Taiwan Insurance Companies' Overseas Investments Near 70%... "South Korea Should Ease Quota Regulations"

[Asia Economy Reporter Oh Hyung-gil] Although Taiwan's 10-year government bond yields are ultra-low at 0-1%, Taiwanese insurance companies are recording a 4% level return on invested assets. This is the result of Taiwan's financial authorities steadily increasing the overseas investment limits for insurance companies from 20% in 2003 to 35%, and then from 35% in 2007 to 45%, starting from the early 2000s when the low interest rate environment of around 1% began.

In 2012 and 2014, foreign currency-denominated insurance products and Formosa bonds (foreign currency-denominated bonds issued in Taiwan) were excluded from the overseas investment limits, causing the investment scale in foreign currency-denominated products to soar to 69% of total invested assets by the end of 2018. This contrasts with domestic insurers, whose overseas investment ratio remains around 15%.

Voices advocating for the relaxation of overseas investment limits for insurers are gaining strength in preparation for prolonged low interest rates, the introduction of new international insurance accounting standards (IFRS17), the new solvency regime (K-ICS), and other liability market valuation systems.

According to the report "Evaluation and Implications of Overseas Investment by Taiwanese Life Insurance Companies" released by the Korea Insurance Research Institute on the 5th, domestic insurers are also experiencing negative interest margins starting with fixed-rate products sold in the past.

With the implementation of IFRS17, K-ICS, and other systems that mark liabilities to market value approaching in two years, the burden of capital reinforcement is increasing. This is why there are calls within the insurance industry to raise the current 30% overseas investment limit.

The Financial Services Commission viewed the "30% overseas investment rule" as an obstacle to effective asset management by insurers and proposed an amendment to the Insurance Business Act in 2017 to abolish the related legal provisions, but it ultimately failed to pass the National Assembly.

Hwang In-chang, a research fellow at the Korea Insurance Research Institute, said, "As the low interest rate environment deepens and continues, the importance of managing insurers' return on invested assets in terms of profitability and soundness will increase. Since Korea has a lower risk of financial instability caused by increased overseas investment by insurers compared to Taiwan, institutional improvements are needed to strengthen autonomy in asset management."

He also advised that appropriate monitoring should be conducted to ensure that insurers do not take excessive risks to increase profits through overseas investments.

In the case of Taiwanese insurers, concerns have been raised that exposure to foreign exchange risk and credit risk could significantly deteriorate soundness if shocks occur in external financial markets. In response, local authorities announced policies to reduce foreign exchange risk exposure and encourage domestic investment.

Research fellow Hwang emphasized, "Relaxing preemptive and direct regulations on insurers' asset management could encourage insurers to pursue profits through excessive risk-taking, so post-event and indirect regulation such as soundness supervision should be strengthened. Monitoring of concentration in specific countries and assets should be enhanced, and stress tests on rollover risk should be conducted regularly to assess the adequacy of foreign exchange hedging strategies."

This content was produced with the assistance of AI translation services.