A Study on Risk-Based Capital of Life Insurance in Taiwan

Insurance companies play an important role as the financial intermediary in the banking market. The key business focus of these insurance companies is to provide financial security for the policyholders and to protect them from economic loss due to unforeseen risks. Therefore, the insurance companies need to have enough financial capacity to cover the insurance payments for their policyholders. As the number of policyholders increases, the asset and the scale of the life insurance industry will also increase in proportion. In 2007, the life insurance assets of all financial institutions reached as high as 21.36%. This situation demonstrated that the operational performance of the life insurance industry could seriously affect the financial stability in the macroeconomics. Five years ago, in July 2003, Taiwan begun to implement the Risk-Based Capital（RBC）system on its banking market. The RBC system didn’t only reflect the business risks and allow authorities to be able to discover insurance companies with weak financial management, but also take the suitable regulatory actions. However, the insurance companies were influenced by the global financial crisis because of the subprime mortgage storm which occurred in America in 2008. This crisis caused the capital adequacy ratio of 1/3 of all Taiwan’s life insurance companies unable to reach the legal ratio of 200%. In addition, it also caused our life insurance companies which were faced with the predicament to increase the capital repeatedly. In our research, we investigate the origin, the process of development and the reason of the solvency supervisory system in Taiwan. Then we review the regulations and rules of the RBC system of US and Japan. We also compare the advantages and disadvantages among these three countries. In view of our inopportune regulations of Taiwan’s RBC system, we draw up some concrete suggestions. We hope these suggestions will be presented to the authority as a reference of revising our life RBC system in the future. Finally, we also review and analyze the regulations of the SolvencyⅡ system in Europe. We compare the similarities and differences of the RBC system and the SolvencyⅡsystem, and provide some suggestions if we were to implement the SolvencyⅡsystem. We hope these suggestions will be adopted by the authority and would make sure that the solvency of life insurance companies is as much as the requirement of the authority and ensure the integrity and solidity of the regulatory systems.