The Market Profile of Taiwan Non-Life Insurance Industry in the Year of 2007 Economic Profile in 2007 I. Economic situation (I) (II) International situation In 2007, although U.S. sub-prime mortgage contribute to the liquidity crunch and confidence fluctuation problems, and international oil price and raw materials price keep rising wildly, but global economic situation is still well-advised and optimistic only under the support of strong purchasing power of emerging economies. Extension in next year will be slow down by the effect on the aggravation of sub-prime mortgage. According to Global Insight Inc., the newest forecast suggests that the global economic growth rate will decrease slightly from 3.9% in 2006 to 3.8% in 2007. Amended by real estate market, the economic growth power in American economies is predicted to be lower. Under the promotion of steady growth on private consumption expenditure and export, the economies in Japan will be kept on steady growing. Although EU is influenced by U.S. sub-prime mortgage and appreciation of Euro, but only increase fixedly the investment, lower the rate of unemployment, and intensify the consumer credit, the economies predicted to be extended steady. Although China still persist in regulation and control policy, but their export and investment is still on expanding plus the promotion on economies by the Olympics next year, predicted their growth situation will be still high. Domestic situation In 2007, the annual economic growth rate in Taiwan is 5.70%. On the external demands, although the prosperities in U.S., Japan, and EU indicated to be alleviated, but the economic performance of emerging markets, such as China, is still very powerful. The economic situations in our major trading partners are still good, so our external trade will be kept on steady situation. On the internal demands, the enhancement of private consumption expenditure should be facilitated by the alleviation of debt effect, upturn of consumer finance, and improvement of labor situation. Under the promotion on expanding and process enhancement of leading semiconductor factories and activation of real estate, small growth is predictable. Whole economy will expand moderately based on the continuous upturn of internal demands and steady growth of external demands. In the signal of economic strategy, it had been turned from red/yellow to green, indicating that Taiwan domestic market is steadily booming. However, as the subsequent development of the U.S. sub-prime mortgage crisis, the international oil and raw materials price still at its peak, and add more uncertainties on the global economy. Taiwan government should keep on observing the shifts in relevant circumstances in order to take up countermeasures in a timely manner. Looking into 2008, as impacted by the U.S. sub-prime mortgage crisis, the global economic growth is expected to be alleviated than 2007. Of emerging markets, the export share of Taiwan is expected to rise continuously, and its growth dynamics could somewhat absorb the impact for slowing import demands among industrialized countries. In internal demands, as the improvement of employment situation, distribution of stock dividends by public-traded and OCT-listed corporations, and the promotion of urban reengineering by government, private consumption expenditure and investment are expected to hold steady; as to the 1
limitation on increment of expenditure in public departments, generally, the economic growth rate is predicted to be 4.32%. II. Export trading and import/export structure Although with a weak domestic demand, Taiwan s foreign trade had performed respectable as propelled by the global economic boom, making it a major force driving Taiwan s economic growth. In 2007, Taiwan s cumulative product exports reached US$246.7 billion, or annual growth rate of 10.14%; on imports, Taiwan reported its annual volume is US$219.3 billion, or annual growth rate of 8.21%. With that, its cumulative trade surplus for the year 2007 had reached to $27.38 billion, rewriting a history high. With Taiwan s outstanding performance on trade surplus owing more than a thriving global economy and a steady market demand, the relatively weak NTD to the other major international currencies had also been one of the main reasons. Looking into 2008, as the growth of the major economies, such as U.S., EU, and Japan, is slowing down, there will be some change in the promotion of economic growth driven by foreign trading based on the circumstance that future growing space is limited. In 2007, although the growth of global economy is influenced and slowed-down by U.S. sub-prime mortgage crisis and its subsequent impacts, yet Taiwan s export structure had undergone a significant shift, with weighing on the emerging markets continuing to rise (the export share on ASEAN-5, Vietnam, India and Middle East areas had reached to 17.7%, much higher than U.S. (13.0%) and EU (10.8%)). Furthermore, we can absorb some impacts from the decreasing of some industrialized countries demands. III. Inflation of consumer price In 2007, as impacted by a rising of international oil and raw materials price, Taiwan s import price deflator and wholesale price index