Matching assets to liabilities in Asia has always been a big challenge due to the relative lack of long-duration bonds and low interest in unit-linked products (ULPs). And the low-interest-rate, low-yield environment in recent years has made things even more difficult.
So it is not surprising that insurance firms in Asia, both home-grown and foreign, are focusing more on asset-liability management (ALM) than they have in the past – especially with their peers elsewhere forced to do the same as Solvency II looms.
Germany's Allianz, for example, aims to build out its ALM capabilities in Asia, with a view to putting experts in this area with some of its local units in the region.
The firm has life businesses in Korea, Thailand, Taiwan, Malaysia, Indonesia, China, India (a joint venture), Sri Lanka and Laos; and property-and-casualty arms in India, Malaysia and Thailand. It runs $25.6 billion in general account assets under management in Asia, mostly in its life business.
"The Singapore team has four ALM specialists, but over time we will need more strong capabilities in each local market. It won’t be the smartest way to do it all centrally out of Singapore," says Bernd Gutting, chief executive and chief investment officer of Allianz Investment Management Singapore, which manages its parent's Asian general account assets*.
ALM and product development activities are currently performed by the Singapore team, but Gutting expects the local Asian teams to conduct the operational functions in future. "This will be a gradual development process," he says, "and we are making a lot of progress in all our operating countries.
"We have definitely put more emphasis on ALM in the past three years in Asia," adds Gutting. This reflects developments within the wider Allianz Group.
"We have to follow global requirements, processes and models, all driven by Solvency II, and getting rolled out worldwide," he notes. "This is happening in Asia as well." (Solvency II are incoming capital standards – the equivalent of Basel III – for insurers.)
"Ultimately, ALM is getting more and more important in Asia," notes Gutting. "Regulators in the region are closely following what’s happening with Solvency II, and are moving to follow those principles."
Home-grown Asian insurers are also taking note, with large Chinese, Korean and Taiwanese firms among those said to be seeking more advice on ALM and in some cases initiating programmes on this and related areas.
Indeed, BNP Paribas Investment Partners won AsianInvestor's institutional product/strategy award this year for its involvement in helping an Asian insurance company to create the latter's first liability-driven investment platform.
The French fund house has responded to this trend by looking to beef up its multi-asset and model-building capabilities in Asia. For example, quant specialist Hua Jing moved from Amsterdam to Hong Kong earlier this year to help build LDI models and work on performance analysis.
Meanwhile, some banks are said to be looking to build up their own ALM capabilities in Asia to be able to better service insurers in the region, although this won't happen overnight.
Gutting has seen this happening in Europe, and feels it is a positive development. "But it takes a lot of time to build this relationship, as our bank partners have to intimately understand the risk characteristics of the liability side of our balance sheets. Not all banks have had the patience to build that expertise."
Another way of tackling the ALM issue is to sell more ULPs, which shift investment risk from insurer to client. But doing so is easier said than done, particularly in Asia.
The best way to sell ULPs in local markets in Asia is via banks, as this reduces the risk that these products will be mis-sold by insurers' tied sales forces, says Gutting.
But as Allianz is a relative newcomer and a foreign firm in Asia, it’s not easy for it to build relationships with local banks in each country – these are mostly domestic ties, he notes. "It’s a slow process to gain access to the bank channels. You won’t see dramatic changes in just one or two years."
Moreover, in some countries, such as Korea, people seem to have little interest in ULPs, notes Gutting. And while Allianz had been "very successful" selling ULPs in India, he says, the regulator indirectly put a stop to that business by capping the payment of commission to agents in 2009.
Still, there are some bright spots: most of the firm's new business in Taiwan is in unit-linked, he notes, and its Indonesian ULP sales accounts for a third of new business.
*See the latest (October) issue of AsianInvestor magazine for a detailed Q&A with Bernd Gutting.