On the surface the Taiwan market looks uninteresting: Taiwan is mired in a relatively low level of economic growth, especially compared to neighboring markets, and there has been a degree of negative sentiment around for years. In addition, the economy has been susceptible to swings in the local political environment. But this has also been a very high growth market over the past few years. Going forward, the factors that drove high growth rate remain intact: the island still enjoys a high savings rate, it has a large number of wealthy potential customers and a significant pool of untapped assets sitting in bank deposits. However, like many other Asian investors, it should be noted that investors in Taiwan have a reputation for seeking short-term gains and a high propensity for quickly switching their investment portfolios.
From 2002 to 2007 the Taiwan life insurance market grew at a compound annual growth rate of 18 percent, despite slow GDP growth during this period that averaged 4 percent. Regulatory changes in the Taiwanese banking industry have fuelled change in the Taiwan life insurance landscape. The period following the Asian financial crisis of 1997 produced financial reform in the shape of the Financial Holding Company (FHC) Act of 2001. The FHC Act allowed financial institutions to consolidate all their companies by forming a holding company that could include subsidiaries from all financial service sectors, including insurance.
This Act, coupled with the government's stated intention to consolidate the financial sector, has led the largest financial players to establish their own FHCs, often with large banking and insurance subsidiaries. For example, the largest local insurers, Cathay Life and Shin Kong, have both made significant banking acquisitions over the past few years. The FHC Act is also prompting many banking players to consider setting up their own life insurance subsidiaries, which may have the potential of creating largely captive bancassurance channels.
As in all other Asian markets, bancassurance deregulation has propelled further growth in the Taiwanese industry. First-year premium generated through bancassurance grew at a compound annual rate of 42 percent between 2002 and 2007. During the same period, sales through agencies also grew 18 percent annually, suggesting that bancassurance created new business, rather than just diverting customers away from agencies.
In 2007, life insurance premium was equivalent to 13 percent of Taiwan's GDP, placing Taiwan at the top of the table globally. It is often surprising to insurance executives to see this number for Taiwan. However, insurance expense per capita was only US$2,218, ranking behind both Hong Kong and South Korea. Despite the large penetration of insurance into the population, there remain plenty of growth opportunities for protection and investments products. National Health Insurance In Taiwan
Although projected population growth is negligible, an aging and wealthier demographic is expected to help drive the life and retirement market. Though not as significant as South Korea, Taiwan is aging as well. For example, Taiwan's median age shifted from 27 in 1990 to 34.9 in 2007; 0.3 million Taiwanese are expected to retire each year from now until 2025.
Despite deregulation of investment-linked insurance and bancassurance channels, the Taiwanese market remains an "old boys dub" dominated by a few players with similar sales forces and similar market strategies. By the third quarter of 2007, the top three insurers in Taiwan - Cathay Life, Shin Kong, and AIG Nanshan - held nearly 50 percent of the gross premiums in the market; the remainder of the market is quite fragmented with 25-odd players holding as little as 0.1 percent market share. This looks remarkably similar to 2002, when the top three's combined market share was 50 percent.
In the rapidly changing Asian market context, the competitive landscape in Taiwan has seen little movement in recent years. The only change to the landscape has been the introduction of bancassurance in 2000 and attempts by companies to position themselves to gain a share of this buffness. This may change after the financial crisis of 2008. Fubon's acquisition of ING's Taiwan business will create another local giant, and AIG's potential divestiture of Nanshan may introduce another player to the market.
Due to the introduction of bancassurance, as well as the FHC Act, the top two local insurers, Cathay Life and Shin Kong, have expanded their business into integrated financial holding companies by buying local banks. Meanwhile, deregulation has paved the way for smaller local players, such as Fubon, to grow their life insurance business by distributing over their captive banking channel. Fubon's gross premium market share grew from 4 percent to 6 percent between 2002 and 2007. This reform also helped some foreign entrants who used their size and know-how from other markets. For example, from 2002 to 2007, Prudential (UK) and Allianz increased their share of the market from 2.2 percent and 1.1 percent respectively to 2.6 percent and 4.9 percent. However, despite the growth in volume, the economics of the bancassurance product are quite marginal. Most of the bancassurance products sold today remain very simple deposit-alternative products with competitive interest rates.
In addition to marginal economics, it is unclear whether these smaller players will continue to gain market share after the initial growth from bancassurance. Newcomers are experiencing difficulties in capturing more than 5 percent of the market. Prudential (UK) for example, grew at a compound annual rate of 35 percent between 2002 and 2004 through a rapid expansion of its sales force. However, between 2004 and 2007, it only grew 7.1 percent, which is lower than the market average rate of 7.7 percent.