had rose 6.2% and 7.5%, respectively in the fourth quarter. Annual index is 5.2% and 6.46%, respectively. Export price deflator is 2.72%. On the consumer price index, with a better climate for the first seven months of this year, the vegetable and fruit prices had been holding steady, yet as impacted by the wind disasters since August, delving a severe blow to the produce output, and as the grain pries going up along the international going rates, it had driven the consumer price index to rise by 4.5%, and the annual consumer pricing index had risen by 1.80%. Looking into 2008, as the international material price hikes are expected to taper, coupled with rising tendency of NTD, some appreciation pressure can be offset and the wholesale price index is expected to be 4.2%. On the Consumer Price Index (CPI), the cost pressure of grain and industrial materials is reflected on the rise of several goods. Only the price fluctuation in service business is maintained steady, vegetable and fruit price will be come down after the recovery of supply. Predict the annual CPI is rising to 1.98%. IV. Interest rate and exchange rate (I) Exchange rate For the tendency of exchange rate between NTD and USD, the Central Bank of Taiwan s shift in its monetary policy from the late May to the early July, 2007 to put the NTD on a rising trend. From August to the mid September, as the U.S. sub-prime mortgage crisis drove 2
(II) international capital to seek shelter in the lower risk American bond market, coupled with the local residents continuing to invest in offshore investment activities, such as offshore funds and the like, it had led to a strong dollar, sending the NTD to USD exchange rates to a slight downturn. In the three months from September to November, following the U.S. Federal Reserve Commission s successive cut of the Federal Reserve interest rates and the discount rates, the NTD to USD exchange rates turned strong again, while the Central Bank of Bank s decision to raise the interest by half a percentage point in September and the end of December had further drove the NRTD to appreciate. Source data revealed that as of the end of 2007, the NTD rose to $32.44 to 1USD, up by 0.4% than at the end of September, and depreciated by 2.0% and 2.7% against the Japanese yen and euro, respectively. As international capital favors the Asian economic growth and the likelihood of a slight appreciation of the RMB in 2007, driving up the major Asian countries capital demand, short-term forecast put the NTD to be holding steady; in terms of the future exchange trend, in spite that the U.S. economy is slowing and its huge trade deficits put the USD in a weak outlook in the long run, yet in the short term, the handsome foreign reserves among the emerging Asian economic entities and the international crude earnings would put it less likely to quickly adjust the exposure to U.S. dollar-denominated assets, hence the U.S. dollar is unlikely to sag drastically, and the NTD to U.S. exchange rates will appear to be shifting toward a slightly rising trend. Interest rate For the interest rate, based on the accommodations against secured loans of the Central Bank, the interest rate hike to half a percentage point and 3.75% in September and late December 2007, respectively As to the interbank call loan rate in financial business, the related interest rates were kept at between 1.67% and 1.93% for the first half of 2007, yet starting in late May, Taiwan s Central Bank made a significant change on its monetary policy, which drove the interest rates to drastic fluctuations and held steady at around the level of 2.03% at the end of 2007. Take into account of the consumer price rising factors, annual consumer price index in 2007 is 1.80%, indicating that there is no increase on the short-term substantial basic interest rate basically. Based on the future tendency of interest rate, the capital situations in domestic financial institutions are still very loose, and the burden applied on enterprise investments is still low. There is a sign showed that the domestic consumer price is rising currently. Under the situation that the substantial interest rate is still low, there is some space for interest rate to be increased. Therefore, current monetary policy in Central Bank might have to do some slight modification. V. The Stock Market A larger fluctuation in the domestic stock market was seen in 2007. In January and February, stock prices were struck by the rebound of Asian stock markets and the crisis of Rebar and Chia-Hsin Food & Synthetic Fiber and swung more significantly. However, 7600 points could be sustained. Later, in September and October, affected by the two reductions in interest ratios by FED in order to stimulate the international stock market and by further investment by institutional investors at the bottom, Taiwan Stock Exchange Capitalization Weighted Stock Index recorded a 7-year peak at 9,810 on October 29 th.in November, the suspect over U.S.A. sub-prime crisis and the ascending international oil price not only brought the global stock markets down but also lowered the prices and the amount of the domestic stock market. The average weighted stock index in December was 8,309. The average annual weighted stock 3
