Taiwan Today

Two years ago, insurer Tsai Wan-lin replaced plastics tycoon Y.C. Wang as Taiwan's richest man. More recently, Tsai was rated by Fortune magazine not only as the richest man on the island, but also as the sixth wealthiest person in the world in 1989. The news immediately made Tsai the focus of public attention in Taiwan. But people not only envied his fast accumulation of riches. They also took a closer look at the insurance industry, the business which has helped make the former vegetable vendor's financial success possible.

Not everyone is an admirer of the insurance industry. Some people claim that Tsai and his fellow insurers have visited injustices on their customers and on society as a whole. One major complaint is that a number of insurers have exploited their policyholders by using premiums to make speculative investments, and amassing fortunes as a result.

Profits for the industry have been growing by leaps and bounds in recent years. Except for the troubled non-life' insurance sector, the industry scored a nearly 100 percent increase in pre-tax earnings, which reached a high of US$515 million in 1989. As in previous years, the lion's share of the industry's 1989 earnings came from its massive in­vestments in real estate and stocks. For example, Tsai's Cathay Life Insurance Co., Taiwan's largest insurer, had a life insurance market share of 59 percent in 1989. The company's investment in real estate topped nearly 30 percent of its total assets of US$5.4 billion, a percent­age that is far higher than the ceiling allowed in most developed countries.

Largely as a result of the huge investments by insurance companies in real estate and their unrelenting manipula­tion of the market, land and home prices have jumped to at least three times the 1986 level. The meteoric price rises since 1986 have caused serious social and economic problems. They have, for instance, destroyed the dreams of numerous would-be home buyers, and added greatly to manufacturers' cost of production. In turn, higher costs have prompted a growing number of manufacturers to move their operations overseas.

Aside from being accused of speculating and driving prices sky-high, insurers have also been blamed for using in­surance entirely as a short-term profit-making tool, instead of taking into account the interests of policyholders by improving the quality of their services and earning stable long-range profits. Insurers have done little over the years to broaden the range of policies open to their customers. They mostly still concentrate on sales of savings-type insurance products, which bring in high premiums but do not offer much protection. Moreover, premium rates for life insurance have until recently remained at the high levels set long ago, despite the increased life span in Taiwan as a result of improved public health and better nutrition.

Some people charge that while insur­ance companies are aggressive in selling their products, they lapse into passivity when it comes to paying claims. Critics cite cases in which insurers have tried their best to save on payments by interpreting vaguely defined contract terms to their own advantage.

While pointing accusing fingers at insurance companies, some critics also blame lax government regulation and a protective attitude toward industry members for the various unfair business practices existing today. For example, the government had for decades banned the establishment of new insurance firms. The ban left the customers at the mercy of existing insurers and denied them the improved services which new competition could have brought to the industry.

The Ministry of Finance allowed only a limited opening of the insurance market to American companies in 1987 as a way to help cut Taiwan's trade surplus with the U.S. When the market was first opened up to the U.S., only two life and two property insurance companies were permitted to set up shop each year. Under pressure from Washington, the annual quota for new U.S entrants has been raised from two to three for each type of insurance company, beginning with August 1990. By mid-August, ten U.S. insurance firms had established themselves in Taiwan, five in each of the two categories. This compares with Taiwan's existing eight life and fourteen non-life insurance companies, all established nearly three decades ago.

Critics also cite two other important areas in which government regulation has been inadequate—real estate invest­ment, and profit-sharing with policy-holders. Under the existing regulations, insurers can invest as much as one-third of their premium receipts in the realty business. This is triple the ceiling in neighboring South Korea and more than double what is allowed in Japan.

With respect to profit-sharing, insurance companies enjoy a dividend-exempt status for after tax earnings up to a corporate profit rate of 6 percent. Dividends are calculated only on the portion of earnings yielding a profit rate above that level. What is controversial is not so much the exemption as it is the provision which says that dividends should be paid only on earnings from the insurance business proper, not from the huge earn­ings on non-insurance investments such as the gains from the real estate and stock markets. Such profits, which have been astronomically high in recent years, are distributed only to company shareholders, leaving out the policyholders. This is considered unfair because the capital used to invest in real estate and stocks all comes from the premiums paid in by the policyholders.

In response to the growing outcry against the many unfair business practices of Taiwan insurance companies, the Ministry of Finance has proposed sweeping amendments to the Insurance Law. A draft of the revised law has been submitted to the Legislative Yuan for approval. But some of the major changes remain controversial, such as the new ceiling on real estate investment. Although the permissible percentage has been lowered to 25 percent of premium receipts from the old level of one-third, some people believe it is still too high and should be cut to 15 percent.

Even the most fundamental change—the call to open the industry to new investment-is considered too con­servative by interested investors at home and abroad. The draft law permits new entrants, but does not guarantee a license to anyone who meets government-set standards. Ministry sources have said that new licenses will be granted on a "permission basis," which is a way of saying that there will be a quota system even after the investment ban has been lifted.

