Cathay Financial Holding Co (國泰金控) asked the central bank to raise interest rates next year, as the widening interest-rate differential between Taiwan and the US has increased the firm’s foreign-exchange (forex) hedging costs, president Lee Chang-ken (李長庚) said on the sidelines of an event in Taipei on Monday.
Since the US Federal Reserve is expected to continue rate hikes next month and into next year, the differential between the New Taiwan dollar and the US dollar will widen further, Lee said.
As the price of a forex swap agreement — a kind of contract that insurers use to hedge their positions — is determined by the interest-rate differential between the two currencies, when the differential expands, insurers have to bear higher costs, Lee said.
“So far we have been doing well in terms of hedging, but the costs are really high,” Lee said.
Based on Financial Supervisory Commission regulations, insurance companies are allowed to hold a special reserve to absorb forex losses on overseas investments in response to volatile global financial markets.
Lee said he is considering expanding the company’s special reserve to better manage forex risks and reduce hedging costs.
Local life insurers reported a combined NT$507.5 billion (US$16.42 billion) in hedging costs during the first 10 months of the year, with forex losses totaling NT$178.2 billion over the same period, the commission said last week.
Net forex losses this year might exceed NT$200 billion, which would be a record, it said.
The central bank has not changed its key interest rates since September 2016. However, there are too many funds with a lack of good investment targets, so demand for funds is not strong.
With interest rates remaining low, it has not only posed challenges for insurance companies, but also taken its toll on people who rely on interest income after retirement, Lee said.
Lee said he understands that Taiwan does not have much room for interest-rate hikes, but an increase of 0.25 percentage points would benefit such retirees, he added.
Cathay Financial is also looking for good targets to invest domestically, as they would pose no forex risks, Lee said.
Possible targets are related to the “five plus two” innovative industries or other start-ups, but the company would not invest in offshore wind farms, as it cannot fully understand the risks, he said.
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