A sharp increase in insurance sales in Taiwan is raising concerns about potential capital outflows, which could drag the local currency, the Taiwan dollar, to levels not seen since the global financial crisis in 2009.
Sales of insurance policies in Taiwan surged to over NT$100 billion ($3 billion) in December, the highest monthly total since January 2022, according to the Insurance Institute of Taiwan. This increase in demand has been largely driven by higher returns on insurance products compared to foreign-currency deposits offered by banks.
The country’s $1 trillion life insurance industry has been increasingly investing in overseas assets, particularly U.S. bonds and dividend stocks, as domestic fixed-income products fail to offer high yields. Analysts, including Lynn Song, chief economist for Greater China at ING Bank, worry that this trend will accelerate, further contributing to capital outflows and putting downward pressure on the Taiwan dollar.
With the currency already under pressure due to geopolitical tensions and Taiwan’s large interest rate discount compared to the U.S., the Taiwan dollar recently fell below the key psychological level of 33 per U.S. dollar for the first time in nine years. Analysts predict the currency could test the 34-35 per dollar range in the coming months, levels last seen during the 2009 global financial crisis.
While a weaker Taiwan dollar may be advantageous for Taiwan’s export-driven economy, concerns are rising about the long-term effects of this currency depreciation. Local insurers, who typically hedge against a stronger Taiwan dollar by shorting the greenback, are reducing their hedging activity due to expectations that the currency may weaken further.
In response to the currency’s decline, Taiwan’s central bank intervened in the foreign exchange market to stabilise the situation, and President Lai Ching-te has vowed to maintain stability in the country’s foreign exchange market, interest rates, and inflation amidst growing economic uncertainty.
