Press Release
TW-ICS Phase 3 Localization and Transitional Measures, and Differentiated Management Measures for Insurance Enterprises
2024-04-16
To assist domestic insurance enterprises to smoothly adopt the new generation solvency system for insurance industry (TW-ICS) by 2026 and encourage them to continuously improve their financial and business development and asset and liability management capabilities, the Financial Supervisory Commission (“FSC”), after considering international standards, the practices of neighboring countries, and the current status of the domestic insurance market, and communicating with insurance enterprises, has drafted phase 3 localization and transitional measures for the adoption of TW-ICS by insurance enterprises as well as differentiated management measures to help them gradually align with international standards, thereby enhancing their resilience in sustainable operations, strengthening the protection of policyholders’ interests, and promoting the stable development of financial market.
I. Phase 3 localization and transitional measures:
(I) Localization measure – including callable bonds in eligible assets: Callable bonds make up a certain percentage in the funds allocation of insurance enterprises in Taiwan. However according to Insurance Capital Standard (ICS) 2.0 published by the International Association of Insurance Supervisors (IAIS), callable bonds are not considered fixed-income assets in nature for they may be redeemed prior to the maturity date and hence are not eligible assets. Such interpretation is adverse to the asset/liability management of domestic insurance enterprises. Considering that the cash flow of callable bond generated prior to its nearest redemption date has fixed-income characteristics and for the purpose of mitigating the impact of ICS 2.0 adoption on insurers and maintaining the stability of bond market, the FSC, in reference to international practices, prescribes that for callable bonds (excluding structured notes) held by insurers prior to December 31, 2023, their cash flow (interest) generated prior to the nearest redemption date may be included in eligible assets; for callable bonds acquired in 2024 and thereafter, the ICS provisions shall apply.
(II) Transitional measure – 15-year transition period for emerging risks: In comparison with the prevailing RBC system, emerging risks added in TW-ICS pose a big challenge to our insurance enterprises. To assist insurers in implementing TW-ICS in a gradual and orderly fashion, and considering insurers’ capability, international practices and industry suggestions, the FSC grants insurance enterprises a 15-year phase-in period (linear increment from 0% to 100%) for them to incorporate emerging risks (including long life, policy surrender, expenses and catastrophe risks) to facilitate a gradual adoption.
II. Differentiated Incentives: Embracing the spirit of “helping those who help themselves”, the FSC adds the support measure of “increasing insurer’s asset allocation flexibility” and an incentive measure of “decreasing risk factor” for insurers who endeavor in “capital increase” and “contractual service margin” (CSM) without increasing their foreign investment limit as described below to encourage insurance enterprises to implement TW-ICS as soon as possible:
(I) Granting the right to choose incentive based on the percentage of aggregate capital increase to risk-based capital:
1. Eligible for the right to choose incentive:
(1) Calculation of aggregate capital increase: Capital increase is calculated on a net basis, and the loss-absorbing capacity of all types of capital is taken into consideration. Hence a weight of 100%, 90% and 80% is assigned to Tier 1 Unlimited (T1U), Tier 1 Limited (T1L) and Tier 2 (T2) (i.e. aggregate capital increase = T1U*100%+T1L*90%+T2*80%).
(2) First-time application for the right to choose incentive: The FSC has required insurance enterprises to conduct valuation of fair value of liabilities arising from effective contracts since 2012, and fully adopt IFRSs from 2013 to steer insurance enterprises to gradually improve their asset and liability management. The FSC also announced in 2020 the adoption of IFRS17 and TW-ICS in 2026. In order to factor in the efforts made by each insurer in the adoption of IFRS 17 and TW-ICS, insurance enterprises are granted the right to choose incentive one to four times based on their amount of aggregate capital increase from 2013 up to the time of first-time application as a percentage of their risk-based capital.
(3) Subsequent applications for the right to choose incentive: After the first-time application, when the newly added aggregate amount of capital increase reaches 10% of risk-based capital, one-time right to choose incentive is granted.
