The global financial crisis and domestic economic slump have increased the risk that negative interest spreads have on local life insurers, whose weak capitalization and poor investment results have undermined their systemic stability, Fitch Ratings said in a report yesterday.
“The substantial decline in Taiwan’s stock market, the volatility of foreign exchange rates and the deterioration of the credit quality of structured securities in 2008 caused substantial losses in the life [insurance] sector,” said Joyce Huang (黃佳琪), associate director of the agency’s insurance team.
“This led to a sharp deterioration in the capital strength of most companies,” she said.
Fitch’s study showed that aggregate shareholders’ equity decreased to NT$230 billion (US$6.96 billion) in April from NT$433 billion at the end of 2007. Moreover, five insurers out of a total of 30 had NT$90 billion in negative net worth at the end of last year. Taiwanese life insurers are less likely to be able to withstand potential equity price declines and foreign exchange rate fluctuations, the report showed.
Fitch said low interest rates have exacerbated negative interest spreads, putting further pressure on weak capitalization.
“Given the generally long duration of a life insurer’s insurance liabilities, the impact of the negative interest spread on its capitalization would be significant if the interest rate continues to stay at this low level,” Huang said.
The agency’s sensitivity analysis concluded that a 25-basis-point fall in the sector’s assumed investment return could cause a 15 percent to 43 percent drop in its embedded value — an indication of an insurer’s present value.