index was 8,510, an increase of 1,688 points from last year. The total trading value was NTD 33.439 trillion, an increase by 38.3% from last year. The Business and Financial Profile of Taiwan Non-Life Insurance I. Prem ium Growth and the Structure In 2007, gross written premium income of Non-Life insurance in Taiwan totaled NTD 112.6 billion, a decrease by 1.33% from last year. It is the second negative growth of written premium in the history. In terms of the sales structure, Taiwan Non-Life insurance market focused on automobile insurance and fire insurance, which accounted for 49.3% and 19.4% respectively and totaled 70% of the total written premium of Non-Life insurance industry. Therefore, automobile and fire insurance were considered as a growth/ recession index for the whole Non-Life insurance industry. However, recently, the skyrocketing oil price resulted in the descending sales volume of new cars in Taiwan, which further drove down automobile insurance. Furthermore, the domestic manufacturing industry and the electronic industry have been emigrating overseas and this also caused the slide of the total premium. In fact, the yearly premium statistics indicates that the growth ratios of written premium from 2003 are 7.9% for 2003, 5.5% for 2004, 2.6% for 2005, -3.7% for 2006 and -1.33% for 2007. The insistent slide is evidently seen. In terms of insurance types, automobile insurance has accounted for over 50% of the written premium of the Non-Life insurance industry over these years. However, in 2007, the economy and the continuously rising international oil price brought the new car sales market to the new low of the past 20 years. Moreover, the reduction of the new ratios for voluntary automobile insurance made the premium of voluntary automobile insurance lower than that of last year by 5%. Although the compulsory automobile liability insurance slightly grew by 0.8%, the total automobile insurance declined by 3.1% and the share was 49.3%. The premium revenue from fire insurance in 2007 did not differ from that of 2005 or 2006. Although a slight decrease by 0.2% was seen, the decrease was due to the decreasing gross written premium of the Non-Life insurance industry. Therefore, the market share of fire insurance was increased by 0.2% because of the premium of total Non-Life insurance decreasing by 19.5%. For marine insurance, cargo insurance premium grew by 5%, or NTD 300 million, because of our thriving import/ export business. Although the premium of fishing vessel insurance was less than that of previous year by 1.4%, the total marine insurance, including cargo insurance, hull insurance and fishing vessel insurance, still grew by 3.5% and the market share also rose from 7.8% to 8.2%, an increase of 0.4%. The aviation insurance premium dropped by NTD 160 million or 10.7% from last year. The decrease basically resulted from the fewer major aviation accidents, which further drove the aviation insurance rate downward. The share also declined by 0.1%, from 1.3% for last year to 1.2%. Meanwhile, no major accidents or loss of human errors happened to domestic major constructions during 2006 and 2007. The 4
engineering insurance fell by only 0.05% or NTD 3 million from last year. The share was still 4.7%. Liability insurance is the insurance that grew the most this year. It grew by NTD 380 million, or 6.6%, from last year. The share grew from 5.1% for last year to 5.5% for this year. The second highest growth was seen on personal accident insurance, which grew by NTD 590 million or 6.4% from last year. The share rose from 8.1% for last year to 8.8% for this year. However, fidelity bond insurance is the type that declined the most. It dropped by NTD 590 million, or 37.9%. The share also plunged from 1.4% to 0.9%. Generally speaking, the public pays their most attention to the growth ratio of direct written premium. However, due to the close relationship that exists between the characteristics of the Non-Life insurance industry and reinsurance. Hence, what should be strengthened and valued more for Non-Life insurance industry is retained premium. Retained premium is defined as the premium revenue net of reinsurance. Although Non-life s overall gross direct written premium declined by 1.33% from last year, the retained premium actually received by the Non-Life insurance industry indicated an increase from NT$ 70.9 billion in 2006 to NT$ 73.5 billion in 2007, or by 3.7%. Especially, fire insurance grew from NT$ 8.8 billion in 2006 to NT$ 9.5 billion in 2007, an increase by 8%. The macro market and economy caused the Non-life s written premium kept descending annually, but it is gratifying that, since 2003, the growth ratios of retained premium of the whole Non-life insurance industry has been far exceeding those of direct written premium. In particular, Non-life insurance carriers have been enjoying great profit recently and the retention ratio has been rising these years, from 46.6% in 2001 to 65% in 2007. This rise had a positive impact on development of Taiwan Non-Life insurance industry. The Non-Life insurance industry can also stop the former impression of the public that the Non-life insurance industry