Chapter 5 Conclusions and Recommendations
5.1 Conclusions
Under the current local labor insurance system, the annuity insurance in commercial insurance can provide the functions of financial planning, tax saving and retirement planning for local people, which can also make up for the deficiency in labor insurance, labor pension and national insurance. To explore the differences between varying systems, the general labor insurance system shall be observed from the essence of social insurance. The main differences of social insurance from commercial insurance mainly cover the following sectors:
1. Social insurance is mandatory and entitled to provide protection by law.
2. In addition to taking the insured’s interests into account, the scope of social insurance coverage should also concurrently consider public interests. Hence, mandatory standards shall be set up to include the disadvantaged workers.
3. The financial source is partially from insurance fees paid by the insured, partially from employers who should also contribute some of the fees, e.g. national health insurance, labor insurance or labor occupational disaster insurance, etc.
Therefore, social insurance mainly provides protection for wage earners in case of illnesses, occupational disasters, disability and senility, etc. Since wage earners are relatively vulnerable to the aforesaid risks, if they lose their working ability—the only way for them to make a living, social insurance, such as labor insurance’s old-age benefits, shall be used to ensure their financial income. In other words, social
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insurance is between commercial insurance and social assistance. General commercial insurance emphasizes the connection between premium and benefit and the amount of its premium is determined according to the level of the risk, whereas social assistance puts more focus on collective solidarity to help the underprivileged through government tax imposition. As a whole, it can only provide the basic coverage for the insured.
Other than compiling the literature data of related insurance systems, the study also interviewed all walks of life in society, covering business owners, dentists, high school teachers, engineers, and auto maintenance mechanics(blue collars), etc., and organized the interview results, with which some important issues as below have been found:
1. The labor insurance system has yet to be fully integrated, which shall be solved by strengthening and activating the current insurance operation mechanism.
Currently, the premium rates of Taiwan’s annuity insurance are still rather low.
To compound matters, due to rapid increase in aged population, more and more old-age benefits have been applied, which results in serious financial imbalance.
Some news reports even revealed possible bankruptcy of the labor insurance fund.
Under such circumstances, our government shall reinforce publicities to its people by explaining its policy implementation, enhance transparency of its policy figures and elaborate on the details. The government may use specific cases to promote the concept of retirement adequacy and pension income replacement to respective ranks of income receivers. In addition, due to local declining birth rates, aging people, early retirement and longer life expectancy, the long-life risk related trends are increasingly obvious. It is estimated that, by 2060, one old person will be required to be supported by 1.3 working persons. Furthermore, due to the lack of cognition of labor insurance,
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labor pension and national insurance systems from the general public, commercial annuity insurance has risen to make up for the deficiency. The “partial lodgment”
adopted by the government’s current annuity system is used mainly to encourage the mechanism where the premiums of old-age benefits received by retirement personnel are to be partially paid by individuals during their working period. Other than the insurance being paid by the current working population, commercial insurance can also be used to alleviate the possible retirement insurance problem resulting from massive retirement. In so doing, the existing insurance operation mechanism can be more activated which will help resolve the resulting problem.
2. Under the current labor insurance system, commercial insurance turns out to be important supplementary insurance, in which different aspects of consideration for varying levels of incomes will be required.
According to the interview results, investment in commercial insurance may vary with people of different incomes, in which those who have higher incomes may purchase more comprehensive medical care, such as general medical care insurance, critical injury insurance, cancer insurance, long-term care insurance and accident insurance, in their commercial insurance. In addition, they may also add the policy with financial planning and tax saving functions, such as annuity saving insurance, foreign currency insurance and investment linked insurance, to make their insurance more intact. As for those whose income is on the average scale, they generally may only cover the more important medical care insurance or financial planning insurance according to their financial ability, in which they often apply the insurance triangle concept by covering accident insurance, medical care insurance, and investment linked (including saving) insurance to get the balance. For those whose income is on the lower end of the scale, they have to consider their limited income, so their insurance mainly covers the basic medical care, and they are in a weaker position to
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deploy their financial planning insurance. As such, for the groups varying in incomes, commercial insurance plays different roles and functions. Generally speaking, commercial insurance policy holders always hope to seek for more integrated or diversified coverage or other financial planning benefits under the government’s labor insurance system. Under such circumstances, the following kinds of commercial insurance will become the mainstream in the future: interest-sensitive insurance, investment-linked insurance, annuity insurance, or medically related long-term care insurance, general medical care insurance or other special kinds of insurance, such as the Easy 360 Degree Realization of Retirement Dream Project launched by a local insurer targeting the retirement group, which flexibly combines varying kinds of insurance based on different attributes by providing appreciation feedback fund and varying currencies’ investment to counter the aforesaid inflation, and offering transfer of the maturity benefit to annuity to eliminate long-life related risks, etc. All of these will be the future development directions for commercial insurance.
