Commercial Insurance

In terms of types of insurance, they can basically be divided into social insurance and commercial insurance, with the categorization shown in Figure 3.

Figure 3 Types of Insurance – Social Insurance and Commercial Insurance Source: Related literature collated by the study

There are differences in commercial insurance and social insurances in terms of content. If commercial insurance and social assistance are at both extremes, then social insurance can be considered the spectrum in between them (Bodenheimer &

Grumbach, 1992), as shown in Fig. 4. Commercial insurance emphasizes the relevance between the amount of the premium and the size of the payment coverage, and the level of the risk dictates the amount of the premium, while the guiding spirit of social assistance is not being able to stand seeing someone suffer. Hence the strength of the community is used to aid and assist the weak through taxation. There is really no relationship between payment and paying out, so to speak. Social insurance lies somewhere in the middle; its principle is that users of this service pay their own way. However, it abandons the risk calculation portion of premium payments. In

Life insurance, health insurance, and accident insurance

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oneself, extra help will be from others. Aside from being mandatory, the term “social”

also forms an important facet of social insurance. Users of this service pay their way while being required to do so at the same time, which is a major feature of social insurance. Consequently, it is the middle ground situated between commercial insurance and social assistance.

Figure 4 Conceptual Map of Insurance Source: Yang Ching-li (2000)

Commercial insurance is divided into two major categories: personal insurance and asset insurance, with the descriptions as follows:

1. Personal insurance: primarily underwrites personal risks such as death, disability and disease, as well as old-age benefits.

2. Asset insurances: primarily underwrites non-personal risks such as buildings, cars, and other assets.

In terms of the status of the commercial insurance market, CTW Securities (2010) once pointed out that the Asia-Pacific market is the largest insurance market in the world, with last year’s premium totaling US$358 billion, accounting for 15.4% of the total global premium payments. It surmised that the reasons are due to the strong and rapid economic growth in the region, higher rate of savings, and urbanization. This is

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also why insurance companies see better performance in the sales figures for accident and medical, retirement and old-age pension products. Taiwan is the region’s fourth largest and the world tenth largest market for commercial insurance; in 2009, premium payments totaled US$52.2 billion. From 2004 to 2009, life insurance premiums grew by 9.4% compounded annually. Moreover, market penetration rate is 13.8%, with average individual premium amounting to US$2,250. This shows that Taiwan is an extremely developed market for commercial insurance products; at the same time, it also indicates that Taiwan’s citizens have a lot of demands in that area.

Lin Wan-yi (2013) pointed out that usually the ratio between payment received after retirement and the person’s income before retirement, which is called income replacement rate may serve as indicator to measure the adequacy of post retirement economic sources. Often, pension insurance will have a corresponding income related payment, primarily because annuity insurance is a form of quality of life guarantee in retirement or old age. If one is highly paid during his or her time in the workplace, and pays high insurance premiums, the person will receive more money after retirement or at old age. In addition, annuity insurance payment can be seen as a form of periodic salary concept. The employee puts aside a part of his salary as premium and gets in back in increments after retirement. Of course, this includes risk distribution and investment benefits. Liao Tsen-wei (2006) pointed out that income replacement rate is the ratio of money received after retirement accounts to money received before retirement in the form of salary. This indicator is used to measure whether the individual will be able to maintain pre-retirement living standards after leaving the workplace. Often income replacement rate will differ according to professions; changes can also be due to difference in pre-retirement salary standards.

The Examination Yuan pointed out that higher income replacement rate indicates that living standards during retirement are higher. Usually because retirees do not have the

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need to save up for things or support their offspring, they are able to maintain the quality of life they had before retirement. The income replacement rate of regular households in Europe and the US is between 60% and 70%. If, for example, pre-retirement monthly salary was NT$100,000, monthly pension can amount to about NT$70,000, enabling the person to maintain living standards he had while working. Currently, combining labor insurance old age benefits and labor pension, the income replacement rate of Taiwan’s citizens is 45%.

Cheng Wei-min et al (2011) pointed out that several factors affect retirement finances, including “personal and system risks” and “risk affecting retirement asset value.” The former describes the risks faced by retirees in accumulating retirement funds as well as after retirement. The latter looks at the risks affecting the pension.

Risks affecting retirement asset value mainly includes health and long life, inflation, investment, gender, marital status and number of offspring, pre-retirement income, and other unpredictable risks. Among these, inflation is what primarily affects the actual purchasing power of the currency. For retirees, some of their expenditures are higher than those for non-retirees, such as medical care expenditures. In addition, investment risks may be divided into systemic and non-systemic. The former includes factors affected by political, economic, and social environments, which cannot be eliminated by spreading the investment. The latter refers to the risks involving the corporate investment target, such as operations and management, financial problems, etc.; spreading out the investment may help reduce these risks. Consequently, systemic risks in retirement are more severely impacted by the overall economy.

Moreover, for those with high monthly salary, the degree of financial adequacy is higher. Post-retirement income can be derived from (1) statutory pension, (2) savings, and (3) other income (such as those from interest, rental fees, or given by offspring).

Other unpredictable risks include divorce, death of spouse, or medical expenses,

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which account for the biggest part of the expenditure, especially medical care for the spouse or for long-term care. These expenditures may greatly reduce the amount of post-retirement monies the either one’s spouse is able to spend. Furthermore, in the study conducted by Reno & Lavery (2007), post-retirement adequacy standards should be based on the actual amount of expenditure. If the pre-retirement income has already reached the basic expenditure required by society at the time, the basic needs after retirement should exceed pre-retirement income standards. In other words, for low-income or poor workers, income replacement rate after retirement should reach more than 100%.

Comparing relevant international demands on old age security ad income replacement rate, we can see that Taiwan has a long way to go. In addition, using the concept presented by Chen Jie-chi, General Manager for Taiwan of International SOS, average insurance coverage rate in Taiwan is more than 200%; this means that each person has at least two policies. This indicates that the general public in Taiwan is very concerned about enhancement of living standards as well as planning financially for retirement and medical care. Many satisfy these needs by purchasing relevant commercial insurance; its supplementary function and the customers’ additional expectations are what make it attractive.

What is even more enticing about commercial insurance is its guarantee of economic security in old age as well as helping in financial planning and tax avoidance. In terms of economic security, products include savings policies, annuity policies, and investment policies. Customers can purchase commercial insurance products that offer interest rates higher than bank rates for long-term or short-term investments. Consequently insurance policies also serve as major tools most people use to force themselves to save. Moreover, Insurance Today (2013) pointed out the tax avoidance function of insurance policies. For example, annual deductions, as well as

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inheritance tax exemptions for designated beneficiaries of personal death insurance, all these inextricably link insurance and tax savings. In addition, for example, investment insurance policies provide investment fund platforms and tax avoidance function. For policies, which came to effect after July 2010, when death benefits fall within the scope of ratio designated for the policy account value, they are exempted from inheritance taxation. Furthermore, the special feature of life insurance combined with investment and financial planning makes it why insurance companies consider this type of product very important and saleable.

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