Lin Xiaoxian is a typical, single, 37-year-old office worker with a mortgage. She also has 11 insurance policies, including six endowment policies, one investment policy, two cancer policies, and two medical treatment policies. Her premiums total roughly NT$200,000 per year, or about one-third of her income. Lin says that she's bought so much insurance as a savings vehicle, and because she also supports her mother. If anything were to happen to her, the insurance money would protect her mother from potentially abject poverty.

According to Swiss Re, Taiwan has had the world's highest rate of insurance penetration (the ratio of insurance premiums to GDP) for four years running. Last year, Taiwan's penetration rate stood at 18.48% (15.4% for life insurance and 3% for non-life insurance), well above the global average of 6.9% (4% for life insurance plus 2.9% for non-life insurance). South Africa ranked second (14.8%) while the UK and the Netherlands tied for third (12.4%). (See Table 1.)

Taiwan's world-leading insurance penetration rate reflects the relative maturity of our insurance market and the fact that our insurance industry contributes far more to our economy than the insurance industries of other nations do to theirs.

According to the Taiwan Insurance Institute (TII), Taiwanese spent an average of NT$104,423 on insurance premiums last year, NT$4,568 of it on non-life insurance and NT$99,855 (95%) on so-called "insurance of the person," i.e. "life insurance" in the broadest sense of the term. That's nearly three times its level 10 years ago. (See Figure 2.)

But if you assume these numbers mean that Taiwanese are "spending a little extra" to protect themselves, you'd be wrong. Instead, most of this spending has been on policies that function as savings vehicles.

"Premiums on savings-oriented policies are higher than those for pure insurance policies, such as term life," says Peng Jin-lung, an assistant professor with National Chengchi University's Department of Risk Management and Insurance. "They are also usually paid in full in advance which increases their weighting in the statistics."

According to Swiss Re, Taiwan's "insurance of the person" category includes life, health, and accidental injury insurance, as well as annuities. Life insurance (65%) and annuities (23%) comprise the bulk of this category. Peng estimates that over half of the more than NT$1 trillion Taiwanese have paid in life insurance and annuity premiums in recent years has gone to savings-oriented products.

Though premiums for savings-oriented products are high, the public continues to buy them because they offer better interest rates than time deposits. On the other hand, Howard Kung, executive vice president of Lei Shan Insurance, admits that though these interest rates are guaranteed and can generate stable profits, "you need to have enough invested to make it worthwhile." For example, 2% on a NT$60,000 policy is just NT$1,200, but on a NT$600,000 policy, it's NT$12,000.

A Mr. Chen, a 40ish office worker, found himself quickly won over by a bank financial planner's pitch for a savings-oriented life insurance policy. The policy required a one-time payment of NT$896,900, and returned NT$1 million at the end of its six-year term, while retaining NT$910,000 in death benefits (1.015 times the initial premium). Chen calculated that the policy offered a 1.83% rate of return, versus the 1.35% rate available on a one-year time deposit, and made the investment.

Savings-oriented policies that "pay you more the longer you live" have existed in Taiwan for 20 or 30 years, and are also sold abroad. Why have they only recently become popular?

It comes down to economics. The global economy has been remarkably volatile for the last 10 years-the subprime mortgage crisis in the US kicked off a global financial crisis in 2008; and now the US and European debt crises are hampering economic recovery.

As a consequence, interest rates on deposits at Taiwanese banks have fallen from 5% to less than 1%. The interest rate on three-year time deposits currently stands at around 1.5%, far below the 8-9% rates of the 1990s.

Insurance and interest rates are linked. "Low interest rates cause interest rates on traditional protection products to decline, premiums to rise, and consumer interest in buying them to decline," explains Peng. "Time-deposit investors begin seeking financial instruments offering higher yields, making savings- and investment-oriented insurance policies more popular."

While interest rates were falling, Taiwan's savings rate was climbing to a new high. According to the Directorate General of Budget, Accounting and Statistics (DGBAS), over the 2001-2010 period the national savings rate (the percentage of GDP saved by households) rose from 24% to 31%, a 21-year high. The excess savings rate (savings minus investments) also rose during this period, from 6.1% to 9-10% in 2009, increasing the amount of idle capital in the public's hands. Soaking up this money requires seeking out investments that preserve capital or generate stable returns. Savings-oriented insurance products do just that.

The Financial Holding Company Act has also played a role. Passed a decade ago as a means to increase the size of Taiwan's banks, the act permitted banks to get involved in the selling of insurance. Financial holding companies introduced "time-deposit-like" policies, contributing to the massive growth in the market share of savings-oriented insurance. By 2009, banks were selling more insurance products than traditional insurers. In fact, they accounted for nearly 70% of premium income last year, most of which was generated by savings-oriented policies.

In 2009, premium income generated from sales by Cathay United Bank and Chinatrust Bank jumped to over NT$100 billion each from roughly NT$80 billion and NT$40 billion, respectively, in the preceding year. Premium income generated by six other banks broke through the NT$10 billion mark, of which 85-90% came from savings-oriented and variable-interest-rate policies.