only plays a role similar to a reinsurance broker. However, Taiwan is located in an area with frequent natural disasters (such as typhoons and earthquakes). As a result, while raising the retention ratio, it should pay extra attention about whether non-proportional reinsurance is able to sustain the retained loss arising from natural or tremendous disasters. As for the market share, the Non-Life insurance in Taiwan is an oligopoly market. During recent years, top five Non-life insurance companies have been replaced by one another due to highly market competition. The top five Non-life insurance carriers kept expanding their market shares from 49% of 1999 to 52% of 2005 and 55% of 2007. Their shares already exceeded half of total premium of the market and have been unceasingly growing which displayed a situation that the bigger companies are getting stronger and stronger and the minor ones will be either acquired or forced to exit the market. II. Claims and the Structure. 5
The gross insurance claim of 2007 in Taiwan totaled NTD 51.3 billion, a decrease of 7% from last year. Three major factors resulted in the decrease: First, automobile insurance, which stands the biggest share of the whole Non-Life insurance industry, is seen a claim largely decreasing by 9.4% from last year. The vehicle section of compulsory automobile liability insurance declined the most, about 20.6% from last year; second, with tightened underwriting and lower coverage of fidelity bond insurance, the claim of fidelity bond insurance in 2007 dropped by 72.9% from last year; third, because no major natural disasters and loss of human errors occurred in 2007, fire insurance and engineering insurance, compared to last year, significantly plunged by 21.6% and 46.9%. Although the whole Non-Life insurance industry did not suffer significantly in automobile insurance, other miscellaneous insurance and fire insurance, a series of vessel burning and sinking resulted in a large increase in hull insurance claim by 312.6% and Naha incident of China Airline caused a major increase in aviation insurance claims by 235.8%. Generally speaking, claims on commercial fire insurance decide whether Non-Life insurance companies will enjoy profit or suffer from the loss for the year. The plants or office buildings of IT companies, in particular, easily suffered a loss of trillions of NT dollars from each fire. Fortunately, such major claim was not seen during 2007. In 2006, no major claim on fire insurance occurred. Thus, the share of fire insurance claim only accounted for 8.6% and 7.3% of claims of the whole Non-Life insurance for 2006 and 2007. The net loss ratio in the whole industry for 2007 was 49%, a decrease of 4% from 53% of 2006. Such decrease resulted mainly from a decrease, about 4.6%, in the net loss ratio of automobile insurance, which accounts for the biggest share in Non-Life insurance. Among all types of insurance, compulsory automobile liability insurance, cargo insurance, liability insurance, fidelity bond insurance, personal accident insurance and other miscellaneous insurance enjoyed better net loss ratio than those in 2006. Fire insurance, hull insurance and aviation insurance suffered from worse net loss ratio than those in 2006 while general automobile insurance, fishing vessel insurance and engineering insurance remained level. Basically, while excluding expense ratios and special reserve, a low direct claims ratio means this business still has underwriting profit; a high direct claim ratio and a low retention claim ratio signify possibility to gain underwriting profit by well-arranged reinsurance. However, high direct claim ratio and high retention loss ratio may cause the great damage to the underwriting profit of the company. The net loss ratio for 2007 improved about 4%. Although soliciting expense was raised by about 3% compared to last year, operation and management expense ratio dropped by about 2% from last year, which made the industry combined ratio of 2007 around 91%, a decrease of 4% from 2006. III. Finance and Capital Utilization 6
(I) (II) The Asset/ Liability Structure Total asset of the Non-Life insurance industry for 2007 valued NTD 209.4 billion. Securities top the asset allocation with 46%, followed by cash and bank savings with 20%, and foreign investment with 16%. The liability and shareholders equity consists of 31.7% as shareholders equity, 11.8% as current liability, 1.34% as long-term liability, 54.5% as operation and liability allowance and 0.64% as other liabilities. The average debt ratio of the Non-Life insurance stands around 68%. Generally speaking, a high debt ratio mirrors low liquidation capability of a Non-Life insurance carrier. However, if the risk based capital ratio (RBC ratio) is also low, the Non-Life insurance carrier may not be able to shoulder the risk and will be facing pressure from capital increase. On the contrary, if the debt ratio is low, suspect for capital surplus or under utilization of capital may loom. If return on shareholders equity is also low, the Non-Life insurance carrier will have to face the pressure its shareholders. The Profit and Loss Structure In profit and loss, net profit before tax of the whole Non-Life