Wed, Mar 14, 2018 - Page 8 News List


An issue of translation?

The article about the Financial Supervisory Commission (FSC) and insurance liabilities is not easy to understand (“FSC warns over insurers’ fixed-income assets,” March 12, page 16). There may be confusion in the translation from Chinese into English, but it appears just as likely that much of the problem is in translation from financial argot into everyday language.

The selected quote “The trend suggests that the domestic market is lacking viable fixed-income products,” for example, seems to contradict the headline.

A “fixed-income asset” is a contract, such as a bond denominated in a particular currency, such as New Taiwan dollars, owned by an insurance company. A “fixed-income product” would be a liability, in the form of a contract sold by the insurance company to a client, denominated in some particular currency, such as euros.

The headline and the quote appear to refer to very different things, but then the body of the article seems to talk about “fixed-income products” in terms of contracts offered by local governments rather than contracts offered by insurance companies.

The body of the article appears to make it clear that the concern of the FSC relates to the assets held by Taiwan life insurers. It expresses concern about the balance between assets in real estate and assets in fixed-income securities issued by local governments of these companies relative to that of their “global peers.” That may be a false comparison.

In the US the vast majority of insurer liabilities are denominated in US dollars. Some of these are in fixed-income and others are in variable terms, such as related to financial indices such as a Standard & Poor’s index.

In that case the regulator’s concern should be that the fixed-income liabilities are balanced by a combination of assets that is effectively a fixed-income asset and the variable value-liabilities be balanced by assets that track the corresponding financial indices. Such an arrangement insulates the insurer from the vagaries of chance in financial markets.

In Taiwan, on the other hand, many contracts are denominated in foreign currencies such as US dollars or euros as well as in NT dollars. In this case the concern should be that fixed-income liabilities in each currency be balanced by combination assets that track fixed-income assets in the denominated currency; so that if the fixed-income investments are in NT dollar contracts would require compensating investments in currency-exchange securities to convert the NT dollars to each of the other currencies.

The proper balance between fixed-income investments directly in the foreign currency and a mix of local currency and foreign exchange investments will, of course depend on the relative transaction costs and how well the basket matches the foreign currency commitments.

In case of liabilities based on financial indices, the concern should be analogous. In this context, simplistic comparisons of ratios may be badly misguided.

Emilio Venezian

New Taipei City

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