New regulations stunt Taiwanese insurance sector

The rules governing investment-linked insurance products in Taiwan, that came into effect in July have had a detrimental impact on the sale of structured products. The Investment Linked Policy Self Regulations were served by the Taiwanese regulator, the Financial Supervisory Commission (FSC), to prevent misselling and misconduct in the market and the decision was hastened by the fact that popular target redemption notes are suffering from heavy mark-to market losses.

"From a product innovation point of view these regulations will adversely affect our capability to develop and compete in the Taiwanese structured products market," says Dustin Wei, investment department at Allianz Taiwan Life Insurance. "The sales volume of structured products has shrunk more than 50% since the beginning of this year. Of course, maybe the market sentiment and financial crisis have played major roles, but it's not easy to imagine that sales will pick up significantly once the market turns around."

The regulations have limited the tenor of products between the range of six and 10 years and only CPPI or TIPP structures can exceed 10 years. Target redemption or any other structures which have the possibility of early termination have been banned. All products must be 100% capital protected, while underlyings and issuer credit ratings have also been tiered in order to determine the size of the minimum investment (see table).

The minimum investment for small investors is NT$300,000 (US$9,500) while for large investors it is NT$800,000. Level one underlyings are indexes calculated by exchanges, level two comprises underlyings including indexes not calculated by exchanges, interest rates, equities, funds, commodities and FX, while level three or CPPI structures includes products with dynamic adjustment mechanisms. A tier-one credit rating (S&P) is AA and above, tier-two is AA- or A+ and tier-three is A or A-.

The decision to ban autocallable structures was prompted by a large number of target redemption structures which are now losing money when marked to market because of the recent downturn in equity markets. Target redemption notes are an index-linked product, usually with a 10-year maturity, that provide a high fixed coupon in the first year and relatively high participation in the underlying for the remaining years. The product will mature early if the combined coupons reach a specific cap. If, however, the underlying was to heavily underperform the market after the first year, the coupon will fall sharply. In some products, if a certain number of stocks or indexes in the basket fall below a certain level the investor will not receive any coupons for the remainder of the 10 years. The product essentially becomes a 10-year bond.

Although market participants understand why the FSC has taken steps to regulate the industry, some feel the focus is on the wrong area. "We understand that the regulator is concerned about the misselling or misconduct, which exists everywhere in the retail market with structured products getting more fancy," says Allianz's Wei. "However, it will do us a big favour if the regulator can focus on the selling process, rather than product creation."

The regulations have further stunted the competitiveness of some life insurance companies which market their products through bank distribution channels. Marketing long-dated, principal protected structures with no auto-call features pale in comparison to the more malleable products available from banks.