Standard & Poor’s Ratings Services, in a new publication entitled “Taiwan Insurance Outlook 2003,” announced that it has revised its outlook on Taiwan’s nonlife insurance sector to stable from negative.
It’s maintaining its negative outlook, however, on the island’s life insurance industry, “to reflect continued financial stress on companies in the sector because of negative spreads.”
“Over the past few years, negative spreads as a result of unfavorable investment conditions have had a particularly tough impact on Taiwan’s life insurance sector,” stated Connie Wong, Director of Financial Services Ratings at S&P’s Hong Kong office. “Negative spreads result when the rates of return that companies receive on their investments fall below the guaranteed rates they have previously offered on policies. In Taiwan, this has happened despite the prudent investment strategies of the island’s life insurers.
“A reduction in the required rates for reserving introduced by the regulator at the beginning of 2003 is likely to help reduce negative spreads,” she continued, “but it is also likely to increase premium rates for new business on traditional life insurance products, which may in turn affect new business generation in the year ahead.”
S&P’s explained that “Nonlife insurers have been affected to a lesser extent than life insurers by the currently unfavorable investment environment,” but the rating agency also indicated that they are “likely to remain affected by higher global reinsurance costs, which have been rising since September 2001.” It noted that “the cost of domestic reinsurance in Taiwan has been pushed yet higher by falling global reinsurance capacity and recent reluctance to participate on the part of overseas reinsurers.”
S&P’s added that on the positive side the increased reinsurance costs had “enabled Taiwan nonlife insurers to raise their premium rates to more justifiable levels,” and that “increased retention has, moreover, had the effect of changing underwriters’ attitudes towards risk management with the result that tighter underwriting management has increasingly been apparent in recent years.”
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