The Taiwanese life insurance sector faces challenges of an unfavourable product mix and rising investment risks, notes Moody's Investor Service which is maintaining its negative outlook on the sector over the next 12 to 18 months.
The weakness in product mix among local life insurers, with most still carrying significant legacy policies with high guarantee rates, leads to high average cost of liabilities, the report says.
Supported by a high household savings rate, savings products, which are highly spread-dependent, have remained the main source of premium growth for life insurers.
But the insurers have made some progress toward improving their product mix, such as reducing their negative-load burdens and promoting products with longer premium terms and with guarantee rates below 2.5%, as well as selling more US dollar-denominated policies and investment-linked policies to mitigate rising asset risks.
However, local firms have been slow in developing products with protection elements, such as health, accident and death insurance, with premium contribution from these products seeing a subdued 2% average growth rate between 2012 and last year, Moody's notes.
As a result of the accumulation of spread-dependent products, life insurers have been steering asset allocations to overseas investments, leading to increased exposure to currency, liquidity and reinvestment risks, the report says.
At the same time, most of the yield enhancement from life insurers’ aggressive investment allocations are passed on to policyholders to meet promised return performance, resulting in weaker internal capital generation and margin of safety to withstand market volatility.
As of the end of July, overseas investment accounted for 64% of insurers’ invested assets, up from 43% at the end of 2013, the report says. In particular, investments in international bonds have increased markedly since the asset class was exempted from life insurers’ cap on overseas investments in 2014.
Unhedged currency risk
Moody’s said that international bonds are a source of currency mismatch risk for the insurers, and the bonds often carry callable options, which adds to reinvestment risks.
“Taiwan life insurers normally do not fully hedge their foreign currency exposure and instead maintain 20-30% of total overseas exposure open to reduce overall hedging costs. This unhedged currency risk will grow as companies’ overseas investment portfolios expand,” the report said.
Meanwhile, life insurers saw their combined pretax profits in the first nine months of the year gain 10% annually to NT$99.9 billion (US$3.3 billion), helped by gains from stock dividends and higher asset prices, Financial Supervisory Commission data show.
Life insurers’ foreign-exchange volatility reserves stood at NT$27.9 billion at the end of last month, up from NT$16.9 billion at the end of May, the data show.
Life insurers’ foreign-exchange related losses in the first nine months were NT$511.1 billion, NT$11 billion higher than the first eight months of the year, of which NT$362.5 billion was offset by hedging, while life insurers produced a NT$16.1 billion write-back to their foreign-exchange volatility reserves.
The commission said that the industry’s foreign-exchange volatility reserves have returned to healthy levels and none of the nation’s life insurers have exhausted their reserves and are not to be barred from using the buffer.