Taiwanese life insurers have been increasing overseas investments for better yields, leaving their capitalisation vulnerable to unfavourable capital and currency market movements, says Fitch Ratings.
Interest rates have been low in Taiwan with the one-year deposit rate dropping to 1% from 1.2% between 2015 and March 2017.
The international rating agency says that the recent strong appreciation of the Taiwan dollar against the US dollar (by about 7% in 1Q17) could put pressure on capitalisation, although the life insurers have managed their currency risk with tools such as currency swaps and proxy hedging. They may also release foreign-exchange volatility reserves to mitigate currency risk. Overseas investments accounted for 64% of the sector's invested assets as of end-March 2017.
In the nonlife sector, insurers have sound capital buffers to withstand investment volatility and potential catastrophe losses, with an aggregate equity-to-assets ratio of 32% as of end-March 2017. They have increased the retention of profitable product lines to sustain premium growth and profitability. The sector's return on assets stayed between 2%-4% in 2011-2015, notes Fitch.