Taiwan Relaxes Rules to Mitigate Currency Impact on Insurers

Taiwan has relaxed rules to help insurers cope with the recent surge in the local currency, which has caused massive paper losses on foreign holdings. The Financial Supervisory Commission will allow insurers to use six-month average exchange rates when calculating risk-based capital, and will increase the policy liability reserve rate to help insurers access additional reserves. This is expected to provide relief to the island's massive life insurance industry, which has reported losses due to the strong Taiwan dollar.

Taiwan's life insurance sector is facing significant challenges due to the recent surge in the local currency, which has led to massive paper losses on foreign holdings. The Financial Supervisory Commission (FSC) has announced new rules to help insurers cope with this volatility. These measures are expected to provide much-needed relief to the island's massive life insurance industry.

The FSC has relaxed rules to allow insurers to use six-month average exchange rates when calculating risk-based capital. This change aims to smooth out the impact of short-term currency fluctuations on insurers' balance sheets. Additionally, the FSC has increased the policy liability reserve rate, enabling insurers to access additional reserves. These measures are designed to mitigate the erosion of capital strength and earnings potential caused by the strong Taiwan dollar.

The currency volatility has been particularly challenging for insurers with significant overseas investments. Over 90% of Taiwan-based insurers' offshore assets are denominated in US dollars, exposing their balance sheets to valuation losses as the New Taiwan dollar appreciates. According to Bloomberg, Moody's Ratings analyst Kelvin Kwok noted that this portfolio structure creates a pronounced asset-liability currency mismatch compared to other Asian markets [1].

The situation has gained urgency as the Taiwan dollar's appreciation, over 9% year-to-date, translates to significant unrealised losses. Currency hedging gaps have amplified the impact, with the average currency hedge ratio across the sector standing at 61.5% in March, leaving a sizable portion of assets exposed to currency movements [1]. Goldman Sachs estimates that every 10% gain in the Taiwan dollar could result in NT$18 billion in paper losses for life insurers [1].

The new FSC rules are a response to these challenges. Cathay Life Insurance Co, Taiwan's largest life insurer, has been particularly affected. The company reported a long-term average investment return of 5%, outperforming local sovereign yields. However, most of its NT$180 billion in foreign assets were held in US dollars, magnifying recent losses [1]. The situation prompted Fitch Ratings to revise its outlook on Taiwan’s life sector to “deteriorating,” highlighting the erosion of capital strength and earnings potential [2].

Domestic constraints have historically driven insurers to seek yields abroad. The limited size of Taiwan’s bond market and its controlled exchange rate regime have incentivized insurers to invest overseas. In 2024, government bond issuance stood at NT$538 billion (US$18 billion), falling short of meeting the investment needs of the industry [1]. The FSC has floated short-term remedies, including regulatory adjustments to hedge accounting and reserve rules, but systemic challenges remain [1].

Insurers are preparing mitigation measures. Some plan to expand hedging programs and issue more foreign currency-denominated policies to manage currency exposure. However, these actions could introduce higher costs. At its May briefing, Cathay Life stated there were limited options for near-term asset reallocation, with investment-grade US bonds still offering the best yield-to-risk profile [1].

The FSC chairperson Peng Jin-lung has publicly stated that liquidity remains stable across insurers despite the currency shock [1]. Nevertheless, analysts have warned that Taiwan’s tightly managed exchange rate may not be sustainable in the long term, potentially increasing the financial burden on institutions heavily reliant on foreign-denominated assets [1].

Fubon Financial Holding Co., which delivered a standout performance in Q1 2025, has also been affected. The company reported a 35% year-over-year (YoY) jump in net profit to NT$41.06 billion, driven by robust growth across its banking, life insurance, and general insurance segments [3]. Despite this strong performance, Fubon's life insurance segment has not been immune to currency volatility. Losses for Fubon Life Insurance Co. almost quadrupled from a month earlier to NT$9.14 billion, as reported by the Taipei Times [4].

The new FSC rules are expected to provide some relief to the sector. However, the long-term sustainability of Taiwan’s tightly managed exchange rate remains a concern. Continued currency fluctuations could pressure insurance margins and introduce additional challenges for the industry.

References:
[1] https://www.insurancebusinessmag.com/asia/news/life-insurance/taiwan-insurers-exposed-as-currency-swings-hit-usd-assets-538803.aspx
[2] https://insuranceasia.com/insurance/news/fitch-sees-apac-insurers-stable-in-2025-capital-buffers
[3] https://www.ainvest.com/news/fubon-financial-q1-surge-leader-asia-financial-landscape-2506/
[4] https://www.taipeitimes.com/News/biz/archives/2025/06/11/2003838388