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, according to Fitch Ratings.

However, the sector outlook for Taiwanese life insurers remains negative as Fitch expects the high guaranteed rates of legacy policies will still constrain the sector’s profitability at least in the near term.

Fitch said life insurers’ costs of insurance liabilities in Taiwan have been dropping by about 10 bp per year with inflows of low-guaranteed-rate policies.

The ratings agency has estimated 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.

It said rising interest rates would help improve returns from life insurers’ assets, which have shorter duration than their insurance liabilities.

According to Fitch, asset risk is the key concern in Taiwan’s life sector, as life insurers have taken significant overseas investments at 55.7% of invested assets at the end of August 2015.

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The ratings agency said Taiwanese life insurers 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.