term earnings. Improvements in ALM have been underway even before the implementation of IFRS 17, and this trend is expected to continue.

S&P Global Ratings released a report this week titled "Taiwan Life Insurance Industry: Emphasis on Asset-Liability Matching Has a Positive Impact on Credit." The report indicates that under the new generation solvency regime framework, Taiwanese life insurance companies have a strong intention to prudently manage their asset-liability duration and cash flow.

The report points out that the mismatch in asset-liability duration among rated life insurers has been gradually improving and is expected to be maintained over the next two years. This is attributed to regulatory-driven product reforms initiated in 2017 and the continuous allocation of assets by life insurers into longer-duration overseas bonds. Consequently, companies had already improved their asset-liability duration mismatch issues before adopting IFRS 17 (International Financial Reporting Standard 17 for Insurance Contracts) and the new generation solvency regime this year.

Wang Pei-ling, a credit analyst at S&P Global Ratings, observed that Taiwanese life insurance companies should be able to maintain their improved level of asset-liability mismatch, thus mitigating the impact of interest rate fluctuations. While asset-liability matching might lead to reduced capital gains opportunities for some insurers, S&P Global Ratings believes their potential value far exceeds short-term returns.

Concurrently, the report states that following the growth in sales of interest-sensitive life insurance products since 2019, which shortened the effective duration of market liabilities, the duration gap between assets and liabilities has also significantly narrowed.

The report also mentions that insurance products launched by the life insurance industry over the past two to three years, such as the popular participating life insurance policies, have helped life insurers maintain a stable liability duration. Furthermore, the recent introduction of more term life insurance products instead of whole life policies indicates an intention to keep liability duration within a manageable range.

The report anticipates that the product mix of Taiwan's life insurance industry will not change significantly between 2026 and 2027. Interest-sensitive life insurance and participating policies are likely to remain mainstream products, supplemented by term life, accident, and health insurance.

Regarding assets, the report indicates that life insurers are expected to increasingly focus on enhancing recurring income and maintaining alignment with liability duration, with a reduced emphasis on capital gains.

The report suggests that although the investment portfolios of insurers are unlikely to change dramatically in the coming years, overseas private equity investments have declined last year due to higher capital requirements under the new regulations. To match existing New Taiwan Dollar (NTD) policies, companies are also turning to domestic investments such as infrastructure, although the growth rate of such investments may be slower.

The report adds that the strong sales of US dollar-denominated policies in recent years have also been a significant factor in improving asset-liability mismatch, a trend expected to continue in the coming years. These overseas bonds are existing investment tools that meet the duration and yield requirements of life insurers. In contrast, NTD policies, burdened by long-term historical liabilities, are typically matched with a portfolio of fixed-income investments and equities.

Furthermore, the report points out that life insurers with a solid track record in interest rate risk management and strong ALM capabilities are expected to benefit from lower interest rate risk capital charges used in S&P Global Ratings' capital model. (Editor: Yang Kai-hsiang) 1150513