2. Insurance enterprises may apply for the following incentives based on the number of times they have acquired the right to choose incentive:
(1) The support measure of increasing insurer’s asset allocation flexibility (which has been included in the notice of draft of “Regulations Governing Foreign Investments by Insurance Companies” dated April 11, 2024):
A. Subordinated financial debentures with foreign credit rating of BBB or BBB-: Investment limit measured based on “approved foreign investment limit” or “percentage of owners’ equity” is increased by 1% or 6% respectively, and the application is limited to 3 times.
B. Corporate bonds with foreign credit rating of BBB or BBB-: Investment limit measured based on “approved foreign investment limit” or “percentage of owners’ equity” is increased by 1% or 6% respectively, and the application is limited to 3 times.
C. Foreign private equity funds and hedge funds: Investment limit is increased by 0.5% and the application is limited to 6 times.
(2) Reducing risk factor: The risk factor of investing in foreign “private equity funds and hedge funds” may be calculated at 90%. Each application is good for 5 years and there is no limit on the number of applications.
(II) Eligible for incentive based on contractual service margin (CSM) during the transition period:
1. Incentive criteria: The FSC will examine the attainment of CSM estimate submitted by each insurer every year. When the attainment rate is 100%, the insurer can apply for the incentive of policy-based infrastructure risk factor; when the attainment rate is 105%, the insurer may also apply for the additional incentive of equity risk factor, in addition to the policy-based infrastructure incentive.
2. When an insurer that has been granted the incentive calculates its capital adequacy ratio the following year, it may maintain prior year’s risk factor for policy-based infrastructure and equity positions.
According to the FSC, the same as the localization and transitional measures for market risk – equity, real estate and infrastructure announced by the FSC on July 25, 2023 and transitional measures for interest rate risk and net assets announced by the FSC on November 23, 2023, the FSC will conduct system review of the aforementioned differentiated management measures and phase 3 localization and transitional measures based on the actual implementation status of insurance enterprises every 5 years after the adoption of TW-ICS. In addition, the FSC will continue to watch latest development of international systems published by IAIS and make necessary adjustment. If the overall financial situations change significantly following the adoption of TW-ICS, the FSC will also review the relevant systems in a timely manner.
Contact unit: Financial Supervision Division, Insurance Bureau
Tel: (02) 8968-0746
If you have any questions, please write to: https://fscmail.fsc.gov.tw
I. Phase 3 localization and transitional measures:
(I) Localization measure – including callable bonds in eligible assets: Callable bonds make up a certain percentage in the funds allocation of insurance enterprises in Taiwan. However according to Insurance Capital Standard (ICS) 2.0 published by the International Association of Insurance Supervisors (IAIS), callable bonds are not considered fixed-income assets in nature for they may be redeemed prior to the maturity date and hence are not eligible assets. Such interpretation is adverse to the asset/liability management of domestic insurance enterprises. Considering that the cash flow of callable bond generated prior to its nearest redemption date has fixed-income characteristics and for the purpose of mitigating the impact of ICS 2.0 adoption on insurers and maintaining the stability of bond market, the FSC, in reference to international practices, prescribes that for callable bonds (excluding structured notes) held by insurers prior to December 31, 2023, their cash flow (interest) generated prior to the nearest redemption date may be included in eligible assets; for callable bonds acquired in 2024 and thereafter, the ICS provisions shall apply.
(II) Transitional measure – 15-year transition period for emerging risks: In comparison with the prevailing RBC system, emerging risks added in TW-ICS pose a big challenge to our insurance enterprises. To assist insurers in implementing TW-ICS in a gradual and orderly fashion, and considering insurers’ capability, international practices and industry suggestions, the FSC grants insurance enterprises a 15-year phase-in period (linear increment from 0% to 100%) for them to incorporate emerging risks (including long life, policy surrender, expenses and catastrophe risks) to facilitate a gradual adoption.
