Taiwan is set to overhaul accounting rules to help life insurers ease the impact of foreign-exchange fluctuations on their financial statements, a move that is likely to save billions of dollars in currency hedging costs.
The new method would let insurance companies spread out exchange-rate gains and losses over time for bonds measured at amortized cost, the Financial Supervisory Commission (FSC) said in a statement on Tuesday.
The changes would take effect next year.
Photo: Kelson Wang, Taipei Times
The revision aims to better reflect the insurers’ long-term business operations and financial condition, and prevent over-hedging activities by the firms, the FSC said.
It comes after a dramatic jump in the New Taiwan dollar in May drew heightened scrutiny on insurers that hold US$700 billion in foreign assets.
About NT$15.2 trillion (US$483 billion) of the insurers’ assets are exposed to exchange-rate risk, based on regulatory calculations that exclude foreign currency-denominated policies. Currently, about 60 percent of that exposure is hedged.
Taiwanese insurers last month proposed changes to accounting rules that would allow exchange-rate fluctuations to be partially recognized over time, rather than having their full impact reflected immediately. The plan was estimated to save US$2.9 billion in annual hedging costs and reduce their reliance on offshore NT dollar forwards as a hedging tool.
Current accounting principles require insurers’ foreign assets and liabilities to be measured using spot exchange rates with currency gains and losses recognized immediately.
However, insurers’ assets are meant to match long-term policy liabilities and generally do not face short-term repatriation needs, the regulator said.
“Under current standards, short-term exchange-rate movements have caused significant volatility in reported earnings, even though most of these are unrealized,” the FSC said. “A revised accounting approach is needed to more appropriately present the financial position of Taiwan’s life insurance industry.”
The regulator would ask insurers to use savings from reduced hedging costs to increase their foreign-exchange volatility reserves — a buffer designed to absorb currency losses — and strengthen capital. Such related measures are still being studied.
The sudden appreciation of NT dollar in May highlighted how currency swings and soaring hedging costs can weigh on insurers’ profitability, raising concerns about their financial health. Taiwan’s life insurance sector posted a record NT$145.4 billion in foreign-exchange losses that month.
Insurers began reducing their currency hedging positions in the second half of the year. By the end of October, the industry’s hedging ratio had fallen to 58.55 percent — the lowest level since the regulator began tracking the data in 2020.
From 2019 to this year, insurers spent more than NT$1.6 trillion on currency swaps and non-deliverable forwards to hedge exchange-rate risks — exceeding their combined net income of about NT$1.4 trillion over the same period.
That underscores the high cost of hedging relative to its limited effectiveness, the FSC said.
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