Not enough invested in reserve pool: Taiwan Ratings

Taiwan’s life insurers have refrained from aggressively building up their reserve to protect against foreign exchange volatility introduced in March last year, reflecting limited desires and flexibility to alter hedging strategies, according to Taiwan Ratings Corp (中華信評), Standard & Poor’s local arm.

The reserve pool accounts for a mere 0.38 percent of domestic life insurers’ overseas investments as of September last year, down from 0.5 percent in March the same year, when they were first allowed to set aside the fund, the ratings agency said.

“Until the fund grows substantially, it can provide only marginal support to insurers’ bottom lines,” Taiwan Ratings’ credit analyst Patty Wang (王珮齡) said, attributing the drop in reserves to rapid growth in overseas investments.

The reserve fund is intended to counter the negative impact of severe foreign exchange fluctuations on their assets.

The slow build-up of reserves indicates that domestic life insurers may keep their prudent hedging strategies unchanged in the coming one to two years, Wang said, adding that they are generally exposed to higher foreign exchange risks than regional peers because of their large overseas exposure and higher rate of currency-mismatch problems.

“We don’t expect the pool to expand rapidly in the near future unless insurers are willing to sacrifice their earnings to make additional provisions,” Wang said.

The small reserve pool restricts hedging flexibility and life insurers are unlikely to lower their hedged positions drastically to save hedging costs in the absence of a strong foreign exchange buffer, Wang said.

Life insurers would have to substantially increase their foreign exchange reserves if they want to more effectively cushion against foreign exchange losses, Wang said.

Consequently, the use of the reserve may not trigger rating actions in the coming one to two years even though drastic changes in foreign exchange risk-taking behavior will impact credit profiles, Taiwan Ratings said.

The agency has assigned a negative rating outlook on local life insurers because of the sector’s volatile capitalization and lower earnings in comparison with Asian peers.