Investors are drawn to investment- and savings-oriented policies by their returns, and largely overlook the protective function of insurance.

With investment-oriented policies becoming so popular, the public has begun to confuse the concepts of "insurance" and "savings." This has given rise to a situation in which high premiums frequently offer little protection.

According to the TII, the average insurance rate (the ratio of valid policies to population) for life insurance and annuities was 210.7% while the average benefit for new life insurance policies was just NT$645,000. If you multiply this figure by the average of 2.1 policies per person, average life insurance coverage amounts to just NT$1.35 million per person, far less than NT$3-5 million average in Europe, the US and Japan.

Peng says that this is related to the widespread desire among Taiwanese to recoup their premium payments during their lifetimes.

"In the US and Europe, the focus is on the purely protective function of insurance," says Peng. "In Asian nations such as Japan, Korea, Taiwan and mainland China, people link insurance and savings. Many people who buy these high-premium investment-oriented products don't think of themselves as buying insurance in the traditional sense, but as 'saving.'"

The problem is that most of the variable-rate annuities currently on the market are set up specifically to accept a one-time premium, and return X interest to the policy holder some number of years later. They completely elide the intended protective function of insurance.

Peng offers an example: An endowment policy with a 10-year term has an annual premium of NT$110,000 and returns NT$1.1 million at term. If the policyholder has the misfortune to pass away before the policy comes to term, the policy's beneficiary receives NT$1 million. "It amounts to saving NT$100,000 per year and using the other NT$10,000 to buy NT$1 million in protection." He argues that it makes more sense to spend this NT$110,000 premium on a life insurance policy offering a NT$7-8 million benefit. Such an approach, he says, offers your family much more security in the event of your passing.

The original purpose of insurance was protection: it was simply a tool for managing risk. This protective function should not be overlooked when insurance also becomes a vehicle for savings, investment and tax reduction. But how much is enough?

Currently, the most common standard is "the double ten rule," which holds that an individual or household's premiums should amount to roughly 10% of annual income, and life insurance benefits equal roughly 10 times the previous year's income. If we apply this rule to Taiwan's average annual income of NT$519,000, it suggests that individuals should have average life insurance coverage of at least NT$5.19 million.

But in fact most Taiwanese are buying mainly savings-oriented insurance but have far too little long-term protection. If something were to happen to a breadwinner in such circumstances, his or her family could find themselves in very difficult straits.

According to the Life Insurance Association of the ROC, Taiwan's life insurance industry paid out death benefits totaling NT$68.96 billion to 126,000 beneficiaries last year, an average per policy of only NT$549,000. This amount is only enough to support the families in question for 10 months or so. And that doesn't even account for burial expenses.

People have different needs at different stages of their lives and should adjust their insurance holdings based on their current income level. The general rule of thumb is to first get some insurance, then worry about getting full coverage.

Carol Lee, chief consultant with Lei Shan Insurance, explains that the risks are greatest for a family whose breadwinner is in his or her prime. Such a family needs to protect itself from economic disaster should its breadwinner be the victim of an accident. Based on the NT$42,000 average monthly salary in Taiwan, a typical family needs about NT$10 million in protection. Lee notes that the family could purchase relatively cheap 20-year term life insurance at a cost of NT$40,000 or so per year. For a double-income family with one child and an NT$5 million mortgage, the premiums would represent an affordable 4.6% of family income.

In this uncertain era, in which global financial systems are interlinked, banks and insurance companies may fail, and governments may default on their debt, all of us must look our risks square in the face. It may be that the best way to address them isn't to accumulate a given amount of assets, but to reflect on how to protect one's family and one's future.

Table 1. Leading Territories/Nations by Insurance Penetration in 2010

Insurance Penetration %

Ranking

Country

Total

Life

Non-Life

1

Taiwan

18.40

15.40

3.00

2

South Africa

14.80

12.00

2.80

3

U.K.

12.40

9.50

2.90

4

Netherlands

12.40

3.20

9.20

5

Hong Kong

11.50

10.10

1.40

6

South Korea

11.20

7.00

4.20

7

France

10.50

7.40

3.10

8

Japan

10.10

8.00

2.10

9

Switzerland

9.90

5.50

4.40

18

U.S.

8.00

3.50

4.50

World

6.90

4.00

2.90

Source: Quoted and translated from "Swiss Re, Sigma No. 2/2011."

Note: "Insurance penetration" is the ratio of insurance premiums to GDP.

Table 2. Taiwan's National Income and National

Savings Rate (2001-2010)

Year

Per Capita National Income (NTD)

National Savings Rate (%)

Economic Growth Rate (%)

2001

399,665

24.15

-1.65

2002

417,639

27.03

5.26

2003

431,947

28.51

3.67

2004

454,718

28.61

6.19

2005

463,778

27.94

4.70

2006

478,968

29.55

5.44

2007

498,912

30.38

5.98

2008

479,214

28.36

0.73

2009

471,797

27.68

-1.93

2010

519,664

31.28

10.82

Source: Directorate General of Budget, Accounting and Statistics