Ailing Insurers Hold Taiwan Hostage
In Taiwan's murky insurance industry, a number of companies have depleted their capital stock but continue to operate without regulatory management. And insurance holders like you and me are left in their stranglehold.
Ailing Insurers Hold Taiwan HostageBy Yi-Shan Chen
From CommonWealth Magazine (vol. 417 )
The net worth of a company is calculated using the simple formula of total assets minus total liabilities.
Taiwan Stock Exchange rules stipulate that once the net value of a company's stock falls under NT$5 per share, the shares will be downgraded to the full cash delivery class, which means that they can only be bought against prompt full cash payment. Should the shares' net value fall to zero causing shareholder equity to evaporate, an ordinary company would no doubt be headed toward bankruptcy.
But such common sense does not seem to apply to Taiwanese insurance companies.
Last year Farglory Life reported an unaudited net worth of negative NT$3.47 billion, but not only did it not fold, it even managed to rake in another NT$46.8 billion in insurance premium payments. Farglory ranked fifth in the industry in terms of market share for newly signed life insurance policies, tripling its business over the previous year.
Kuo Hua Life, for its part, has a negative book value of NT$58.8 billion. And while its capital stock was already depleted eight years ago, the company has not floundered.
Singfor Life has had a negative net worth for three years running, with its current book value standing at negative NT$15.5 billion. The same goes for Global Life, which now has a net worth of negative NT$6.5 billion. Sinon Life has had a negative net worth for two years, which now stands at negative NT$2.2 billion.
None of these five companies have gone bankrupt, although their capital stock has been exhausted. They still open their doors for business every day. (see table)
Topsy Turvy Justice
When a bank's net worth slips into negative territory, the Financial Supervisory Commission (FSC) will take over its management. But the insurance industry resembles a gambling venue without clear game rules. Despite their dire financial situation, these insurers do not pull out of the market. Instead, they keep selling insurance policies to consumers on highly favorable terms. As long as insurance premium payments keep streaming in, they can maintain cash flow or even achieve a cash surplus, and they do not fold.
In contrast, foreign insurers, which take pride in images of professionalism, have given up and left the Taiwanese market early on. Justice seems to have been turned on its head.
"In the past when clients asked me why our policies were not as favorable as those offered by Kuo Hua Life, I would tell them that Kuo Hua Life was bound to go under," says Ms. Hu, a former ING Antai insurance salesperson now working for an independent firm. "Who would have thought that Kuo Hua Life would not fold, but that ING Antai Insurance would be sold – even sold twice?"
Hu spent 16 years of her two-decade insurance career with ING Antai. Back then she discovered that Kuo Hua Life policies were much more favorable than the policies that she was pitching herself: The average insurance company's health insurance will, for instance, reimburse insurance holders only for medical costs that they paid out of their own pockets, whereas Kuo Hua Life also reimburses medical costs that are already covered by the National Health Insurance.
"Having been trained at a foreign company, we wondered how this could be possible. So the best way of brushing off such comparisons was to tell clients that Kuo Hua Life was unstable," recalls Hu.
But having left her longtime employer three years ago, Hu describes the policies sold by the financially weak insurers as "attractive." Hu has not only bought Kuo Hua Life and Singfor Life insurance policies for herself, but is also selling them to her clients.
"These products have all been vetted by the FSC, and they have been on the market for a long time. The government will not let these insurance companies go bankrupt," Hu says with demonstrative confidence.
Does True Gold Truly Not Fear the Fire?
Given that these ailing companies are not ready to exit the market on their own, it is a sure bet that the government will not let these insurers fail.
It is also for that reason that Hu, despite having worked for a "well-known, reputable" insurance company, like other independent insurance agents and banks now dares to sell Farglory Life, Singfor Life and Kuo Hua Life products. "We're true gold that can stand the refiner's fire," says Ms. Chen, a former employee of Kuo Hua Life who now works in the same office as Ms. Hu.
