Taiwan’s tightened foreign-exchange reserve requirements are “credit positive” for local insurers, Moody’s Investors Service said yesterday.
The Financial Supervisory Commission on Tuesday last week announced higher requirements on insurers’ foreign-exchange volatility reserves.
The tightening is credit positive because it requires insurers to set higher foreign-exchange volatility reserves as a buffer against potential foreign-exchange losses and will push them to raise hedging ratios against a potential appreciation of the New Taiwan dollar, the agency said.
The foreign reserve requirement began in 2012 to allow insurers to adopt flexible hedging strategies and reduce hedging costs by absorbing 50 percent of the accounting earnings from foreign-exchange movements through the reserves.
The rule change would increase the required monthly provision to the reserve to 0.05 percent of insurers’ unhedged foreign-currency exposure from 0.042 percent.
It would also raise the minimum required balance of reserves to the higher of either 20 percent of the previous year’s outstanding balance or 20 percent of the average year-end outstanding balance between 2012 and last year, Moody’s said.
Previously, the minimum required balance stood at 20 percent of the outstanding balance in the previous year.
Additionally, insurers must set aside 75 percent — up from 60 percent — of their monthly foreign-exchange gains from their unhedged positions for the reserves if the outstanding balance of their reserves is lower than the minimum required balance for three consecutive months.
They must do so until the reserves grow to three times the minimum required balance, up from twice, the commission said.
The higher provision requirement would speed up the recovery of foreign-exchange volatility reserves, which have slumped among major insurers amid the local currency’s appreciation.
The new rules would incentivize insurers to increase their hedging ratios, which range between 20 and 30 percent among major Taiwanese life insurers, because it becomes more costly to provision their unhedged positions, Moody’s said.
Insurers would also have to maintain higher required minimum balances on their reserves before utilizing them to absorb foreign-exchange losses, it said, adding that insures would cut unhedged positions to prevent the currency movements from affecting their earnings.
Although higher provision charges might dampen insurers’ profitability, the expected improvement in earnings stability would offset the pinch, Moody’s said.
The rule change would provide a larger capital buffer if the NT dollar rises further against the US dollar, it said.
Moody’s expects local insurers to keep investing in overseas securities to accommodate the addition of spread-dependent products on their books and reinvestment pressure from a low, albeit rising, interest rate environment.
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