Taiwan life insurers stable for now as Fitch sees capital strength

The appreciation of the NT$ is also driving up currency hedging costs.

Taiwan’s life insurance sector could worsen, due to increased risks to earnings and capital following a sharp appreciation of the New Taiwan dollar (NT$), warned Fitch Ratings.

The NT$ rose by 8% against the US dollar over two days in early May, exposing insurers to potential losses due to significant currency mismatches.

Taiwanese life insurers typically hold a large proportion of their invested assets—around 70%—in foreign currency, mainly US dollar-denominated bonds, whilst their liabilities are primarily in NT$. 

The recent appreciation has likely depleted many insurers’ foreign-exchange valuation reserves, making them more vulnerable to further currency fluctuations.

The Financial Supervisory Commission introduced new non-mandatory rules in August 2024 to allow insurers greater flexibility in managing foreign-currency risks. 

These include provisions to build larger volatility reserves and offset foreign-exchange gains or losses against those reserves. 

However, adoption of these measures has been uneven across the sector.

The appreciation of the NT$ is also driving up currency hedging costs, compressing margins, and adding pressure on insurers to adjust their strategies. 

Fitch expects insurers to increase the hedged portion of their foreign-currency exposures, currently estimated at 60% to 70%, and boost sales of US dollar-denominated policies, which accounted for 37% of first-year premiums in 2024.

Fitch noted that whilst there has been no significant rise in policy surrenders, this remains a risk. 

Early redemptions could force insurers to sell assets that are booked at amortised cost but may be worth less in the market, particularly given the rise in US interest rates since 2022.

The currency shock adds strain as insurers continue to implement the Taiwan Insurance Capital Standard (TW-ICS) and IFRS 17. Lower capital generation from forex-related losses could challenge their ability to meet new capital requirements.

Despite these pressures, Fitch said its rated insurers have adequate capital buffers to absorb a 10% appreciation in the NT$ from the start of 2025 without breaching their downgrade thresholds. 

However, additional NT$ strength combined with weaker earnings could lead to negative rating actions.