FSC Supervisory Measures for the Impact of Rising Interest Rates on the Solvency of Life Insurance Enterprises
2022-09-22
In response to recent announcements by central banks of different countries for raising interest rates, the Financial Supervisory Commission (FSC) stated that it will continue to monitor changes in market interest rates in the second half of 2022 and track the financial performance of individual life insurance companies. If the relevant financial ratios fall below the statutory standards, the FSC will request the company to propose a capital increase and financial improvement plan in accordance with Article 143-6 of the Insurance Act for a comprehensive assessment of the following: (1) the inconsistency in the method for the recognition of life insurance assets and liabilities in response to interest rate increases in the current accounting system; (2) the reasons for the decline in the net worth of individual life insurance companies; and (3) the implementation of individual life insurance companies' capital increase and financial business improvement plans. If the solvency has not been weakened, the FSC shall supervise the implementation of the proposed financial improvement plan.
The life insurance companies in Taiwan adopted IFRS 9 along with the international community in 2018 to measure assets at fair value. companies may make suitable choices for the classification of financial assets in accordance with the provisions therein. When adopting IFRS 9, insurance assets and liabilities that are not simultaneously measured at fair value may result in inconsistent accounting treatment. In regards to assets, most of the life insurance companies in Taiwan hold bonds to collect fixed interests on a long-term basis. Fluctuations in unrealized valuation due to the recent decline in asset prices as a result of rising interest rates will reduce the net worth. In regards to liabilities, Taiwan will implement IFRS 17 (insurance liabilities) in 2026 to measure liabilities at fair value after reviewing the implementation process in different countries and opinions from different sectors in Taiwan. Insurance liabilities are currently recognized on a lock-in basis and are not adjusted periodically based on current interest rate assessments. The current financial reports of life insurance companies show inconsistencies in the recognition of assets and liabilities as a result of rising interest rates. When interest rates change, the degree of fluctuation in net worth of each enterprise is affected in varying degrees by the accounting policies it chooses for the classification of financial assets.
As central banks of different countries may continue the policies for increasing interest rates in the second half of 2022, the net worth of life insurance enterprises may still be affected due to the decline in the valuation of the assets they hold. The FSC will review the 2022 annual CPA-audited financial reports filed by the enterprises by the end of March 2023. If the relevant financial ratios fall below the statutory standards, the FSC will request the enterprise to propose a capital increase and financial business improvement plan in accordance with the Insurance Act. The FSC shall carefully review the impact on the solvency of the life insurance enterprises by reviewing the inconsistencies in the assets and liabilities in the aforementioned financial reports, the positive impact of rising interest rates on the solvency of the life insurance enterprises, and the reasons for the decline in the net worth of each life insurance enterprise. If the solvency has not been weakened in cases where the financial ratios meet statutory standards once the insurance liabilities are measured at fair value, the FSC shall supervise the implementation of the proposed financial improvement plan.
As of the end of August, the premium income of life insurance companies in 2022 amounted to NT$1.6013 trillion and the companies retain NT$895.2 billion in cash and cash equivalents, which is sufficient for paying insurance claims totaling NT$1.2986 trillion. In addition, life insurance companies in Taiwan hold bond assets mostly for long-term holding until maturity. Changes in valuation due to short-term fluctuations do not affect the original returns on bond assets. They continue to collect interest and receive the principal upon the maturity date. In addition, there are other liquid assets available for use or cashing in. There are currently no liquidity risks for life insurance enterprises and the rights and interests of policy holders remain unaffected.
The FSC will continue to monitor the financial conditions of life insurance companies and remind them to pay special attention to liquidity, financial soundness, solvency, and asset allocation. It will also supervise life insurance companies to enhance risk management and response measures in response to changes in financial markets to ensure the stable operations of the insurance companies and protection of the rights and benefits of policyholders.
The life insurance companies in Taiwan adopted IFRS 9 along with the international community in 2018 to measure assets at fair value. companies may make suitable choices for the classification of financial assets in accordance with the provisions therein. When adopting IFRS 9, insurance assets and liabilities that are not simultaneously measured at fair value may result in inconsistent accounting treatment. In regards to assets, most of the life insurance companies in Taiwan hold bonds to collect fixed interests on a long-term basis. Fluctuations in unrealized valuation due to the recent decline in asset prices as a result of rising interest rates will reduce the net worth. In regards to liabilities, Taiwan will implement IFRS 17 (insurance liabilities) in 2026 to measure liabilities at fair value after reviewing the implementation process in different countries and opinions from different sectors in Taiwan. Insurance liabilities are currently recognized on a lock-in basis and are not adjusted periodically based on current interest rate assessments. The current financial reports of life insurance companies show inconsistencies in the recognition of assets and liabilities as a result of rising interest rates. When interest rates change, the degree of fluctuation in net worth of each enterprise is affected in varying degrees by the accounting policies it chooses for the classification of financial assets.
As central banks of different countries may continue the policies for increasing interest rates in the second half of 2022, the net worth of life insurance enterprises may still be affected due to the decline in the valuation of the assets they hold. The FSC will review the 2022 annual CPA-audited financial reports filed by the enterprises by the end of March 2023. If the relevant financial ratios fall below the statutory standards, the FSC will request the enterprise to propose a capital increase and financial business improvement plan in accordance with the Insurance Act. The FSC shall carefully review the impact on the solvency of the life insurance enterprises by reviewing the inconsistencies in the assets and liabilities in the aforementioned financial reports, the positive impact of rising interest rates on the solvency of the life insurance enterprises, and the reasons for the decline in the net worth of each life insurance enterprise. If the solvency has not been weakened in cases where the financial ratios meet statutory standards once the insurance liabilities are measured at fair value, the FSC shall supervise the implementation of the proposed financial improvement plan.
As of the end of August, the premium income of life insurance companies in 2022 amounted to NT$1.6013 trillion and the companies retain NT$895.2 billion in cash and cash equivalents, which is sufficient for paying insurance claims totaling NT$1.2986 trillion. In addition, life insurance companies in Taiwan hold bond assets mostly for long-term holding until maturity. Changes in valuation due to short-term fluctuations do not affect the original returns on bond assets. They continue to collect interest and receive the principal upon the maturity date. In addition, there are other liquid assets available for use or cashing in. There are currently no liquidity risks for life insurance enterprises and the rights and interests of policy holders remain unaffected.
The FSC will continue to monitor the financial conditions of life insurance companies and remind them to pay special attention to liquidity, financial soundness, solvency, and asset allocation. It will also supervise life insurance companies to enhance risk management and response measures in response to changes in financial markets to ensure the stable operations of the insurance companies and protection of the rights and benefits of policyholders.
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Update：
2023-01-06