Taiwan's Foreign Insurers
Life beyond the High-yield Game
Disengaging from a money-losing battle with local insurers over market share, how can Taiwan's foreign insurers find a strategy to survive in tight quarters?
Life beyond the High-yield GameBy Shiau-Jing Ding
From CommonWealth Magazine (vol. 432 )
On October 13, American insurance conglomerate AIG announced it had reached an agreement to sell off its subsidiary Nan Shan Life Insurance Co., Ltd. – Taiwan's second largest life insurer – for US$2.15 billion to Hong Kong-based Primus Financial Holdings and little-known China Strategic Holdings (pending regulatory approval).
Once the darlings of Taiwanese consumers, foreign life insurance companies currently hold a small fraction of the Taiwan market – just 16 percent (excluding Nan Shan) as of August this year.
Never have Taiwan's foreign insurance companies held less sway than now. Yet despite being caught with little room to maneuver, there is a revolution quietly catching fire among foreign insurance circles.
Since the beginning of this year, foreign life insurance companies, facing the rigorous demands of international accounting standards, have shifted strategies, from products to distribution channels, refusing to continue chasing market share through the short-term insurance savings plan game, and returning instead to their core insurance businesses.
Getting Back to Assurance Products
According to First-Aviva Life Insurance Co., Ltd. CEO Robin Lin, foreign insurers in Taiwan are faced with unfair competition. The parent companies of European insurers in Taiwan must deal with risk contingency reserve requirements under the International Financial Reporting Standards (IFRS), prompting those parent companies to adopt an increasingly conservative approach toward sales of such high-risk, low-return products as short-term, high-yield insurance savings plans. Domestic insurers, however, are under no such pressures, and sales of these product offerings from domestic insurers continue apace over the counter in banks.
According to the observations of Peng Chin-lung, director of Shih Chien University's Department of Insurance and Risk Management, in addition to the restrictions of their parent companies' corporate policies, the primary reason foreign insurers have cut back on sales of these products, and have given up on the myth that profit comes from battling for market share, is soaring distribution costs and hidden negative spread.
Moving toward relatively higher-return pure assurance products such as life insurance and accident insurance is virtually the only option for foreign life insurers. Their determination to go this route has been further cemented as sales of investment-based insurance policies have stalled due to the global financial crisis.
French insurer Cardif Assurance Vie, which has long specialized in structured note investment policies, has redrawn its product strategy and will now focus on its traditional fixed-term life insurance and medical/accident insurance businesses.
"We consider ourselves to have already died once," Cardif general manager Ben Ng says gravely. "We're rethinking our entire strategy."
The French insurer's new approach is akin to a convenience store's placement of low-cost items such as chewing gum at the cash register. The company now offers low-cost, easy-to-understand "bundled" assurance products.
Early this year, Cardif began heavily pushing guaranteed-renewal NT$500,000 one-year medical insurance policies coupled with a NT$1,000/day hospital stay stipend. Ng doesn't mince words, saying the company is initially only selling one-year, low-coverage products because they want to first test the distribution channels and consumer response. The biggest consideration lies in the fact that overly complex assurance products are difficult to sell.
Getting assurance products into banks for sale to banking clients has become the key issue for foreign insurers. Prudential's cooperative arrangements with E.Sun Bank and Standard Chartered bear close examination.
E.Sun/Prudential Strategic Alliance
Prudential (U.K.), which last February sold its Taiwanese sales and distribution units to China Life, has taken like a duck to water to sales of its products in bank branches. Revenues from new policies sold through banks have reached NT$5.5 billion in the first eight months of the year, up 99.7 percent over the same period last year. Fully half of those sales were of annualized premium participating policies, clearly indicating that the E.Sun and Standard Chartered distribution outlets are up to the task of selling relatively complex annualized premium insurance products.
The major breakthrough came through E.Sun and Prudential's joint financial planning and consultation unit.
Unlike other banks where insurance policies are sold by financial consultants, when E.Sun financial consultants encounter clients with relatively more complex insurance needs, they immediately refer that client to the team at the joint financial planning and consultation unit. E.Sun officials note that the key to client referrals is that financial consultant commissions are not based upon individual performance but rather on the entire branch office as a unit, weighing the performance of the entire team.
Also, as each branch is assigned a number of financial planning consultants, each E.Sun branch also handles client claims – unlike most banks, which only engage in sales, and leave after-sales service to the various insurance companies' customer service reps. The ability to achieve this level of service is the biggest advantage of a long-term strategic alliance, says Alfred Cheung, CEO of Prudential Corporation Asia.
Currently, Prudential, Cardif and First-Aviva have entered into long-term strategic alliances with E.Sun and Standard Chartered; Taiwan Cooperative Bank; and First Commercial Bank, respectively. But a number of industry insiders have pointed out that with high basic employee salaries and low commission incentives at the old-line banks, it's difficult to motivate employees. So the foreign insurers still face quite an uphill battle.
Perhaps the foreign insurers, waking up from the myth of market share and operating under international standards, offer a mirror in which Taiwan's domestic industry may observe itself. As Taiwanese insurers continue to busy themselves with attracting fixed depositors' purchases of high-return endowment insurance, the question of whether this will ultimately be a boon or a disaster for Taiwanese insurance clients and the industry as a whole in the long term has already been quite clearly answered.
Translated from the Chinese by Brian Kennedy
Chinese Version: 不賺高利財 外商壽險夾縫創新