II. Differentiated Incentives: Embracing the spirit of “helping those who help themselves”, the FSC adds the support measure of “increasing insurer’s asset allocation flexibility” and an incentive measure of “decreasing risk factor” for insurers who endeavor in “capital increase” and “contractual service margin” (CSM) without increasing their foreign investment limit as described below to encourage insurance enterprises to implement TW-ICS as soon as possible:
(I) Granting the right to choose incentive based on the percentage of aggregate capital increase to risk-based capital:
1. Eligible for the right to choose incentive:
(1) Calculation of aggregate capital increase: Capital increase is calculated on a net basis, and the loss-absorbing capacity of all types of capital is taken into consideration. Hence a weight of 100%, 90% and 80% is assigned to Tier 1 Unlimited (T1U), Tier 1 Limited (T1L) and Tier 2 (T2) (i.e. aggregate capital increase = T1U*100%+T1L*90%+T2*80%).
(2) First-time application for the right to choose incentive: The FSC has required insurance enterprises to conduct valuation of fair value of liabilities arising from effective contracts since 2012, and fully adopt IFRSs from 2013 to steer insurance enterprises to gradually improve their asset and liability management. The FSC also announced in 2020 the adoption of IFRS17 and TW-ICS in 2026. In order to factor in the efforts made by each insurer in the adoption of IFRS 17 and TW-ICS, insurance enterprises are granted the right to choose incentive one to four times based on their amount of aggregate capital increase from 2013 up to the time of first-time application as a percentage of their risk-based capital.
(3) Subsequent applications for the right to choose incentive: After the first-time application, when the newly added aggregate amount of capital increase reaches 10% of risk-based capital, one-time right to choose incentive is granted.
2. Insurance enterprises may apply for the following incentives based on the number of times they have acquired the right to choose incentive:
(1) The support measure of increasing insurer’s asset allocation flexibility (which has been included in the notice of draft of “Regulations Governing Foreign Investments by Insurance Companies” dated April 11, 2024):
A. Subordinated financial debentures with foreign credit rating of BBB or BBB-: Investment limit measured based on “approved foreign investment limit” or “percentage of owners’ equity” is increased by 1% or 6% respectively, and the application is limited to 3 times.
B. Corporate bonds with foreign credit rating of BBB or BBB-: Investment limit measured based on “approved foreign investment limit” or “percentage of owners’ equity” is increased by 1% or 6% respectively, and the application is limited to 3 times.
C. Foreign private equity funds and hedge funds: Investment limit is increased by 0.5% and the application is limited to 6 times.
(2) Reducing risk factor: The risk factor of investing in foreign “private equity funds and hedge funds” may be calculated at 90%. Each application is good for 5 years and there is no limit on the number of applications.
(II) Eligible for incentive based on contractual service margin (CSM) during the transition period:
1. Incentive criteria: The FSC will examine the attainment of CSM estimate submitted by each insurer every year. When the attainment rate is 100%, the insurer can apply for the incentive of policy-based infrastructure risk factor; when the attainment rate is 105%, the insurer may also apply for the additional incentive of equity risk factor, in addition to the policy-based infrastructure incentive.
2. When an insurer that has been granted the incentive calculates its capital adequacy ratio the following year, it may maintain prior year’s risk factor for policy-based infrastructure and equity positions.
| CSM attainment rate | Incentive |
| 100% | 1. Use prior year’s risk factor for policy-based infrastructure assets |
| 105% | 1. Use prior year’s’ risk factor for policy-based infrastructure assets 2. Use prior year’s risk factor for equity assets |
According to the FSC, the same as the localization and transitional measures for market risk – equity, real estate and infrastructure announced by the FSC on July 25, 2023 and transitional measures for interest rate risk and net assets announced by the FSC on November 23, 2023, the FSC will conduct system review of the aforementioned differentiated management measures and phase 3 localization and transitional measures based on the actual implementation status of insurance enterprises every 5 years after the adoption of TW-ICS. In addition, the FSC will continue to watch latest development of international systems published by IAIS and make necessary adjustment. If the overall financial situations change significantly following the adoption of TW-ICS, the FSC will also review the relevant systems in a timely manner.
Contact unit: Financial Supervision Division, Insurance Bureau
Tel: (02) 8968-0746
If you have any questions, please write to: https://fscmail.fsc.gov.tw
- Visitor： 1319
- Update： 2024-05-29
