Interest Rate Shift Measure for the Adoption of IFRS 17 (Insurance Contracts) and TW-ICS Phase 2 Transitional Measures for Insurance Enterprises
2023-11-23
In order to facilitate the smoothly adoption of IFRS 17 (Insurance Contracts) and TW-ICS (Insurance Capital Standard) by domestic insurance enterprises by 2026, the Financial Supervisory Commission (“FSC”), after considering international norms, the practices of neighboring countries, and the current status of the domestic insurance market, and through ongoing communication with insurance enterprises, has drafted respectively an interest rate shift measure and phase 2 transitional measures for the adoption of IFRS 17 and TW-ICS by insurance enterprises. These measures aim to assist in the steady implementation of these two international systems, thereby enhancing the resilience of insurance enterprises in their sustainable operations.
1. A 50 bps interest rate shift measure for high interest rate policies: Taiwan initiated the gradual full adoption of International Financial Reporting Standards (IFRSs) in 2013. Paragraph 36 of IFRS 17 provides: “Discount rates should reflect the time value of money, the characteristics of the cash flows and the liquidity characteristics of the insurance contracts.” In Taiwan, for policies sold prior to January 1, 2004 by life insurers (referred to “high interest rate policies” below), the policy reserve rate at the time of sale reaches 6% or higher, significantly surpassing the current interest rate, and such situation is unique in Taiwan. Given the low liquidity characteristics of such policies, it is reasonable to set a liquidity discount featuring additional parallel shift of 50 basis points (bps) throughout the term of the high interest rate policy to conform to the spirit of IFRS 17. This measure will simultaneously apply to TW-ICS to enhance the financial resilience of insurers in the face of market rate fluctuation and facilitate a smooth transition to TW-ICS.
2. A 15-year interest rate risk transitional measure featuring linear increment from 50% up: Interest rate risk is a main source of risk for our life insurers, and the standards for interest rate risk measurement will be raised after the adoption of TW-ICS, posing a significant challenge for life insurers. For the orderly and progressive introduction of the risk-based capital (RBC) system, the FSC set the goal of increasing the interest rate risk factor at the time of adoption to 50% of the TW-ICS interest rate risk factor, starting in 2021, to increase insurers' capital charge for interest rate risk by the year. In reference to the experience of ICS adoption in other countries and the status of interest rate risk charge by our insurance enterprises, the FSC established a 15-year phase-in period starting from the date of TW-ICS adoption for insurance enterprises to increase through linear increment the interest rate risk factor from 50% of the TW-ICS risk factor to 100%.
3. A 15-year net asset transitional measure for high-interest-rate policies: Upon the adoption of IFRS 17 and TW-ICS in our insurance industry, adverse effects on insurers' liabilities will arise when the policy reserve rate of the aforementioned high-interest-rate policies is higher than the current market rate. Additionally, the US Fed has raised interest rate by 5.25% since March 2022, and Taiwan’s Central Bank has raised interest rate by 0.75% during the same period, resulting in adverse effects on asset valuation. Recognizing the challenges faced by insurers in the adoption of the new systems, the FSC has implemented a transitional measure allowing insurers to recognize the net asset effect (i.e. the net effect resulting from the recognition of assets and liabilities at fair value) in a 15 year period starting from the date of adoption.
According to the FSC, the same as the localization and transitional measures for market risk – equity, real estate and infrastructure published on July 25, 2023, the FSC will review the aforementioned interest rate shift measure and the transitional measure after the adoption of the new systems, once every 5 years, based on the actual implementation status of insurance enterprises, and in addition, continue to monitor the latest system development published by the International Association of Insurance Supervisors (IAIS), and make necessary adjustments in a timely manner. If significant changes occur in overall financial situations before and after the adoption of IFRS 17 and TW-ICS, the FSC will also review the relevant systems in a timely manner.
