Taiwan’s financial account showed a deficit of US$17.88 billion for the final quarter of last year, according to the central bank’s balance of payments released last month. This indicates persistent net capital outflows for the 34th consecutive quarter and brings aggregate net outflows to US$413.31 billion since 2010. Government officials, lawmakers and economists have mostly blamed the local life insurance companies, who have been shifting capital from Taiwan’s low interest rates and ample liquidity to high-yield foreign investments.
The foreign investments, including global bonds, of local life insurers totaled NT$16.73 trillion (US$542.74 billion) as of January, making up 68.06 percent of the companies’ combined working capital, Financial Supervisory Commission (FSC) statistics showed.
Lawmakers have warned that Taiwan’s ratio is higher than Japan’s 21.6 percent and the US’ 12 percent, and far higher than South Korea’s 8.3 percent and China’s 2 percent, exposing local life insurers to foreign-exchange volatility and huge losses if the New Taiwan dollar appreciates markedly.
According to FSC tallies, local life insurance companies reported net forex losses of NT$232.3 billion last year when the NT dollar depreciated by 2.97 percent against the US dollar, compared with net forex losses of NT$176.1 billion in 2017, when the NT dollar appreciated 7.53 percent against the greenback.
The 31.9 percent annual increase in forex losses reflects the rising hedging costs that insurers pay to manage forex volatility, and the widening interest spread between the NT dollar and the US dollar. The costs are reflected in the industry’s annual pre-tax profit, which slipped from NT$131.1 billion in 2017 to NT$98.9 billion last year.
Regardless of the strength of the NT dollar, local insurers have encountered forex losses over the past two years, which the FSC has attributed to low interest rates at home, as well as Taiwanese attitudes toward money and wealth management — insurance customers favor investment products, which boosts first-year premiums but adds pressure on insurers to consistently obtain high yields.
The central bank has said that the fundamental issue facing local life insurers is a long-term mismatch between their assets and liabilities, which is primarily due to a lack of long-term investment tools in the domestic market. The mismatch could lead to a higher risk of losses if market prices experience larger fluctuations, pushing insurers to favor overseas investments.
Whether considering low interest rates or mismatched assets and liabilities, local insurers are pushed to guarantee somewhat higher interest rates on policies to drive up investment product sales. However, a gap between guaranteed policy rates and the companies’ actual investment returns has raised concerns over negative interest spreads and forced insurance companies to target high-risk, high-yield investments, mostly abroad.
The FSC last week instructed insurance companies to reduce potential risks by lowering the rates that they guarantee on products, but this is not enough. The regulator must also monitor policies with high, guaranteed interest rates, and require insurers to differentiate products’ risk levels and implement risk controls.
While local interest rates remain low, the FSC could encourage companies to offer more traditional insurance products rather than investment policies, reducing the possibility of losses from negative interest spreads.
A lack of domestic investment opportunities underlies the industry’s vast allocation of capital to foreign investments. The Ministry of Finance could issue more long-term government bonds to provide insurers with long-term investment offerings, and other government agencies could remove local investment barriers so that funds could flow into other industries.
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