3. Relevant complementary measures for the social insurance system shall be developed according to different levels of income earners
As mentioned above, while there are trends of aging, declining birth rates, compounding inflation, unlikely salary raise and the overall stagnant economy, the financial burden of the middle and lower income workers will get heavier and heavier.
For those who are in different income levels, factors affecting their pursuit for high quality life and living security may vary. As a result, their budgets and integrity for commercial insurance may also vary. Nevertheless, in terms of whole society stability, the groups with low income or low income replacement rates are those who generally lack financial planning and medical care protection, so they are more dependent on government’s labor insurance system in order to elevate their post-retirement living quality and medical care. It recommends that, for the labor insurance reform, relevant
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complementary measures be developed according to different levels of incomes, so as to build a more integrated social security protection system.
4. The labor self-selection platform in the draft of amendment to the new labor pension system shall cover complementary measures.
Currently, the government is working on amending its labor insurance system by referring to the labor insurance development in the countries worldwide, such as the U.S., Hong Kong and Macao, etc., in the hope of opening the self-selection funds to the general public, so as to increase the insured’s investment amount in the labor pension and meet the needs in response to the overall development trend. However, the study found that it would be too complicated for the general public to understand the goodwill of the government according to the added self-selection items including two types of self-selection funds and annuity, which have further divided into aggressive, moderate, conservative and target date types for the self-selection funds, and guarantee as well as non-guarantee types for the annuity. Hence, when setting up policies, it recommends that the relevant government agencies simultaneously put forth financial planning education plans to introduce latest labor insurance system’s operation status, income replacement ratios, correct financial planning concept, and promote the concept of long-term care, so the government’s new policy directions can have expected effects, and avoid public’s doubts about their additional worries or financial burdens resulting from their ignorance of the launched national insurance.
Moreover, as put forward by Chen Shu-Huei, Chen Yu-Lung (2013), the mechanism releasing self-selection investment has been an important development trend for the major countries in the world adopting the defined contribution plan. With the self-selection investment mechanism, both employees and employers can have the right to determine their investment, and use the self-selection platform to manage the pension funds which will facilitate labor’s retirement rights and interests, for instance,
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the US’s 401k pension plan and Hong Kong’s Mandatory Provident Fund Plan, which are mainly based on the employer and employee’s self-selection platform scheme and annuity insurance’s pension management system. The study results also indicate that government’s pension funds are all lower than the funds on the commercial annuity insurance platform. On the other hand, when the investment period is shorter, the performance of life cycle ratio allocation, aggressive, moderate and conservative types does not show any significant variance. However, the investment return will improve as the investment period becomes lower. Hence, if, in the future, the government could reinforce its promotion, aggressively open the labor pension self-selection platform and increase tax shelter to elevate worker’s self-allocation ratio, workers are recommended to do self-allocation and lodgment, so OECD’s income replacement ratio could be achieved through long-term investment. Also, as limited by statutory laws and regulations, the average income of corporate annuity insurance shall not be less than bank’s 2-year term deposit interest rate, in which the deficit shall be made up by the insurance company. Furthermore, corporate annuity insurance shall not be processed until adopted by a majority of 200 insured members. As a result, no annuity insurance businesses have been launched in the insurance market to this day since the new labor pension system was launched. In the future, it is hoped that the government will relax its laws and regulations, so the commercial insurance industry may design appropriate annuity products in accordance with labor pension fund’s self-selection platform to meet the market demand. When the fund platform can provide diversified and appropriate products for selection and offer selectable guarantee income, local people’s retirement life will then be more integrated.
5. Joint action of government, enterprises and private institutional entities to promote integration of citizens’ retirement life planning
Latest local insurance development, covering opening of new labor pension
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system’s self-selection platform and promotion of long-term care insurance act, shows that local policies shall be adjusted to respond to overall global development trends and the circumstance where whole society is aging and birth rates are declining. As such, the study suggests that, in the future, the government collaborate with related institutional entities and enterprises to reinforce the integrity of retirement insurance, e.g. in addition to combining related institutional entities to lay the ground for the aforesaid fundamental insurance and financial planning education, the public’s retirement financial requirements shall be further analyzed with the concept of the government big data, followed by setting up each citizen’s monthly self-contribution amount and the goal of the yield in accordance with the replacement ratio, so as to gain people’s confidence. Additionally, the government shall encourage general enterprises to include annuity insurance as one of their personnel welfare policies. In so doing, the enterprise per se can be more flexible to control their expenditure and cost, help their personnel equipped with the financial planning concept and increase the contribution amount. On the other hand, by simultaneously utilizing related policy instruments and facilitating legislation to include commercial insurance or other multi-financial instruments in the labor pension self-selection platform, the financial insurance market will be more activated. In the future, if the increase of tax exemption amount for the purchase of commercial insurance can be applied according to the draft of the long-term care insurance purchase system, local people will be more interested in preparing their own pension. Also, the insurance industry shall extend the premium payment years for interest-sensitive policies and adopt the measure not allowing short-term surrender. The main feature of interest-sensitive policies is that the insurer may monthly adjust its “declared interest rate,” in which a policy holder shall pay their premium in “a single lump sum” in the beginning, and, after deducing related expenses, the policy value reserve of the insurance product shall be calculated
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according to the declared interest rate applicable to the beginning of the policy year.