Last year Farglory Life's high-interest insurance policies, which carried interest of some 0.2 to 0.5 percentage points above the market rate, became a top-selling product at local banks. Bank-brokered insurance policies accounted for 90 percent of Farglory Life's revenue. Singfor Life also collected NT$5 billion in premiums through small banks for its old-age insurance. Another NT$2 billion in insurance policies were sold through independent agents.
Agents also helped Kuo Hua Life collect NT$2.7 billion in premium payments, which amounted to 60 percent of the turnover generated by Kuo Hua's own sales personnel.
These unsound companies keep attracting new policyholders with high yield policies. Holding hostage a high number of policyholders, the insurance companies refuse to liquidate their mismanaged businesses, making it more difficult for regulators to remedy the problem.
Farglory Life General Manager C.S. Tu denies that the company lures customers with high interest rates. He argues that Farglory Life should not be lumped together with the other insurance companies, because its book value turned negative for the first time only last year.
Tu asserts that the major shareholders keep supporting the company, pointing to a NT$1.2 billion capital increase that was approved in December 2008. Once the company's financial statements have been signed off in March, Farglory Life will carry out the capital increase if the overall environment is right.
"Our core business has already reached economies of scale – its value keeps increasing," Tu is eager to point out.
Kuo Hua Life general manager Ching-jiang Chen is also on the defensive. He argues that Kuo Hua did not attract the highest amount of money last year, which shows that its products are not promising the highest interest rate on the market.
Last year Kuo Hua Life commissioned financial consulting firm Pricewaterhouse Coopers (PWC) Taiwan to search for investors for a capital increase. Originally, two foreign firms showed interest, but now that the global financial crisis has hit, "things are no longer that easy," Chen admits.
A high-ranking insurance manager, who is familiar with the internal affairs of Kuo Hua Life, reveals that over the past eight years the insurance firm's founder and major shareholder Weng Yi-ming, who died in 2006, and his daughter Weng Shih-chia made great efforts to find sources for a capital infusion. Meanwhile, the transparency of Kuo Hua Life's finances has greatly improved. In 2007 for the first time auditors signed off on the company's annual report without reservations.
But improving the struggling insurance firm's capital base has proven difficult. After a two-year evaluation private equity firm Newbridge Capital decided against taking over Kuo Hua Life's old insurance policies. In July last year Newbridge suspended its acquisition of Kuo Hua.
Singfor Life spokesman Wu Wen-jung notes that his company is not the only one offering high-yield policies and that Singfor Life policies do not generate the highest yield.
He says the company has been slow phasing out the controversial old policies because the FSC does not allow insurance firms to replace old products with new ones whenever they want. The company will do its best to complete the capital increase that the regulators have been demanding before June this year, he asserts.
Exit Mechanism Needed
Many insurance agents believe that the government needs to acknowledge – as with the bad-loan problem of local banks in the past – that several insurance firms in Taiwan lack the wherewithal to close their doors if they rely on free-market economic principles alone.
But no matter which solution is chosen – be it the American example where the government first recapitalizes ailing insurance companies to recoup its investment later when the crisis is over, or that the legislature passes a special budget to provide financially weak insurers with new capital and put them under government control – the Insurance Stabilization Fund definitely needs to be expanded.
After the upcoming merger of the Property Insurance Stabilization Fund and the Life Insurance Stabilization Fund, the resulting Insurance Stabilization Fund will be left with just NT$16 billion in funding, which is severely inadequate to plug the gaping holes in troubled insurers' capital foundations.
In a Finance Committee meeting at the Legislative Yuan on March 7, Lo Shu-lei, legislator for the ruling Kuomintang, submitted a proposal demanding that the FSC prohibit insurance companies with a negative book value from merging with other insurers.
She also demanded that insurance companies that do not meet capital adequacy ratio requirements should be barred from selling new policies, to prevent a violation of policyholder interests.
Given that the risk of failure is rising, the FSC can no longer bury its head in the sand, but needs to come up with a mechanism for shutting down nonviable insurers.
Translated from the Chinese by Susanne Ganz
Chinese Version: 漂亮保單 綁架全台灣