Research Design

In this study, we first discuss the key characteristics of both IFRS 9 and IFRS 17.

Secondly, we analyze the corresponding supervision measures and strategies taken by the FSC. Through conducting qualitative interviews with two representative industry players, we further explore the impact of IFRS 9 and IFRS 17 on domesticlife insurance industry after each standard becomes effective.

Moreover, although IFRS 17 has not yet been implemented, it is estimated that the implementation will have a great impact on the life insurance industry. Thus we employ quantitative simulation analysis to fully investigate the dual impact of both standards on Taiwan’s life insurance companies when implementing simultaneously.

In the quantitative analysis, at the given composition of liabilities and of a company’s objective function, we simulate assets and liabilities, and try to find the optimal combination and suitable accounting classification of investment assets of a life insurance company.

First we assume that life insurance company A will sell whole life insurance policies to 10,000 35-year-old female policyholders at the beginning of each year in the next thre years, which means 30,000 policies in three years. The insured amount of each policy is NT$1 million, and the premium is paid over a 20-year period and collected at the beginning of each year. When an insured person dies, company A will pay the insurance money at the end of the year.

In terms of capital investment, we assume that life insurance company A will invest funds that received from premiums in stocks and bonds, and the investment strategy is to buy and hold. The stock positions are in EFF of Taiwan Stock Exchange Weighted Index (TWSE), and the bond positions are evenly distributed between zero-coupon government bonds with maturities of 1 to 30 years. According to IFRS 9, bond investment can be classified into FVTPL, FVOCI and AC; stock investment can be classified into FVTPL and FVOCI. Therefore, company A’s overall investment positions will have 2 types and 5 accounting classifications of assets.

3. Results

Our research shows that the FSC has opted for industrial self-discipline, external cooperation and corporate governance.Overall, thesestrategies can indeed help reduce

the severity of the impact and achieve smooth integration. We also find that after implementation of IFRS 9, volatility of both the life insurance industry’s profits and losses and owners’ equity has risen. And the willingness of the industry to hold stocks offering high dividends is also up, which has made recognition of bond benefits more flexible.

At present, life insurance companies generally invest in a large number of bonds in non-active markets to obtain fixed returns. Therefore, the two interviewed life insurance companies believe that most of these investment tools can pass the contract cash flow test and conform to the business model; these investments are also likely to be classified as “Amortised Cost” (AC). Even if changes in interest rates will affect the value of these investments, because based on the new standard, most of the existing positions can be classified as “AC,” the impact on profit and loss fluctuations is relatively limited.

On the other hand, IFRS 17 may have two possible impacts on profit and loss of life insurers. First, it should become necessary to re-evaluate the future cash flows, discount rate, risk adjustment and contractual service margin. The results of the re-evaluation will reflect immediately in current income statements, which leads to the increase of the range of changes in profit and loss. Second, since within the contract boundary, all premiums and claims are regarded as future cash flows of insurance contract liabilities rather than profit and loss; the profit and loss will decrease. Third, to assess insurance contract liabilities, life insurance companies should also greatly expand the establishment of actuarial and financial models. There are also certain difficulties when dealing with valuation of in-force polices on transition date in practice. For example, the compulsory dividend payment of participating policies cannot be calculated retrospectively. Last, for insurance companies, the content and structure that can be used to calculate insurance contract liabilities based on investment products and portfolios and business units will undergo major changes.

Therefore, insurance companies will have to modify or substantially update their financial consolidations and reporting systems.

Our results of quantitative simulation analysis show that after solving the optimal asset allocation and classification, about 90% of the FVOCI should be in bonds and 10%

in stocks. This configuration will bring about 5% return on owners’ equity and a standard deviation of 16%, corresponding to a 0.06% probability of insolvency. Since the optimized result is not allocated to FVTPL, the net income and its changes are very small. But the key to this seemingly reasonable risk lies in the extremely high ratio of owners’ equity to total assets (over 90%). However, it is impossible to achieve such a high proportion under current situation of the industry. Thus no matter how funds are allocated to different

classes of assets and the accounting classifications, the life insurance companies will not be able to meet the long-term goal of maintaining a low probability of bankruptcy.

4. Implications

To sum up the above findings, we believe that the life insurance companies should take a cautious approach while setting the interest rate model for measuring the fair value of liabilities.Because as long as the resulting interest rate curve has some changes, fair value of liabilities may change greatly. To abosorb the shock, we offer the following two suggestions. First, change the way the yield curve is constructed. Second, change the nature of life insurance products. That is, requiring life insurance companies reduces long-term interest rate guarantees.

5. Contributions

To the best of our knowledge, this is the first study to analyze the possible impacts of IFRS 9 and IFRS 17 on life insurance industry in Taiwan. Through reviewing regulatory actions and interviewing domestic insurers, we offer practicable suggestions which are in conformity with the two new standards. Furthermore, our quantitative analysis not only fill the gap of relevant literature, but also provide domestic life insurers and the FSC with feasible soulutions to adapt smoothly to IFRS 17 in the future.

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Author Biography