US embassy cable - 05TAIPEI2163

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