FSC imposes stricter investment rules for insurance companies

Michelle Hsu, TAIPEI, Taiwan, The China Post

The Financial Supervisory Commission (FSC) on Friday announced a new policy to define the short-term and long-term investments of an insurance company and that may soon derail the investment operations of most of the major insurance companies in Taiwan.

In Taiwan, it has long been a common practice for insurance companies to get involved with the operations of some companies in which they hold a fairly large stake. The way they do it is to buy the majority of stock in a company by using short-term capital from the stock market.

“The new policy is to make a clear cut between the short-term and long-term assets of an insurance company,” said FSC Vice Chairwoman Susan Chang.

Under the new policy announced last Friday, an insurance company cannot appoint a representative to serve as a director or supervisor with any of its invested companies, nor get involved with the management of the company’s operations through either direct or indirect means.

In addition, an insurance companies is also prohibited from buying the proxies or voting for the directors or supervisors of the companies it buys shares in unless it’s supportive to the company’s existing management team.

These restrictions are regarded as effective measures for the government to prevent a financial group from using the capital of its affiliated insurance companies to acquire other financial institutions.

Buffer period

Upon announcing the new policy, Chang said that her commission will allow a buffer period for the insurance companies to adjust their investments to clearly define the short-term investments from the long-term ones. “The policy does not prohibit insurance companies from making long-term investments, but just requires them to make long-term investments with long-term capital,” she stressed.

Chang cited Article 146-6 of the Insurance Law as saying, “ For making any long-term investments, an insurance company should apply to the insurance bureau and the total value of all its long-term investments should not exceed 40 percent of its paid-in capital.” Otherwise, the insurance company should increase its paid-in capital.

The new policy may keep the short-term investment quota stated in Article 146-1 of the Insurance Law that an insurance company can use up to five percent of its premium income or ten percent of its paid-in capital for making the short-term securities investments.

Investments readjustments

However, it prohibits an insurance company from taking up seats on the board of directors or supervisors at any listed companies.

The insurance companies that have controlled or been closely involved with the operations of their invested companies may soon need to re-adjust their investment strategies.

It may impose an apparent impact on Waterland Financial Holding as one of its major shareholders, Kuo Hua Life, will soon withdraw from its board of directors and lose its power to support its current chairman Lin Hua-teh, whose chairmanship has been severely challenged since Procomp Informatics investigated financial problems due to his marital relations with Procomp’s chairwoman.

The restrictive policy to govern the insurance company’s investments was announced at a sensitive time, when Macoto Bank a staunch supporter of the ruling Democratic Progressive Party, had been entering the final takeover negotiations with Waterland.

Various problems

China Life, which beefed up its holdings in China Development Financial Holding (CDFH) with short-term funds to help KGI Securities control the management team of CDFH, may have to increase its paid-in capital, otherwise it will lose a seat on the board of supervisors of the CDFH when it converts its CDFH holdings to short-term investments. The problems Fubon Financial Holding are encountering may not be so serious as they claimed that they did not appoint any representatives to serve as director or supervisor of its affiliates through the investments of Fubon Life Insurance.

Taiwan High-speed Rail Corp. (THSRC), however, may see a worsening financial problem if Shinkong Life Insurance, which had acquired a stake in the THSRC through its affiliate Shinkong Insurance, withdraws its funds from it.

While these restrictions would lead to more or less trouble for the insurance companies, they are applauded by some market observers as a clear guideline for the investments of the insurance companies, and effectively restrains them from making improper investments with their clients insurance premiums.