Taiwan's Financial Supervisory Commission (FSC) is taking steps to reduce the life insurance industry's heavy dependence on U.S. dollar-denominated assets and to curb their extensive use of currency hedging. This move comes after Taiwanese insurers experienced substantial foreign exchange losses, including a record NT$145.4 billion ($4.6 billion) in May due to a sharp appreciation of the Taiwan dollar. The industry holds about $700 billion in overseas assets, with over 90% denominated in U.S. dollars, leading to significant exposure to currency fluctuations.
The FSC is overhauling accounting rules to allow insurers to spread out exchange-rate gains and losses over time for bonds measured at amortized cost, effective next year. This aims to reduce the immediate impact of currency swings on financial statements and is estimated to save insurers about $2.9 billion annually in hedging costs. Insurers have already begun unwinding hedging positions, with offshore currency hedge reductions largely completed by last month and a shift to unwinding onshore positions now underway. The industry's hedging ratio fell to 58.55% by the end of October, its lowest since 2020.
From 2019 to 2025, Taiwanese insurers spent over NT$1.6 trillion ($50.8 billion) on currency swaps and non-deliverable forwards for hedging, exceeding their combined net income of approximately NT$1.4 trillion ($44.5 billion) during the same period. The FSC aims to address this imbalance, considering the high cost of hedging relative to its limited effectiveness. The regulator will also require insurers to use savings from reduced hedging costs to boost foreign-exchange volatility reserves and strengthen capital. This push to diversify away from U.S. dollars is also driven by concerns over systemic risks to Taiwan's finances, especially given the industry's $1.2 trillion size, which is 1.5 times the country's economy.
