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Interpretation Letter Concerning Paragraph 2 of Article 145-1 of Insurance Act

Trisha Chang/Wei-Shun Hsu

The Financial Supervisory Commission ("FSC") issued an interpretation letter for Paragraph 2 of Article 145-1 of Insurance Act, Ref. No. Jin-Guan-Bao-Cai-Zi No. 10804501381 dated June 25, 2019. Main points are as follows:
1.      To ensure the stability of financial structure of domestic life insurers, enhance their debt-paying ability, and mitigate the impact of applying International Financial Reporting Standard 17 ("IFRS 17") to Insurance Contracts in the future, from January 1, 2019, life insurers shall allocate (recover) the after-tax amount of profit or loss on derecognition of unmatured debt instruments, which are taxed at twenty percent (20%) of nominal tax rate, as Special Reserve, and shall amortize it as distributable earnings over its remaining term to maturity, except for those with uncertain remaining term to maturity, which should be amortized and recognized over a ten-year period:
(1)   Financial asset not measured at fair value through profit or loss.
(2)   Financial asset at fair value through profit or loss with changes in fair value recognized through other comprehensive income.
(3)   Financial asset at fair value through profit and loss, with changes in fair value included in profit or loss, and which is eligible for the overlay approach.
2.      The abovementioned unmatured debt instruments may exclude beneficiary certificates, short-term bills, preferred stocks, and assets held in separate accounts for participating policies or interest sensitive products.
3.      The remaining term to maturity mentioned in point 1 shall be counted as one year if less than one year.
4.      The Special Reserve in this interpretation letter shall be allocated after allocation of the special reserve pursuant to point 9 of Notes to Foreign Exchange Valuation Reserve for Life Insurers and the cumulative sum shall not be negative.
5.      Life insurers shall disclose the annual reconciliation, ending balance of previous period and amortization schedule showing annual increased amount for each future year of the Special Reserve under this interpretation letter in its annual financial report. Auditors of life insurers shall include this scheme in the scope of audit for internal control every year. Internal control unit of life insurers shall conduct a special audit for this scheme every year.
6.      In case of distributing cash dividend from undistributed earnings after allocation of Special Reserve, insurers shall act in accordance with the interpretation letter issued by the FSC, Ref. No. Jin-Guan-Bao-Cai-Zi No. 10202501992 dated February 8, 2013.