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Taiwan: Insurers' international bond holdings under scrutiny

Source: Asia Insurance Review | Dec 2017

Taiwan Regulation Risk Management

The Financial Supervisory Commission (FSC) said it will curb foreign exchange risk in insurers’ international bond holdings and study whether or not to tighten supervision over the investments. 
 
   In a review report, the FSC said that it would scrutinise more closely insurers which have a relatively high proportion of investments in such bonds, reported Reuters. The moves follow the highlighting of risk in these investments, including liquidity risk in the secondary market and interest rate risk. 
 
   The FSC said that it had acted to try to improve liquidity by relaxing foreign participation and trading hour rules. The regulator also said the gradual upward interest rate trend in the US may lead to an increase in the yields of long and medium term bonds, which is expected to help Taiwanese insurers to reinvest the proceeds of fixed-income products in the future. 
 
Currency mismatch risk for insurers
The international bonds issued by foreign companies are listed on the Taipei Exchange. Because they are excluded from Taiwan insurers’ overseas investment limit (45% of total investments), life insurers have been adding the bonds to their portfolios to gain additional yield over NT$ bonds.
 
   In a report in October, Moody’s stated that foreign-currency denominated bonds are a source of currency mismatch risk for insurers which normally do not fully hedge their foreign-currency exposure.
 
   Earlier this year, the FSC had already sought to curb risk in such bond holdings. Since May, Taiwan insurers could only invest in international bonds that have non-callable periods of at least five years in the primary market or at least three years in the secondary market. This was because most of these bonds matured in 1-7 years, but issuers had often redeemed them early, jeopardising stable holdings. A 
 
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