This is because the Taiwanese incumbents do not have a business model that is drastically different to that of the new players (for example, their housewife agent model is much less entrenched), unlike South Korea where there is a big gap in the operating style of new and old players. Taiwanese incumbents have adapted to the market changes by readjusting their sales forces and launching new products. In this way, they have managed to leverage their size and their brand names to maintain their market dominance.
Furthermore, they have also used their immense bargaining power with asset-management houses for better fees on investment-linked products, and succeeded in cross-selling products within their financial holding company entities (for example, selling through their captive bank channels). As a result the loss in the dominant players' market share appears to have halted since 2003 and the incumbents continue to be market leaders.
However those investing in the Taiwan life insurance market must be wary of certain unique market challenges in Taiwan. National Health Insurance In Taiwan
First, the short-term orientation of its investors and the instability of Taiwan's economic environment create high volatility in product trends, making it very difficult to predict product volumes. For example, investment linked annuity policy sales went from -53 percent growth in 2004-05 to 91 percent in 2005-06. Even the most experienced executives in Taiwan say that they have no real way of telling at the beginning of the year whether their annual budgets and projections of product mix are realistic or not.
Second, given the mature and undifferentiated nature of the market, the life insurance sector, like the rest of the Taiwanese financial sector, is notorious for its thin margins. For example, Taiwanese banks have some of the lowest margins and returns on equity (ROE) in the region. In this market, price competition often becomes the only source of differentiation, and market-share ranking (in terms of volume) is often the key indicator of success. As a result, over the past few years, many insurers (mostly local) have come up with marginally profitable or even unprofitable products in order to grow market share. This has often led to price wars, especially with the simpler bancassurance products and other single-premium, interest-sensitive products where pricing is much more transparent compared to traditional products.
Third, there is a lack of depth in the domestic capital market, which poses a significant challenge for insurers. The 10-year bond yield in Taiwan has hovered between 2 and 3 percent over the past few years, consistently one of the lowest in Asia. Furthermore, there is a shortage of long term investment assets, as the limited stocks of long-term government bonds are already held by the insurers and are rarely traded. The lack of long-term, local-currency-denominated assets has led to a large mismatch in assets and liabilities for the insurers (for example, the traditional life contracts are obligations of up to 20 years with some guaranteed interest rate).
This problem is exacerbated by many of these insurers having issued policies during the late 1990s that had high guaranteed interest rates. This has given rise to the "negative yield" situation while insurers promised 6-8 percent returns to many of their long-term customers, they are only able to generate a 4-5 percent return through their investments today, with current long-term government rates at 2-3 percent. There are essentially two ways to get around this problem. Either these insurers inject significant capital and limit their future downside today, or they try to grow and invest out of this problem.
The massive size of these liabilities makes it impossible for most of these family-owned insurers to recapitalize, and as a result, they have no choice but to grow out of this dilemma. There is no free lunch in the investment world though, so in following the latter route these insurers have to take on more risk on their investments in order to generate higher returns. The regulator has also loosened many of the investment restrictions for the insurers to help them do this for example, the latest regulation in 2007 allows life insurers to raise their current investments abroad from 35 percent to 45 percent as a share of total assets, which will make Taiwan insurers the only life insurers in the world with almost half of their assets invested in non-local currency assets (excluding the markets that have fixed exchange rates).
The liberal stance on investments is a double-edged sword. On the one hand, it opens up more investment opportunities for the insurers to enhance their investment yield, but on the other hand, it imposes significant challenges for insurers to manage their risk in terms of new products, exchange rates, and others across a larger range of international asset classes. Not managing these risks properly will lead to disastrous outcomes for the insurers and their customers. For example, the 2008 financial crisis and meltdown in global equity and fixed-income markets have been a major crisis for Taiwanese insurers, who are very exposed to US high-yield and global equities.
Another theme for the large local Taiwanese insurers is regional expansion. Nearly all incumbent Taiwanese players - Cathay Life, Shin Kong, Fubon - have expressed an intention to expand into China. Although none has gained meaningful market share to date (Cathay Life is the only one with any real presence in China through its joint venture with China Eastern Airlines and Shin Kong has an insurance joint venture with Hainan Airlines), success in the massive Chinese market could significantly strengthen the financial strength and prospects of these companies.
There is still a significant upside in Taiwan for those who can navigate this unique market. The local insurers are aggressively moving into China and also expanding into the domestic banking industry. A few of the foreign players have been generating a significant portion of their Asian profits from Taiwan and many more see this as a market where they have raised ambitions in the short term. This remains one of the Asian markets where customers have accumulated significant wealth and are relatively rich. To find out more, you can check out National Health Insurance In Taiwan.
