As insurance firms in Asia put more money into alternative assets to boost their investment returns and income, some are looking at how they can reduce the risk-based capital (RBC) charges imposed on such holdings, especially private equity and debt.

One possible avenue is to apply the ‘look-through’ approach for risk-charge calculations, while another is to allow the use of internal rating models. Insurers would like to see more flexible rules in respect of both areas.

RBC charges on investments in private credit and private equity are relatively high under current, or planned, solvency capital rules in several Asian jurisdictions.

These charges seek to reflect the perceived greater risks attached to such investment strategies, but they also drag on returns, as is the case in Europe where the Solvency II regime is seen deterring some insurance firms from investing into private equity.  

LOOK-THROUGH BENEFITS

What can help counter such issues is using look-through treatment, whereby regulators allow RBC charges on a fund investment to be set at the same level as if an insurer had invested directly in the assets held by the fund. 

This approach not only leads to greater consistency in the treatment of direct and indirect investments, but also means the RBC charges would also better reflect the underlying risks, Alan Yip, Asia head of insurance strategy at JP Morgan Asset Management, explained.

Alan Yip, JP Morgan AM

Some regulators, including the Monetary Authority of Singapore (MAS) and Thailand’s Office of Insurance Commission, already allow insurers to use the look-through approach in certain circumstances. It is also permitted in Europe.

“It will be good to see more Asian insurance regulators embrace the look-through approach,” Yip told AsianInvestor

But asset managers must be ready to provide sufficient and timely data to facilitate such an approach, he added.

Some of DWS Investments' insurance clients in Asia – notably in Korea and Taiwan – appear prepared for the adjustment, having asked the German fund house to provide insight for a look-through to certain underlying alternative assets such as private debt, said Stefan Gans, an institutional sales executive at the firm, last month.

“As insurers' demand for certain investments rises,” Frankfurt-based Gans added, “they will look for asset managers to help and, in turn, challenge the regulators on this to reduce risk charges.”

That ties in with questions that insurance firms in Asia are asking about how their European peers have implemented Solvency II and what might be next in terms of regional RBC rules.

However, a look-through approach based on asset allocation may pose operational challenges for insurers in some cases, Yip noted. For example, he said, there could be many individual securities in a fund.

As a result, MAS, for instance, has said it will consider methods such as data grouping, which alleviate such operational challenges, as long as such methods are prudent.

INTERNAL MODELLING

More regulatory flexibility around the internal rating models used by insurers in Asia could also help boost investment into certain asset classes, such as infrastructure debt.  

Insurance firms should be allowed to apply to use such models to calculate capital charges on fixed income assets, as they can in Europe, said Stephan van Vliet, chief investment officer of life insurer Prudential Corporation Asia, said. 

“It’s important that the regulations allow for internal rating models to provide some incentive for insurers to step into this long-term financing space,” he added, pointing to the big infrastructure funding gap in Asia. Infrastructure in the region needs $26 trillion of investment – or $459 billion a year – by 2030, the Asian Development Bank said last year.

Yet in some countries regulations make investment into private credit difficult, and some do not allow it at all, Hong Kong-based van Vliet noted. In Malaysia, for example, the private debt market is hampered by high charges, he said, and in Vietnam insurers can’t invest in private credit or do direct financing.

Mark Konyn, group chief investment officer of Hong Kong-based life insurer AIA, made a similar point when speaking to AsianInvestor a few weeks ago. The firm engages with regulators with a view, among other things, to gaining recognition for how it rates credit internally, he said.

For asset classes such as infrastructure, which offer long-term economic benefits, Konyn said, “we are keen to have such investments recognised from an asset-liability matching perspective”.

Indeed, AIA is considering making its first moves into direct infrastructure loans, initially via individual investments rather than through pooled funds, as it told AsianInvestor recently.

See the August/September issue of AsianInvestor magazine for an article on the implications of looming new solvency and accounting rules in various Asian jurisdictions for insurers' investment portfolios, and how these firms are responding.