Taipei: The Taiwan dollar's rapid appreciation against the United States (US) dollar in recent days has raised foreign exchange (FX) risk concerns for the country's life insurers, according to a new commentary from AM Best.

According to BERNAMA News Agency, AM Best noted that the local currency surged by a combined eight per cent against the US dollar over a two-day period in the past week. Factors that fuelled this momentum include increased foreign capital flow into the domestic equity market, speculative investments in the exchange rate, and some de-risking of US-denominated assets by institutions with significant exposures, such as Taiwanese life insurance companies and large exporters.

AM Best director of analytics, James Chan, stated that Taiwan's life insurance segment has been gradually building up its foreign exchange fluctuation reserves, which amounted to TWD283.6 billion at the end of March 2025. Chan highlighted the increasing complexity of Taiwan's macroeconomic environment, exacerbated by heightened geopolitical risks, which presents persistent challenges to Taiwan's insurance industry.

However, FX risk management is a key component of Taiwanese insurers' enterprise risk management (ERM), with nearly all non-life rating units in Taiwan having an ERM assessment of appropriate. Taiwanese life insurers' allocations to foreign investments have been reported by the Taiwan Insurance Institute as representing approximately 70 per cent of the segment's overall portfolio as of year-end 2024.

The non-life segment allocated approximately just 15 per cent to foreign investments in 2024, focusing on maintaining sufficient liquidity to support short-tail underwriting liabilities, according to the commentary. Coupled with lower foreign investment-to-capital gearing, smaller balance sheets, and consistent application of FX derivatives with a moderately high hedging ratio, AM Best expects the non-life segment's profit and loss and capital position to remain resilient against the recent large FX volatility.