Moody’s Investor Service on Tuesday maintained its negative outlook on the nation’s life insurance sector over the next 12 to 18 months, due to lingering challenges of an unfavorable product mix and rising investment risks.
The weakness in product mix among local life insurers, with most still carrying significant legacy policies with high guarantee rates, leads to high average cost of liabilities, the report said.
Supported by a high household savings rate, savings products, which are highly spread-dependent, have remained the main source of premium growth for life insurers, it said.
As a result of the accumulation of spread-dependent products, life insurers have been steering asset allocations to overseas investments, leading to increased exposure to currency, liquidity and reinvestment risks, the report said.
At the same time, most of the yield enhancement from life insurers’ aggressive investment allocations are passed on to policyholders to meet promised return performance, resulting in weaker internal capital generation and margin of safety to withstand market volatility.
As of the end of July, overseas investment accounted for 64 percent of insurers’ invested assets, up from 43 percent at the end of 2013, the report said.
In particular, investments in international bonds have increased markedly since the asset class was exempted from life insurers’ cap on overseas investments in 2014.
Moody’s said that international bonds are a source of currency mismatch risk for the insurers, and the bonds often carry callable options, which adds to reinvestment risks.
“Taiwan life insurers normally do not fully hedge their foreign-currency exposure and instead maintain 20 to 30 percent of total overseas exposure open to reduce overall hedging costs. This unhedged currency risk will grow as companies’ overseas investment portfolios expand,” the report said.
The report said that life insurers have made some progress toward improving their product mix, such as reducing their negative-load burdens and promoting product with longer premium terms and with guarantee rates below 2.5 percent, as well as selling more US dollar-denominated policies and investment-linked policies to mitigate rising asset risks.
However, local firms have been slow in developing products with protection elements, such as health, accident and death insurance, with premium contribution from these products seeing a subdued 2 percent average growth rate between 2012 and last year.
Meanwhile, life insurers saw their combined pretax profits in the first nine months of the year gain 10 percent annually to NT$99.9 billion (US$3.3 billion), helped by gains from stock dividends and higher asset prices, Financial Supervisory Commission data showed.
Life insurers’ foreign-exchange volatility reserves stood at NT$27.9 billion at the end of last month, up from NT$16.9 billion at the end of May, the data showed.
Life insurers’ foreign-exchange related losses in the first nine months were NT$511.1 billion, NT$11 billion higher than the first eight months of the year, of which NT$362.5 billion was offset by hedging, while life insurers produced a NT$16.1 billion write-back to their foreign-exchange volatility reserves.
The commission said that the industry’s foreign-exchange volatility reserves have returned to healthy levels and none of the nation’s life insurers have exhausted their reserves and are not to be barred from using the buffer.
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