Fitch: Rising Interest Rates to Ease Taiwan Life Insurers' Negative Spreads

Fitch Ratings says in a new report that a persistent decline in the costs of insurance liabilities and improvements in recurring investment yields on rising market interest rates will reduce Taiwanese life insurers' negative interest spreads. However, the Sector Outlook remains Negative as Fitch expects that the high guaranteed rates of legacy policies will still constrain the sector's profitability at least in the near term.

Life insurers' costs of insurance liabilities have been dropping by about 10 bp per year with inflows of low-guaranteed-rate policies. Fitch estimates that large insurers have lower funding costs at below 3.5% after including mortality/morbidity and loading gains, versus above 4.5% for some small insurers. Rising interest rates would help improve returns from life insurers' assets, which have shorter duration than their insurance liabilities.

Asset risk is the key concern in the life sector, as life insurers have taken significant overseas investments at 55.7% of invested assets at end-August 2015. They are increasingly involved in corporate bonds, financial debentures and sovereign bonds of emerging markets, shifting from treasuries and agency bonds issued by developed countries. Their capitalisation, therefore, is vulnerable to unfavourable movements in the capital and currency markets.

For non-life insurers, their Stable Sector Outlook is supported by strong capital buffers and satisfactory underwriting performance, with combined ratios generally below 95%. Non-life insurers' aggregate equity-to-assets ratio was 32% at end-August 2015. They had also accumulated claims equalisation reserves of 13% of total assets by end-2014. The sector's underwriting leverage remains low, at around 1x between 2011 and 2014, as measured by net premiums written/shareholders' equity.