Insurance firms in Asia Pacific are showing far more appetite for investment risk and less focus on credit quality than those elsewhere, finds a new survey* by Goldman Sachs Asset Management.
This reflects concerns raised by industry observers that the region’s insurers’ headlong search for yield could land them in trouble. Fears have been voiced by rating agencies such as Fitch and even professionals in the industry, such as Ian Brimecome of Japan's Tokio Marine.
A quarter (26%) of insurers globally plan to increase their portfolio risk in the next 12 months, while 10% plan to reduce it. Yet among Asia-Pacific respondents the number looking to raise risk is 59% (against 9% planning to lower it).
What’s more, Asian insurers say the investment risk they are most concerned about is low yield, yet they are far less worried than their global peers about credit quality deterioration (see figure 1).
US corporate debt focus
Yet, perhaps surprisingly, the asset class that Asia-Pacific insurers are most focused on raising their allocations to is US investment grade corporate debt, unlike their peers elsewhere. American respondents ranked collateralised debt obligations highest in this regard and European insurers infrastructure debt (see figure 2).
This may be driven by the fact that in many Asian markets investors have had a hard finding long-duration assets, Tuan Lam, Asia Pacific head of institutional business at GSAM, told AsianInvestor.
As for how they plan to make their allocations going forward, Asia-Pacific insurers (43% versus 19% globally) plan to ramp up their use of external asset managers than those elsewhere.
US rate rise outlook
Another area where Asia-Pacific insurers’ outlook differs notably from that of their peers elsewhere is in respect of the expected effect of US rate rises. A quarter (26%) of firms in the region said the impact of Federal Reserve hikes would have a “very significant” impact on their investment portfolios; the figure was only 18% globally.
As a result, more Asia-Pacific insurance firms are moving more into floating-rate instruments to offset the impact of rate rises, said Lam. These include collateralised loan obligations and mid-market loans, he noted.
US investment-grade bonds is top of their list for planned allocations, despite the fact that such debt will be strongly affected by Fed rate hikes, added Lam. This is because they also need longer-duration and high-quality assets, he noted.
Despite their relatively high risk appetite, insurance firms in Asia Pacific are taking note of looming solvency rules that will make it more expensive to hold riskier assets such as equity and certain alternative investments. Three-quarters (the highest proportion) said regulatory capital was likely to be the main capital constraint affecting their investment strategy in 2017.
While companies in Hong Kong, Singapore and Australia, for instance, have been thinking about these rules for quite a while, said Lam, others in the region are also focused on new regulatory frameworks. “They are now not so far behind [in terms of preparing for new solvency frameworks].”
This is becoming clear from what they are looking to invest in, he noted. “If you ask insurance clients where they think will find returns, they say private equity and public equity. But if you ask where they will deploy capital – they plan to focus on increasing their credit allocations. This comes down partly to the capital treatment of credit versus equity.” Ultimately, credit is less costly to hold than equity.
Moreover, “[asset-liability management] is a topic in almost every meeting [with Asian insurers] now”, added Lam. “In some markets it is three to four years before the new regulatory framework will kick in, but they are looking at how it affects how they manage and invest capital.”
They are trying to find more yield and longer-duration assets, he added.
As for the main perceived macroeconomic risks facing insurers, fears about a recession in China have receded, especially in Asia Pacific, where only 7% ranked it as a leading risk compared to 28% last year.
Globally respondents ranked ‘political events’ top, followed by ‘economic slowdown/recession in the US’ and ‘credit and equity market volatility’. Well down the list, at sixth, was ‘economic slowdown/recession in China’ (see figure 3).
Fears about China’s slowing economy was a top three concern last year, said Lam, but that is no longer the case.
This is perhaps to be expected, in light of political events in Europe and the US in the past year, such as Britain's vote to leave the EU last June, the election of Donald Trump as US president in November, and other major votes in Europe.
Meanwhile, cash/liquidity management is less of a focus for Asian insurers than those elsewhere; 24% said it was not applicable to their business, as compared to 10% globally.
But this is a bigger topic in Asia than it was three or four years ago, said Lam. Insurers’ focus on it is increasing especially in higher-growth markets, he added, where premium incomes are rising fast and they are realising the need to manage their capital better.
There are more discussions around short-duration money-market funds, for instance, he noted.