The surge of the TWD may lead to a storm! The Financial Supervisory Commission closely monitors the dollar exposure of the life insurance industry.

Recently, the significant appreciation of the New Taiwan Dollar has drawn attention from various sectors. The Taiwanese life insurance industry, facing low domestic investment returns, holds 767 billion USD in overseas assets, resulting in substantial exposure to the USD. As the New Taiwan Dollar appreciates, life insurance companies find themselves in a dilemma, with hedging costs reaching 450,000 TWD per million USD. The Financial Supervisory Commission has requested an assessment of exchange rate risks and plans to hold a meeting to discuss countermeasures.

(Shocking foreign media! The New Taiwan Dollar soars nearly 7%, while the central bank remains inactive. What calculations are hidden behind Bloomberg's analysis? )

Taiwan's life insurance industry holds a large amount of U.S. assets.

Due to the Taiwanese people's fondness for purchasing large amounts of insurance, and since these life insurance, annuity, and retirement funds are denominated in New Taiwan Dollars, but there are insufficient investment opportunities locally in Taiwan, or the investment returns are lower than those overseas, this has resulted in the Taiwanese life insurance industry holding over 23 trillion New Taiwan Dollars (,670 billion US Dollars ) in overseas assets.

These market participants sell New Taiwan dollars to buy US dollars, using the US dollars to purchase foreign assets such as stocks and bonds, resulting in significant dollar exposure.

The cost of hedging against the US dollar is high, and many operators simply choose not to hedge.

The cost of hedging against the US dollar is usually high, due to the interest rate differential between Taiwan and the US. Many operators simply do not hedge ( or only hedge partially ), and can still benefit from the strengthening of the US dollar.

But the recent decline of the US dollar means that they face potential losses. According to Bloomberg, citing estimates from Bank of America, by the end of last year, Taiwan's life insurance companies had only hedged about 65% of their holdings, close to a historical low.

How to hedge against the US dollar?

There are two traditional hedging methods: one is to hedge through forward foreign exchange, and the other is to use a non-deliverable forward contract (NDF).

Forward foreign exchange hedging requires the presentation of relevant import and export documents, usually as a substantial hedging need for exporters or importers. They can hedge based on the current exchange rate when confirming the payment date for goods delivery. The cost of hedging mainly arises from the interest rate difference between USD and TWD.

However, non-deliverable forward contracts ( NDF ) do not require import and export documents, but there are quota restrictions, and prices are affected by market expectations, resulting in greater volatility. The costs are often much higher than those of forward foreign exchange.

According to the interbank quotes this morning, the cost of a one-month forward foreign exchange is 0.088, but the NDF cost is as high as 0.454, which means that to hedge one million US dollars, a cost of 88,000 and 454,000 TWD is required.

The Financial Supervisory Commission requires an assessment of foreign exchange risk.

Now that the New Taiwan Dollar has significantly appreciated, exporters and life insurance companies are caught off guard, and the cost of entering the market is too high, creating a dilemma where they cannot avoid it nor can they face it.

Life insurance companies have been asked to assess the impact of foreign exchange fluctuations and the measures they can take to manage foreign exchange risk. According to informed sources, the Financial Supervisory Commission may invite more insurance companies to participate in a meeting in the coming days.

Zhu Su, the founder of Three Arrows Capital, also expressed his views on X, stating that this situation is somewhat similar to yen arbitrage liquidation trades, except that it is more driven by domestic participants rather than overseas participants.

The dynamic in USDTWD is basically Taiwan runs one of the biggest ongoing trade surpluses in human history, hence it has a top5 global size foreign reserves at ~$600b (esp large when considering population is only 23million)

Life insurance / annuities / pensions are denominated…

— Zhu Su (@zhusu) May 5, 2025

This article discusses the surge of the New Taiwan Dollar, which may cause turmoil! The Financial Supervisory Commission closely monitors the dollar exposure of the life insurance industry, first appearing in Chain News ABMedia.