Taiwan Life Insurers Demonstrate Financial Resilience Amid Currency Fluctuations
The sharp appreciation of the New Taiwan dollar (NT$) against the US dollar since late April 2025 has raised concerns about Taiwan’s life insurance sector, as approximately 70% of their investments are in overseas bonds and equities. According to CreditSights, a Fitch Solutions company, the stronger NT$ reduces the valuation of these assets in local currency terms.
CreditSights suggests that the rapid currency movement was likely triggered by speculation about the central bank allowing further NT$ appreciation, Taiwanese exporters holding onto US dollars, and life insurers’ limited ability to quickly increase foreign exchange (FX) hedging due to high FX volatility. The cost of hedging the US dollar using 3-month NT$ non-deliverable forwards (NDF) surged to over 10% from less than 2% at the start of 2025.
Risk Management Strategies
Taiwanese life insurers employ various hedging strategies to manage FX risk:
- About 30% of foreign investments are naturally hedged through policies denominated in foreign currencies like the US dollar.
- Approximately 65% are hedged using currency swaps and non-deliverable forwards.
- 10% of stock investments remain unhedged.
- 25% is managed through proxy hedging using currency baskets.
Some insurers have increased their hedging positions since the beginning of 2025, anticipating NT$ appreciation. The industry has developed sophistication in FX risk management due to historical reliance on overseas investments. Leading insurers have maintained hedging costs below 2% for several years.
Solvency and Risk Tolerance
CreditSights believes that insurers can likely manage an 8% NT$ appreciation. Over the past decade, insurers experienced annual NT$ appreciation about half the time, with a notable 8.1% increase in fiscal year 2017. The current solvency buffers, with RBC levels above 350% for major players like Cathay Life and Fubon, and TW-ICS ratios around 170-190%, are well above minimum requirements.
Unlike the UK’s leveraged LDI crisis in September 2022, Taiwanese insurers are not leveraged and don’t use bonds as collateral. Their solvency appears secure even with further moderate currency appreciation. Recent selling activities are attributed to anticipated market volatility, liquidity needs for policy servicing, and some speculation on exchange rates.
Key Concerns
The key question remains: what is the maximum stress level that life insurers’ FX hedging strategies can withstand? Despite multiple inquiries, CreditSights has not received a definitive answer from insurers, maintaining caution regarding FX risk. While insurers can probably cope with the recent 8% appreciation, the maximum level of stress they can endure and their response strategies remain unclear.
The recent speed and magnitude of currency changes have surprised life insurers. The FX volatility reserve can likely cover about 4% of NT$ appreciation. If the current level persists until June 30, 2025, it may negatively impact quarterly earnings.
In conclusion, while Taiwan’s life insurers currently demonstrate sufficient solvency to manage currency fluctuations, the maximum stress levels their hedging strategies can withstand remain uncertain. Continued monitoring of their risk management practices and financial resilience will be crucial in the volatile FX market.
