The Financial Supervisory Commission (FSC) on Thursday said it would refer to the EU’s regulations and add the “symmetric adjustment” mechanism into its risk-based capital calculation for life insurers, which is expected to liberate investment funds in the sector and help stabilize local markets.
Risk-based capital is what a financial institution is required to have in reserve based on its size and risk profile. It is a value multiplied by stock position, risk weighting and a weighted beta.
With the new rules, the risk weighting of Taiwanese stocks will become adjustable according to the performance of local shares, the commission said.
When markets experience a sell-off and performance drops below their three-year average, the risk weighting will be modulated down from the 0.2165 currently, it said.
With the risk weighting down, insurers’ risk-based capital requirements would also fall, meaning capital requirement would be lower, easing recapitalization pressures — such as being forced to sell shares, Insurance Bureau Deputy Director-General Wang Li-hui (王麗惠) said, adding that insurers might even buy more stock with the lower prices.
When the local markets move more than 8 percent higher than the three-year average, the risk weighting would be revised upward, increasing risk-based capital requirements and disincentivizing stock purchases, Wang said.
“In a bear market, investors tend to feel pessimistic and sell, and vice versa in a bull market,” Wang said, adding that the regulations would help reduce stock market volatility.
According to the EU’s Solvency 2 regulations, which took effect in 2016 as a regulatory risk framework for insurers, the “symmetric adjustment” mechanism aims to mitigate pro-cyclical risks that equities face.
“The mechanism is designed to counter the business cycle and reduce volatility in local markets,” Wang said.
The changes are to be promulgated next year, after the commission announces formal regulations at the end of this year, the commission said, adding that it would review the weighting every six months.
As of the end of last month, life insurers’ investable funds were about NT$23.6 trillion (US$761.9 billion), of which 7 percent had been invested in local shares, Taiwan Insurance Institute data showed.
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