The Financial Supervisory Commission is taking steps to reduce the burden of life insurers’ foreign-exchange hedging costs, which have risen because of the wide gap between Taiwan and US interest rates.
Local insurers would be allowed to apply to increase foreign exchange reserve (forex) volatility reserves from other reserve pools, Insurance Bureau Deputy Director-General Tsai Huo-yen (蔡火炎) said at a briefing yesterday in Taipei.
The changes would effectively boost insurers’ forex hedging reserves to as much as NT$960 billion (US$30.1 billion) from the current level of NT$300 billion, Tsai said. This would reduce their need for hedging tools like currency swaps and non-deliverable forwards, lowering hedging costs.
Photo: CNA
New rules would also double the so-called extra deposit and offset rate for the forex gains and losses of insurers’ unhedged assets and liabilities to 100 percent.
The New Taiwan dollar has declined about 4 percent this year against the greenback, with the local benchmark interest rate of 2 percent less than half of the 5.25 percent to 5.5 percent in the US.
The industry spent more than NT$360 billion hedging against foreign exchange fluctuations last year, commission data showed.
Taiwan first introduced the reserves mechanism in 2012, allowing insurers to deposit part of their forex gains to the pool and tap the funds to hedge against losses, in a way to smooth out their profits. It revised the rules in 2019 and again last year to increase the flexibility of forex risk management.
The total pool of reserves across life insurers increased 66 percent to NT$231 billion from the start of this year through last month, official data showed. While life insurers reaped forex gains of NT$923.7 billion so far this year thanks to a weaker NT dollar, hedging tool losses and costs totaled NT$894.2 billion.
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