The Taiwanese government wants the country's insurers to invest more locally; imbibing on a cocktail of improved economic growth at home and increased uncertainty abroad will encourage them to do so.

However, if the government wants to harness insurance capital more effectively to help fund local development, it may have to go further than it has done to date.

In a scheme unveiled this month, the Taiwanese financial regulator said it wanted to expand the domestic fixed income market to help retain more insurance money on the island.

On the face of it, the timing looks propitious. 

With interest rates expected to gradually rise and local shares holding up – the benchmark TWSE Index is up more than 2% year-on-year and at different times over that period has threatened to push higher – insurers are already seen to be eyeing the home market, Serene Hsieh, director for financial services ratings at Taiwan Ratings, told AsianInvestor. Taiwan Ratings is the local affiliate of S&P Global Ratings.

The domestic economic picture is also slowly improving, despite growing global trade tensions and Taiwan's pivotal place on global technology supply chains, with the central bank last week raising its 2018 economic forecast to 2.68%.   

In contrast, investment returns in foreign markets, mainly the US, have turned less attractive, she said, as exchange rates turn more volatile, pushing up currency hedging costs at a time when the dollar is strengthening.

Taiwan lifers, with almost $820 billion in total assets at current exchange rates, already have more than 60% of their assets invested overseas and it’s not optimal to raise the allocation further, Hsieh added.

Taiwan lifers had 66.83% of their total amount of capial invested in overseas markets as of April, while foreign investments only accounted for about 50% in 2014, according to the Taiwan Insurance Institute.

Source: Taiwan Insurance Institute

FIVE PLUS TWO

The repatriation of some of that capital is much desired by the local regulator. In a financial development scheme released by the Financial Supervisory Commission (FSC) on June 14, it aims to direct insurance funds to help economic development in Taiwan.

According to the framework, the target is for insurers to invest NT$150 billion ($4.9 billion) in the next three years into the so-called 5+2 innovative industries, as well as the public construction and long-term care sectors.

The 5+2 refers to five pillar industries – the internet of things, biomedical, green energy, smart machinery and defence, subsequently expanded to include new agriculture and the circular economy (related to the recycling of products).

Still, as Hsieh said, it is not the first time that the government has tried to encourage insurers to invest more capital locally to promote Taiwan's economic development, so whether it gets its way or not will really depend on the underlying financial circumstances.

“[Investing onshore] will ultimately depend on their asset-liability management, and whether there is enough return or incentive to justify the new investment activity,” she said.

Part of the government's new measures is to encourage lifers to invest in local private equity funds by lowering the relevant capital charge. Fund houses in Taiwan have been allowed to sell private equity funds since August last year and the government has been encouraging investments into sustainable industries via these new vehicles.

But private equity funds are by nature less liquid and insurers can only make limited allocations to this relatively risky asset class. So even though the capital charge has been slashed from about 40% to 20%, it is unlikely to increase insurer allocations significantly, Hsieh said.

TOO RISKY

The FSC policy framework also seeks to relax the rules on money pooled for the development of public construction projects, promote green bond issuance, and increase the size of Taiwan's fixed income market to satisfy the long-term investment needs of insurance companies.

But even then, without more government skin in the game, it could be insufficient to convince institutional investors to invest more in the targeted sectors, say some notable insurance industry insiders.

The risks for investments into the 5+2 industries are too high; the government or banks should provide guarantees for them, Huang Tiao-kuei, chairman of the Life Insurance Association of the Republic of China, said in a media report in April. Huang is also the chairman of Cathay Life.

The government should also issue public debt or securitisation products to help fund public construction projects, Huang said. But there is no mention of this, or of providing guarantees, in the current FSC blueprint. 

“I want money to stay in Taiwan too, but the government has to find [suitable investments],” Huang said.

Insurance companies typically prioritise “safety” and “yield”; it’s the policyholders’ money and cannot be used in large amounts for public welfare and risky investments, Huang said.

At the time of writing, the Life Insurance Association had not replied to AsianInvestor’s request for comment on the FSC’s new plan.

*This story is updated to show that the numbers in the chart are percentages of total amount of capital invested, instead of total assets.