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Taiwan’s FSC likely to bar insurance-linked products from investing in high-yield bonds

FSC
By Donna Chen*   
April 22, 2022

Taiwan’s financial regulator is expected to prohibit insurance-linked products (ILPs) from investing in high-yield bonds to reduce risk, a move that is likely to force insurers to shift billions of dollars into other investments.

The proposal was announced at a parliamentary finance committee meeting with officials of the Financial Supervisory Commission (FSC) on April 11.

The FSC is expected to discuss the proposal with the insurance industry and announce the new regulation in June.

Some legislators and FSC officials believe high-yield bonds are too risky for investors. Last year, the FSC issued rules requiring asset managers to change the Chinese names of high-yield bonds into non-investment grade bonds by May 2022 for fear the term “high yield” would mislead investors.

ILP funds currently allocate NT$500 billion (US$17.1 billion) to high-yield bonds. The new regulation expected by the middle of the year would mean ILPs would no longer be able to invest in high-yield funds, which include discretionary investment-oriented policies.

Taiwanese investors prefer stable cash returns so some asset managers expect more funds to be channelled into distributive dividend onshore funds when the regulation comes into force.

Under current regulations, insurance proprietary investments can only be made in foreign investment-grade bonds which have a minimum rating of BBB+ (domestic investment products are only limited by category and capital weighting, not the credit rating).

Taiwan’s Securities and Futures Bureau defines high-yield bonds as debt rated below BBB+. The securities regulator is expected to decide by June whether to alter the threshold level.

*Donna Chen is with Taipei-based investment consulting firm Keystone Intelligence.­