Taiwan’s new foreign-exchange accounting rules might help smooth life insurers’ earnings, but they would not eliminate the sector’s underlying currency risks, Taiwan Ratings Corp (中華信評) said yesterday.
Regulatory changes introduced this year would encourage insurers to rely less on short-term hedging and instead build larger foreign-exchange valuation reserves to absorb currency swings, the local arm of S&P Global Ratings said.
“We believe the new foreign-exchange accounting treatment would smooth earnings, but also introduce complexity,” Taiwan Ratings credit analyst Serene Hsieh (謝雅瑛) said.
Photo: Wu Hsin-tien, Taipei Times
While the shift could stabilize profits, the industry remains structurally exposed to foreign-exchange volatility because of its heavy overseas investment holdings, Hsieh said.
The changes form part of broader regulatory efforts by the Financial Supervisory Commission to bolster the sector’s resilience to exchange-rate fluctuations.
Taiwan’s life insurers have long faced significant exchange rate exposure because of their large overseas investment portfolios, which help boost returns in a persistently low domestic interest-rate environment.
To manage the risk, insurers have traditionally relied heavily on short-term currency hedging instruments, which can become costly and volatile when market conditions shift.
Under the new regulatory framework, insurers are expected to gradually shift away from frequent hedging transactions and place greater emphasis on long-term capital management.
The changes encourage firms to build foreign-exchange valuation reserves that can absorb currency swings before they affect profit and loss statements.
The new approach was expected to lead to more stable reported earnings, as larger reserves help cushion exchange-rate volatility.
However, the agency said that the reforms would not remove the sector’s structural exposure to currency movements.
Taiwan Ratings said stress tests it conducted suggested that credit profiles across the industry could diverge more sharply during periods of economic volatility.
Insurers with stronger financial discipline, effective asset-liability management and long-term capital planning are likely to outperform peers focusing on boosting short-term earnings, it said.
“The ability of insurers to proactively manage foreign-exchange risk, maintain robust asset-liability management and prioritize long-term capital resilience over short-term profits would drive the divide,” Hsieh said.
The ratings agency also found that the industry’s foreign-exchange valuation reserves might still be insufficient to fully absorb severe currency shocks.
In a stress scenario assuming the New Taiwan dollar appreciates 10 percent, some insurers could face renewed pressure from currency volatility, particularly those with weaker capital buffers or less disciplined risk management, it said.
Companies with stronger financial performance and clearer strategic planning would be better positioned to weather such fluctuations, even as regulatory reforms help the sector build greater resilience to foreign-exchange swings, it said.
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