Also, new insurance licenses reportedly will be given only to Taiwan investors in the first two years after the opening to new entrants. This has raised serious concerns among foreign insurers, especially the non-American firms, none of which has been granted permission to operate in Taiwan up to now. As many as twenty-one such insurers, most of them from Europe, have set up liaison offices in Taiwan to pave the way for formally entering the Taiwan market when the opportunity arises.

Commenting on the reported Finance Ministry plan for a two-year delay before foreign insurers can enter Taiwan's insurance market, Olivier Charles Moore, director of the Taipei liaison office of UAP (L'union Des Assurances De Paris), the largest insurance company in France, said: "This is not fair to foreign companies. Two years later, there will be more Taiwan and American insurance firms in the market, and that will intensify the competition and make things difficult for all latecomers."

Moore, who is concurrently chairman of the insurance sub-committee of the European Chamber of Commerce in Taiwan, believes that the ROC government is treating European insurers unfairly by granting insurance licenses only to U.S. firms. "We understand that Taiwan has opened the insurance market to American firms because it has been running a huge trade surplus with the U.S.," he says. "But Taiwan is also running growing trade surpluses with many of the EC countries."

Officials at the ministry refused to confirm whether the government is seriously planning to open the insurance market only in a limited way as reported. But informed sources said that is indeed the case. The ministry is known to be concerned that a sharp increase in the number of new entrants will spawn vicious competition that will hurt local insurers already in the industry. Another concern is that domestic companies will be crowded out if the program to admit foreign firms is too fast-paced.

But a number of experts disagree. They contend that the ministry must liberalize the insurance business at a rapid rate to bring in competition if it wants industry members to improve their services. They do not agree that the presence of foreign insurers, although blessed with long-standing experience and better marketing skills, will threaten the survival of their Taiwan counterparts. As one expert points out, the foreign firms have a number of inherent handicaps.

This is admitted by a top executive at the Taiwan branch of the Aetna Life Insurance Company, one of the five American life insurers that entered the Taiwan market in early 1987 when the ROC government first agreed to admit U.S. firms. Joseph Shao, manager of the branch's marketing department, points to a cultural gap between the peoples of the two countries that makes it difficult to sell insurance here in the American way.

In the U.S., it is relatively easy for insurance salespeople to obtain accurate data about a prospective customer's income and other personal financial facts required to work out a policy plan tailored to the client's specific needs. But it is not so easy to use this marketing method in Taiwan, because people are generally reluctant to disclose full infor­mation about their finances.

There are also some other handicaps. Foreign insurance firms face other obstacles in Taiwan. They are not allowed to set up branches outside Taipei, a restric­tion that puts them at a real disadvantage in competing with local insurance firms, which have branches throughout the island. According to an official at Cathay Life, foreign insurers also have difficulty in competing with their Taiwan counter­ parts for talented employees. He ob­serves that sometimes young people are unwilling to work for foreign firms because they often summarily fire workers for even minor mistakes, or they cut their work force without mercy as soon as business takes a downturn.

In view of these and other handicaps, the Cathay official sees no serious competitive threat from the Taiwan branches of American insurance firms. He is confident that Cathay Life will be able to maintain its current market share through the next five years, despite the rising competition. He predicts that by the year 2000, the percentage of people with life insurance coverage will increase to 2.5 times the present level, reaching a high of almost 68 percent compared to the current level of 27 percent.

The official admits that the presence of U.S. insurance firms has brought in new competition that has already benefit­ed the policyholders. One such effect is that many insurers are now quick to pay claims because an interest penalty, according to policy stipulations, will be added for each day of delay beyond the contracted payment date.

Another positive effect of the increased competition is lower premiums. For example, the premium for life insur­ance has been lowered because of the increasing life span of Taiwan's citizens. The premium on life policies for women has also been lowered and differentiated from policies for men, because the life span for females is now six years longer than the male average of 71 years.

The entry of U.S. insurance firms into the market is also apparently having a stimulating effect on the development of new insurance products. Aetna Life, for example, is planning to provide medical coverage for retired people or people over 65. "These are the people who need medical service the most, but unfortunately no Taiwan insurer has ever offered such insurance, " says manager Shao of Aetna. The company also wants to introduce universal life insurance, a product that would boast the dual functions of life protection and interest-generating investment. Shao says that plans for the sale of these prod­ucts is still awaiting Finance Ministry approval.

Despite the competition they bring in, almost all of the branches of the American insurance companies, be they life or property, are still losing money. But according to Shao, this is nothing unusual. "In the initial period of operation, you simply cannot avoid registering losses, because you have a lot of start-up expenses to cover," he says. "The cost of hiring people and training them during this period are especially large."

The five American property insurance firms here have an additional reason for losing money: their losses on fire and other industrial insurance have been growing as the economy slackens and the premium base shrinks because of mounting company failures. According to an official at the Taipei branch of Continental Insurance of the U.S., non­-life insurance in Taiwan is a difficult business, although the market potential is high. The official cites cutthroat competition, such as rebates and cut-rate sales, in addition to the especially high loss ratios. She says most U.S. non-life insurance firms in Taiwan have not yet really penetrated the market. For the moment, they still rely for their sustenance on fellow American and other foreign companies operating in Taiwan. —Osman Tseng is a senior journalist based in Taipei, and is a regular contributor to the Free China Review.