Taiwan's government is set to allow its insurers to invest in Chinese financial instruments for the first time, a sign of how improving cross-strait relations are yielding economic benefits for businesses.

The Financial Supervisory Commission, Taiwan's financial regulator, said in a statement late on Tuesday that it planned to allow qualified insurers to invest up to 10 per cent of their overseas investment limit in Chinese stocks and up to 5 per cent of the limit in bonds. Insurers will also be allowed to invest in host of other Chinese financial instruments including Treasury bills and exchange-traded funds.

The relaxation is a boon for Taiwan's insurers, who have had a tough time generating meaningful returns in the past because the local market is relatively mature and intense competition has sparked price competition that has eroded profitability.

Chao Tsai-ling, executive vice-president at Fubon Life Insurance, the island's second-biggest life insurer, said the new rules would have a positive impact: “It increases avenues for investment and so will help improve returns on our investments.”

A number of foreign players, including ING and Prudential, have exited the market over the past two years, and AIG is attempting to sell its Nan Shan life insurance unit.

The low interest rates over the past two years have also meant insurers lacked investment opportunities generating the levels of return they had guaranteed their clients.

Even before the financial crisis, Taiwan's life assurers earned an average of less than 1 per cent return on assets between 2003 and 2007, according to Fitch.

Taiwanese insurers have T$11,000bn ($347.2bn) in assets, according to government data, and most are allowed to invest up to 40 per cent of that into overseas assets. Due to China's capital controls, however, Taiwanese insurers would still need to apply for “qualified foreign institutional investor” (QFII) status from Chinese regulators before they could invest in China.