A new regulation for Taiwanese life insurers’ investment-linked policies became effective on 1 March, barring target maturity bond funds linked to these policies from investing in bonds rated below Baa1 from Moody’s or equivalent ratings from other rating agencies.
In addition, the holding of bonds rated Baa1 cannot account for more than 40% of these bond funds’ net asset value. Additionally, for all investment-linked policies sold, insurers are now obligated to notify policyholders within three days if any bond these policies hold is downgraded to Baa1 or lower.

The new regulation is credit positive for insurers because it would mitigate the risk of mis-selling by lowering the credit risk in investment-linked policies, says Moody’s Investors Service in an article in the the 11 March 2020 issue of “Moody’s Sector Comment”.

Mr Mike Liu, associate analyst; Mr Kelvin Kwok, analyst and Ms Sally Yim, associate managing director, all of the Financial Institutions Group at  Moody’s Investors Service, co-writers of the article, say that as interest rates have stayed low for a prolonged period, investment-linked policies have gained importance in insurers’ product mix and accounted for around 30% of their first-year premium (FYP) in recent years.

Target maturity bond funds are a common anchor to these policies because of the attractive yields they offer. However, some of them have high credit risk because of their sizeable allocation to non-investment grade bonds.

Credit risk

The introduction of a credit-risk cap under the new regulation means it will be less likely for insurers to be accused of mis-selling after losses from investment-linked policies.

These polices are not principal-guaranteed by insurers and as a result their value could fall sharply in bond market downturns and in case of defaults of the underlying bonds. This could lead to disputes between insurers and policyholders, regulatory investigation and even reputational damage for insurers.

The new regulation will reduce potential losses suffered by policyholders and thus grievances and disputes with insurers. It also underscores the Financial Supervisory Commission’s aim to promote proper sales practices and consumer protection.

Moody’s said, “We do not expect the new rule to crimp sales volume of investment-linked policies. Although insurers may have to cut the yield for these policies, they will remain attractive for yield-seeking customers amid the low interest rate environment. Overall, the regulation will improve market transparency and promote informed interaction between insurers and customers.”

 

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