Taiwan, World's Most Insured, Allows Derivatives for Risky Cover

Asian investment banks scouting for extra revenue may want to look at Taiwan. The world’s most insured nation is opening up some of its riskier business to the region’s derivatives providers.

The island’s watchdog is easing rules so insurers can use derivatives to hedge risks arising from the sale of investment-linked policies, according to a statement from the Financial Supervisory Commission. The change aims to boost local sales of variable annuities -- policies that can offer buyers returns in retirement linked to the performance of funds -- to cater for the needs of an aging population.

By tapping derivatives, Taiwan insurers could offer Asia’s investment banks a potential bite of business tied to more than $80 billion of annual premiums as the region’s lenders cut jobs and retrench in some areas. While variable annuities are already popular in U.S. and European markets, in Asia they’re most widely sold in Japan, where more recent entrants like Credit Suisse Group AG compete with incumbents like Societe Generale SA.

“Taiwan’s insurance business is extremely competitive and variable annuity products are a way insurers can differentiate themselves,” said Cyrille Troublaiewitch, head of Citigroup Inc.’s multi-asset group for Asia Pacific. “Almost every insurance company in Taiwan is looking into this.”

No. 1

Taiwan had the world’s highest insurance penetration rate in 2014, as measured by the ratio of premiums received to gross domestic product, according to Taiwan Insurance Institute data that cited a Swiss Re Ltd. report from June last year.

Insurers including Canada’s Manulife Financial Corp. have suffered losses by failing to hedge against variable annuities, especially after the 2008 financial crisis roiled global markets and eroded asset values.

In mature insurance markets such as Japan, hedging gives variable annuity sellers an edge as they compete based on the strength of their balance sheets, according to John Goff, the head of global markets structuring at Nomura Holdings Inc. Fixed annuities are seen as less risky as they provide a guaranteed payout.

“In a risk-based capital framework, the capital charges on variable annuities may be higher than fixed annuities,” Hong Kong-based Goff said. “By hedging with banks, insurers transfer the risks from the variable annuity products to the banks and reduce the charge on their balance sheet.”

Big in Japan

Japan’s life insurers collected 7.3 trillion yen ($64.5 billion) of new premiums for fixed and variable annuities from individuals last year, data compiled by Bloomberg show. That compares with Taiwan’s NT$303 billion ($9.1 billion) from new and recurring annuity premiums, part of a total NT$2.91 trillion the industry received from individuals.

Banks aren’t expecting a flood of new business just yet. Even with the rule change, Taiwan’s insurance market differs from Japan’s and that may impede the growth of variable annuity products, according to Citi’s Troublaiewitch.

“Policyholders in Taiwan are used to products with high fixed-rate guarantee,” he said. “How to position a product with a potentially higher but variable return relative to what Taiwanese are used to would be key to the success of variable annuity products.”