Asia-Pacific insurers outside of Japan grew their assets under management (AUM) by 18.02% in 2017, picking up from the 10.46% pace set in the previous year.

Maintaining a similar rate of expansion this year and next, though, could prove tricky as investment markets become more volatile and interest rates rise.

Nine out of the 10 insurance markets saw strong double-digit growth last year, led by India, Thailand and Taiwan, according to the AI300, our annual list of the region's 300-biggest asset owners.

China was the main driver of growth, its 18.96% rate of increase backed up by $1.28 trillion of AUM, representing about 19% of all the AUM held by insurers across the region last year.

Japanese firms, in contrast, dragged on the overall regional performance, partly due to the yen's depreciation against the dollar. Accounting for nearly a third of AI300 constituents and 48.1% of total AUM, Japanese insurers experienced a 6% AUM drop in greenback terms last year -- a decline of $207.1 billion.

As the biggest segment and the only one to see a decline in AUM, Japanese insurers brought the annual AUM growth rate among all Asia-Pacific insurers down to 5.11%.

Taiwan's insurance sector stood out as one of the region's strongest growth markets for two key reasons, according to Janet Li, wealth business leader at consultancy Mercer.

“The strong growth was driven by market returns and also the good sales of their insurance policies,” Li told AsianInvestor.

Among individual insurers, Hong Kong-based FWD Group had the highest AUM growth, at 56.47%, propelling it up 31 places to No.189 on the AI300 list. It too benefited from solid equity returns as its AUM increased to $26.6 billion last year, Paul Carrett, FWD's group chief investment officer, told AsianInvestor.

Japan’s Dai-Ichi Life Insurance grew its AUM by 3.2% to ¥31.4 trillion, helped also by its stock market returns, especially at home, but a 11.5% depreciation of the yen versus the dollar in the review period brought down its AUM by 7.4% in dollar terms.

VOLATILITY AND RATES

A shakier stock market outlook as Western monetary policy is tightened after years of strong policy accommodation may make sustaining last year's sizzling AUM growth in Asia more difficult and is prompting investors to look around for different ways to make money, Carrett said.

The Cboe Volatility Index (Vix), a widely-used gauge of market confidence, averaged 11.01 in 2017, the lowest yearly average for the Vix since it revised its methodology in 2003. The index then jumped to 37.32 on February 6, and it has averaged 16.4 since.

“We are aggressively looking to diversify our sources of return. This is especially important as we move from a regime of abundant liquidity to one of much tighter liquidity,” Carrett said.

FWD declined to give specific examples of where the company was diversifying its investments.

However, the search for alternative investment markets is part of a broader regional trend, not least among Japanese institutional investors, who face a potential double whammy as domestic interest rates stay at rock bottom and interest rates elsewhere rise, potentially sapping economic activity.

“We will continue expanding exposure to fields that are less correlated with traditional assets, such as infrastructure and real assets,” a spokesman for Dai-Ichi told AsianInvestor

The Bank of Japan’s interest rate range has remained at 0% to -0.1% since February 2016, while the US Federal Reserve has raised its rates seven times since late 2015 and is slowly unwinding its balance sheet.

ALTERNATIVES TREND

Dai-Ichi is not alone among regional insurers in looking to increase allocations to alternatives. HSBC Insurance’s Hong Kong unit has been looking at private debt, commercial real estate loans, bank loans, and infrastructure debt in recent years to help match its liabilities and take advantage of the illiquidity premium, chief investment officer William Chan told AsianInvestor in March.

Thai life insurers like FWD Thailand, Krungthai Axa Life, and Muang Thai Life are also eyeing alternatives, and India’s Edelweiss Tokio Life is looking at infrastructure and real estate assets for the higher yields.

Other asset owners in the region dipping into alternatives in recent months include Japanese pension fund GPIF, which announced its first infrastructure mandate in January, and Manulife Life Insurance, which said in April that it would invest about $2.5 billion into pan-Asia real estate.

Taiwanese insurers are also looking into alternatives, particularly on the private market side, Mercer’s Li said.

“They need to try to deliver more sustainable and good outcomes for the insurance portfolio, so the private markets would definitely be an area that they should look into more,” she said.

However, these private market investments still may not be enough to make up for lower returns in equities this year.

“Because private markets are still a small portion of the overall portfolio, no matter how strong it is, it’s still hard to make such a big difference,” Li said.