Taiwanese life insurance industry's reserve levels insufficient to withstand severe exchange rate fluctuations, says Taiwan Ratings

The Financial Supervisory Commission (FSC) proposed new exchange rate accounting rules at the end of last December, aiming to reduce the impact of exchange rates on financial reports through amortization. The life insurance industry continues to lower its hedging ratio, and in February this year, revised the 'Notes on Foreign Exchange Price Fluctuation Reserve,' adjusting the existing foreign exchange price fluctuation reserve and special surplus reserve to create two pools each, totaling four pools, to help the life insurance industry strengthen its ability to withstand exchange rate risks.

Taiwan Ratings recently released a report titled 'Taiwan Life Insurance Industry: Risks Persist After Implementation of New Foreign Exchange-Related Regulations,' analyzing how recent regulatory changes in Taiwan are reshaping how life insurers manage foreign exchange risks.

Taiwan Ratings stated that the purpose of the new foreign exchange price fluctuation reserve system is to internalize hedging expenses and enhance capital and profit buffers to cope with unfavorable foreign exchange fluctuations. However, the current level of foreign exchange price fluctuation reserves in Taiwan's life insurance industry is still insufficient to withstand the impact of severe exchange rate changes. Although the new foreign exchange accounting rules reduce the volatility of book profits, they also increase complexity.

Taiwan Ratings believes that the credit gap between life insurance companies may widen in the future. Whether life insurance companies can actively manage foreign exchange risks, maintain robust asset-liability management, and prioritize long-term capital resilience over short-term profits may all contribute to the widening credit gap. Life insurers with strong financial performance and sound planning will be better equipped to cope with foreign exchange fluctuations in the long run.

Overall, Taiwan Ratings observed that due to increased reserve levels, the average hedging ratio of Taiwan's life insurance industry by the end of 2025 has decreased from 65.9% in 2024 to 50.3%. At the same time, the average reserve buffer space for Taiwan's life insurance industry continues to expand, reaching 7.6% in 2025, higher than 4.1% in 2024.

To understand the ability of Taiwan's life insurance industry to cope with different degrees of New Taiwan Dollar appreciation, Taiwan Ratings conducted stress tests and found that the reserves of Taiwanese life insurance companies by the end of 2025 could provide approximately 7.6% of buffer space for New Taiwan Dollar appreciation. Although the current reserve level should be able to cope with mild to moderate New Taiwan Dollar appreciation scenarios, its effectiveness will decline as life insurance companies reduce their hedging ratios.

Taiwan Ratings pointed out that the current reserve level is insufficient to fully absorb the impact of a 10% appreciation of the New Taiwan Dollar. A 10% appreciation of the New Taiwan Dollar could negatively impact the profitability of life insurers. With hedging ratios of 50%, 40%, and 20% respectively, the return on assets (ROA) would decrease by 0.4%, 0.9%, and 1.5% respectively.

Taiwan Ratings also reminded that foreign exchange fluctuations will directly affect the strength of life insurance companies' reserve buffers, and the available buffer space from the four-pool mechanism will also increase or decrease accordingly. Under IFRS 17 (International Financial Reporting Standard 17 Insurance Contracts), insurers with good profitability records and robust contract service margin (CSM) as a percentage of total assets may have a better ability to absorb negative impacts without significantly eroding capital and profits.

Taiwan Ratings believes that effective long-term foreign exchange risk management and prudent capital management will gradually widen the credit gap between life insurance companies. Robust asset-liability management will help life insurers cope with market volatility and maintain capital resilience. However, life insurance companies that significantly reduce hedging to prioritize short-term profit performance may face greater profit volatility, and their capital buffers will become weaker. (Editor: Lin Shu-yuan) 2026/04/08