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Life insurers boost product diversity to hedge risks

The nation's life insurers are seeking increased diversity in products and distribution channels to improve their risk profile and cope with the industry's challenging operating conditions, Fitch Ratings said in a press statement yesterday.

As interest rates remain low, insurers have launched products such as participating policies and investment-linked contracts to lower their risk profiles despite these policies' lower intrinsic profitability.

Participating policies refer to those in which policyholders are eligible to receive dividends from the company's surplus. But earning such a dividend depends on many variables such as expected return on investments, operating expenses and the cost of death benefits.

The industry's average reserve costs have also continued to trend downwards with sales of new product types, the credit agency said.

However, rising hedging costs could potentially lead to heightened foreign currency exposure, which would in turn introduce volatility to the sector's earnings and capital position.

Developments in the global market, such as the implementation of Solvency II and Phase II of International Financial Reporting Standards 4, would introduce a better alignment between risk and capital in the insurance market, said Greg Carter, managing director and head of the EuroAsia Insurance Group, during the Taipei leg of Fitch's 2007 Asia Insurance Roadshow yesterday.

He said that would also stimulate developments of alternative risk hedging products such as insurance securitization.

Driven by these changes in the global market, the Asian insurance market is becoming increasingly credit rating sensitive and is migrating from "single rating" to "multiple ratings" in terms of corporate capital market strategies, risk management and regulatory recognition, Carter said.
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