Taiwan Ratings Corp (中華信評) has said that it welcomes the Financial Supervisory Commission’s plan to tighten sales of insurance policies featuring target-maturity bond funds, adding that the move would help rein in risks that investors are not generally aware of.
The commission is to promulgate details intended to curtail sales of insurance policies linked to target-maturity bond funds with below-par credit ratings.
The policies have gained popularity over the past few years, with their balance surging to NT$300 billion (US$10 billion) in November last year, from NT$200 billion in January last year, Securities Investment Trust and Consulting Association (證券投信投顧公會) data showed.
The ratings agency attributed the policies’ popularity to the promise of monthly distributions of dividends equivalent to a 5 percent yield for the duration of the policies, which usually last six years.
However, many investors are not aware that junk bonds underlie such policies and there is no guarantee that their principal would remain intact upon redemption, Taiwan Ratings added.
“There is a wide credit gap between the issuer and the issued, but insurance companies fail to clarify the risks involved,” Taiwan Ratings credit analyst Andy Chang (張書評) told a media briefing on Friday last week.
The commission plans to limit the sales of similar polices to bond funds with “BBB+” ratings, on a par with life insurers’ own standards for investments in overseas debt, and limit such bonds to 40 percent of overall funds.
The new requirements might take effect next month without affecting existing policies, the commission said.
The restriction is reasonable, as insurers should not sell investment tools that they would shun, Taiwan Ratings said.
It is difficult to assign credit ratings to such policies, as they are linked to structured debt and come with conditions for redemption, it said.
Prospective policy buyers should not mistake the credit ratings of insurers or fund houses for the ratings of the products they sell, it said.
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