Taking the interest-sensitive annuity currently popular in the market as the example, the fig. 6 below shows the product structure of the interest-sensitive policy.
Figure 6 Structure of Interest Rate Sensitivity Policies Data source: Taipei Fubon Bank
https://ebank.taipeifubon.com.tw/ibank/html/pages/jsp/LifeAll/LifeAll_10.jsp
After expiration of the period accumulating the policy value reserve for an interest-sensitive policy, the policy holder may freely choose if going into the annuity benefits. Given that the policy value reserve is calculated according to the declared interest rate during the accumulation period, this kind of insurance shall be more suited to those moderate customers who plan the capital required for their long-term retirement life. When it comes to the annuity benefit period, the insurance company will annually pay the annuity benefit as long as the insured is alive. Generally speaking, the longer the insured live, the more annuity benefit they will receive.
Those who live in the modern world where medical care and technology have daily improved may make good use of the interest-sensitive annuity insurance product to plan their retirement life, so as to eliminate the risk of deficiency in living cost in their retirement life. However, in recent years, some insurance companies launched the
“appreciation feedback fund” strategy for their interest rate sensitivity insurance products, in which the difference between declared interest rate and policy interest
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rate would be distributed to the policy holder as interest. Some insurance policies even offered monthly interest distribution, which greatly appealed to high-asset policy holders. When drawing a large amount of short-term capital, the insurers are possible to encounter liquidity problem if the insured surrender the insurance at any time. As such, in August 2014, the Insurance Bureau of Financial Supervisory Commission promulgated two measures including not offering appreciation feedback in the first 10 years of the interest-sensitive life insurance policy, in which there would be no cash interest, the amount could not be put in the account for yielding interest and the policy holder could only choose to increase purchase of the guarantee amount or offset the premium payment, whereas the surrender fee should be charged for at least six years, so the insurance would not turn out to be the short-term saving insurance.
Furthermore, with the “policy conversion act” launched by Financial Supervisory Commission in August 2014, those who hold the life insurance policy may convert the life insurance into health insurance (including long-term care insurance) or deferred annuity insurance under the principle not to increase the premium amount. As estimated by the life insurance trade, the market could potentially generate at least three to four million cases of policies, in which about 1.5 million people will benefit. When requesting the insurance company to do the conversion, the policy holder shall be entitled to return to the old policy within three years. The purpose of it is that, after the policy is converted, the insurance will have the annuity benefit function, which will provide the insured with the position to use the insurance amount. In reality, the life insurance company will first calculate post-conversion policy value according to the policy holder’s age, and health status, followed by comparing the calculated value with the value of the old policy and returning the difference or having the difference made up. With the conversion function, the policy holder may split their policy, in which, in addition to the original
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life insurance policy, a health insurance policy can be added but the amount of the original life insurance policy will be reduced. In view of current overall commercial insurance development trends, the government policy orientation has also been heading for diversification and flexibility, so those survivors who actually make the premium payment can make good use of their risk planning for the rest of their life, and will be more willing to put more focus on their insurance financial planning.
The main purpose of extending premium payment years through institution of related policies is for the insured to be able to plan their retirement life with
commercial insurance. To respond to the function of life insurance policies, by the end of 2014, commercial insurance companies successively promoted the activation of policies (functional contract conversion) to provide the middle-aged and senior insured who are qualified for the activation of policies with an opportunity to convert their insurance products and to assist them to plan perfect retirement life. However, the conversion of policies has aroused criticism from the public as over the years, Insurance Bureau, Financial Supervisory Commission has been criticizing life insurance companies for selling merely savings insurance, leading to low average insurance coverage for death for Taiwanese. On the premise, how can the insured have sufficient insurance coverage for conversion? Nevertheless, some people think that the purpose of policy conversion is to solve the problem of negative spread of policies of life insurance companies, especially “old companies,” and that people eventually have to pay for the negative spread. Therefore, before you choose to convert your policies, it is better to evaluate your policies first. Insurance products have to be viewed and adjusted in different life stages to effectively elaborate their risk transfer function.In recent years, due to aging population and declining birth rate in Taiwan, I, being a supervisor of commercial insurance, suggest that the insured
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examine their policies based on their retirement planning and find out their needs in different life stages, for example, whether your savings and asset allocation can meet the demand of your retirement life. If the answer is no, life insurance for your family
examine their policies based on their retirement planning and find out their needs in different life stages, for example, whether your savings and asset allocation can meet the demand of your retirement life. If the answer is no, life insurance for your family