insurance industry totaled NTD 5.8 billion, an increase of 41.1% from NTD 4.1 billion of 2006. The operation income of 2007 was NTD 7.05 billion or 3.2% less than 2006. The operation cost was also NTD 6.41 billion or 3.4% less than 2006. Although the operation income in 2007 was lower than 2006, depending on the lower operation cost, the lower overall operation expense, by about NTD 910 million (from NTD 22.8 billion in 2006 to NTD 21.9 billion in 2007), and the non-operating loss that was NTD 1.41 billion less than 2006 still brought the industry net profit before tax that was NTD 1.69 billion more than 2006. (III) Capital Utilization In capital utilization, total amount of capital investment in Taiwan Non-Life insurance industry valued NTD 173.1 billion. The capital of Taiwan Non-Life insurance industry in 2007 was mainly utilized for, by sequence, savings (20% of total utilized capital), stocks (16.2% of total utilized capital), foreign investment (16.2% of total utilized capital), bonds & savings voucher (13% of total utilized capital) and real estate investment (12.4% of total utilized capital). Overall, net yield of total utilized capital in Taiwan Non-Life insurance industry for 2007 stayed around 4.2%. Historical capital utilization of the Non-Life insurance industry indicates that, since 2004, securities and bank savings have been lessening. The lessened section was converted into foreign investment. Thus the capital utilization of the Non-Life insurance industry has grown more diverse and international. The suitability of capital utilization and responding capability on investment decisions will affect the investment profit of the Non-Life insurance industry. If competent investment 7
teams in the Non-Life insurance industry can be formed to exercise effect risk-averse tools, it would be help effective capital utilization and acquisition of better investment profit. Prospect Year 2007, for the Non-Life insurance market in Taiwan, was a year not so good but not so bad, either. The unfavorable factors arose from external economic environment. In addition to the global recession triggered by the U.S. sub-prime mortgage crisis, the skyrocketing international oil prices struck the sales volume of the new car market, which is also one of major factors for the shrinking of Non-Life insurance market. Fortunately, no major claims occurred in Taiwan during 2007 so the overall loss ratio stayed fine. Overall, although written premium income is less than last year, claim also descends. Therefore, 2007 was not a fruitful year for the Non-Life insurance industry but profitability was also visible. While 50% of premium income by Taiwan Non-Life insurance industry each year come from automobile insurance, what influences automobile insurance the most is the sales volume of new cars. However, in the society with high prices of commodities and high oil prices but low income, the desire of Taiwanese to replace cars is less and less. The sales volume of new cars descends more and more. Automobile insurance in Taiwan has been thus declining. More terribly, international crude oil pries might never hit the bottom, which makes the car industry unable to rebound in the short run. With the possible gap for automobile insurance in the future, Non-Life insurance carriers in Taiwan must not only strengthen the professionalism of underwriting staff to select quality business and minimize the loss ratio, more importantly, they should advance other insurance types, develop new products and create new markets in order to minimize the recession possibility of automobile insurance and, through omni-bearing insurances managing strategies to minimize the operational risks of the Non-Life insurance industry. Compared to the ratio of having insurance coverage of personal line in Taiwan Non-Life insurance industry, earthquake insurance, with 25% for the ratio of having insurance coverage, is currently less participated in huge growth potential is still available. Apparently Taiwanese still hopes for a narrow squeak on the earthquake insurance. In fact, Taiwan is located on the seismic belt between Eurasian Plate and Philippine Sea Plate. Taiwanese should save the earthquake insurance as the backup. Therefore, the development of the earthquake insurance market lies in propaganda from the authority, but also the business expansion of the Non-Life insurance carriers. Only the close cooperation between the two can raise crisis awareness of Taiwanese so as to nip the loss in the bud. Recently, few calamities have been seen in Taiwan. Although the loss ratio is satisfactory and the underwriting profit has been high, the weak economy, low interest ratios and mounting prices over these years have brought the written premium income of the industry into the continuous negative growth. To deal with the shrinking business, the Non-Life insurance industry can well manage one-year health insurance in 2008, which is expected to possibly shed a glean hope for the industry. Also, the industry, government and 8
academy should keep striving for new business developing strategies in hope of other business opportunities to perfect the capital utilizing effect of the Non-Life insurance industry. 9