Letters:

Interest in interest rates

An interesting article by Norman Yin (殷乃平) ("Insurance companies hurt by rate cuts," April 30, page 8) seems self- contradictory at first look. Yin argues that the insurance companies are, on the one hand, issuers of fixed-interest rate debts in a high interest rate environment and suffer when the interest rate goes down. On the other hand, they are buyers of low interest rate government bonds and thus suffer when the interest rate rebounds and the bond prices fall. It seems to say that insurance companies get hurt either way interest rates move.

To exemplify my point, I can counter-argue that the insurance companies benefit from interest rate cuts because the government bonds they hold now are worth more under a low rate environment. On the other hand, when interest rates go up again, companies sell products priced on a low interest rate would benefit from that cost of capital and a higher return on their assets. So what is the truth?

The truth is both scenarios are possible. Insurance companies can get hurt by having long term fixed income liabilities when interest rates fall. They can benefit from it if they hold long term fixed income financial assets instead of liabilities. The advantage and disadvantage reverse when interest rates go up.

So what should the insurance companies do? If insurance companies can neutralize their exposure by matching the term of their assets to their liabilities they should be immune from interest rate moves. They will function solely as a service provider of risk pooling, insurance product marketing, claim service and legal assistance rather than an asset manager. Managing assets in today's global economy and interest rate environment can be a very tricky business. The crisis of Long Term Capital Management LLP is a daunting example. If an insurance company decides to keep its exposure either liabilities or assets, it should be a concious business decision. The company should know it is making a bet on the interest rate moves and that it can profit or lose from it. Insurance companies should not rely on the central bank to maintain a stable interest rate environment. Since the later has a primary goal of combatting inflation or recession. The central bank will raise or cut interest rates whenever needed to safeguard the economy and a lot of time their moves are restricted by the global environment.

My point of view is the same as Yin's only with a different emphasis on responsibilities. Insurance companies can get hurt in a changing interest rate environment. So the government should not in any situation press financial institutions to buy government bonds. On the other hand, insurance companies should always know their asset liability decisions are markets bets, all the time. As fair players they should take their profit as well as losses. Under today's global economy, insurance companies should think twice about their interest rate exposures. And maybe it would be wise to concentrate on their specialties when exposing themselves to risk and let somebody else worry about the interest rate for them.

Shultz Lu

Atlanta, Georgia

`Fakers' should serve

The conscription system in Taiwan recently came under the spotlight again as claims were made that physician Chai Chien-min (趙建銘), President Chen Shui-bian's (陳水扁) future son-in-law, had dodged compulsory military service by using fraudulent documentation. Based on Lin Mei-chun's article ("Medics defend draft exemption, April 30, page 2), Chao was just one of 1,226 medical students who were able to escape military service between 1995 and 1999.