Low interest rates and a lackluster performance by the stock market are likely to constrain Taiwanese insurers’ investment yields, especially for life insurers that rely heavily on investment income for profits, Fitch Ratings said in a report yesterday.
“Taiwanese life insurers remain exposed to market risks due to their foreign securities investments and domestic equity positions,” the international agency said.
Losses could impair their already moderate capitalization, the primary factor underlying the sector’s negative outlook, the report said.
By contrast, Taiwan’s non-life insurers have maintained a stable outlook because they face more manageable investment risks, given their smaller exposures to foreign financial market investments and domestic equities, the report said.
The stable outlook was bolstered through a strong capital buffer and satisfactory underwriting performance, the report added.
While new premiums with lower guaranteed rates help life insurers to dilute the impact of legacy high guaranteed rate policies, funding costs have dropped at a slower pace with investment yields breaking-even at about 3.5 percent between 2009 and last year, the report said.
Sustainable investment performance minimizing the impact of negative interest spreads could lead to the life sector’s outlook being revised to stable, Fitch said, adding that such a scenario would be difficult, if interest rates remain low.
Increases in new, more profitable policies could also improve life insurers’ profitability, but this will take time, the report said.
Non-life insurers, on the other hand, have reported an increase in profitable business amid fierce price competition and moderate growth potential, the report indicated.