The FSC indicates that the purpose of adopting the two new systems is to strengthen the financial viability and asset and liability management capability of insurance enterprises, effectively addressing changes in the financial market, safeguard the interests of policyholders, safeguarding the interests of policyholders, and guiding insurers to gradually adjust their product structure to embrace the essence of insurance. In consideration of the status of new system implementation by insurers, the FSC will continue to develop suitable localization and transitional measures that conform to the international norms, aiding insurance enterprises in aligning with international systems in a gradual and orderly manner.
1. A 50 bps interest rate shift measure for high interest rate policies: Taiwan initiated the gradual full adoption of International Financial Reporting Standards (IFRSs) in 2013. Paragraph 36 of IFRS 17 provides: “Discount rates should reflect the time value of money, the characteristics of the cash flows and the liquidity characteristics of the insurance contracts.” In Taiwan, for policies sold prior to January 1, 2004 by life insurers (referred to “high interest rate policies” below), the policy reserve rate at the time of sale reaches 6% or higher, significantly surpassing the current interest rate, and such situation is unique in Taiwan. Given the low liquidity characteristics of such policies, it is reasonable to set a liquidity discount featuring additional parallel shift of 50 basis points (bps) throughout the term of the high interest rate policy to conform to the spirit of IFRS 17. This measure will simultaneously apply to TW-ICS to enhance the financial resilience of insurers in the face of market rate fluctuation and facilitate a smooth transition to TW-ICS.
2. A 15-year interest rate risk transitional measure featuring linear increment from 50% up: Interest rate risk is a main source of risk for our life insurers, and the standards for interest rate risk measurement will be raised after the adoption of TW-ICS, posing a significant challenge for life insurers. For the orderly and progressive introduction of the risk-based capital (RBC) system, the FSC set the goal of increasing the interest rate risk factor at the time of adoption to 50% of the TW-ICS interest rate risk factor, starting in 2021, to increase insurers' capital charge for interest rate risk by the year. In reference to the experience of ICS adoption in other countries and the status of interest rate risk charge by our insurance enterprises, the FSC established a 15-year phase-in period starting from the date of TW-ICS adoption for insurance enterprises to increase through linear increment the interest rate risk factor from 50% of the TW-ICS risk factor to 100%.
3. A 15-year net asset transitional measure for high-interest-rate policies: Upon the adoption of IFRS 17 and TW-ICS in our insurance industry, adverse effects on insurers' liabilities will arise when the policy reserve rate of the aforementioned high-interest-rate policies is higher than the current market rate. Additionally, the US Fed has raised interest rate by 5.25% since March 2022, and Taiwan’s Central Bank has raised interest rate by 0.75% during the same period, resulting in adverse effects on asset valuation. Recognizing the challenges faced by insurers in the adoption of the new systems, the FSC has implemented a transitional measure allowing insurers to recognize the net asset effect (i.e. the net effect resulting from the recognition of assets and liabilities at fair value) in a 15 year period starting from the date of adoption.
According to the FSC, the same as the localization and transitional measures for market risk – equity, real estate and infrastructure published on July 25, 2023, the FSC will review the aforementioned interest rate shift measure and the transitional measure after the adoption of the new systems, once every 5 years, based on the actual implementation status of insurance enterprises, and in addition, continue to monitor the latest system development published by the International Association of Insurance Supervisors (IAIS), and make necessary adjustments in a timely manner. If significant changes occur in overall financial situations before and after the adoption of IFRS 17 and TW-ICS, the FSC will also review the relevant systems in a timely manner.
The FSC indicates that the purpose of adopting the two new systems is to strengthen the financial viability and asset and liability management capability of insurance enterprises, effectively addressing changes in the financial market, safeguard the interests of policyholders, safeguarding the interests of policyholders, and guiding insurers to gradually adjust their product structure to embrace the essence of insurance. In consideration of the status of new system implementation by insurers, the FSC will continue to develop suitable localization and transitional measures that conform to the international norms, aiding insurance enterprises in aligning with international systems in a gradual and orderly manner.
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Update：
2024-04-19