China insurers plan more investment outsourcing

Mainland insurers will continue handing out mandates for alternatives and equity portfolios, despite Beijing's new solvency rules monitoring their risk exposure, heard an AsianInvestor forum.
China insurers plan more investment outsourcing

Following the introduction of new solvency rules in China this year, domestic insurers are set to continue building allocations to global assets and new types of fixed income through external asset managers, heard AsianInvestor’s China investment forum in Beijing.

Larry Wan, chief investment officer at AIA China, said his firm had traditionally invested in low-risk and low-volatility assets, such as long-dated government bonds, but it may look to take more risk now, such as adding exposure in equities and alternatives.

However, small and medium-sized players, whose assets have grown quickly through the sale of universal life policies over the past two years, are under pressure in terms of their solvency levelssaid Wan during a panel at the event. This is because they have increased their risk exposure and thereby reduced their capital-adequacy levels.

They might not raise their equity exposure this year, he added, but instead may look for bonds they were not interested in previously, without specifying the type of instruments he was referring to.

Speaking on the same panel, Don Guo, chief investment officer at Singapore-based Asia Capital Reinsurance (ACR), said outsourcing provided strong flexibility for making international allocations. The firm outsources about half of its portfolio, he noted, adding that most of its external investments are for global exposure in fixed income, equities and real estate funds.

Outsourcing to fund managers provides flexibility, because it is difficult to establish internal investment teams for global assets, Guo said. “We need to do asset allocation internally; this is the most important decision.”

New rules

The China Insurance Regulatory Commission (CIRC) implemented the China-Risk Oriented Solvency System, the country’s ‘second-generation’ solvency regime, in the first quarter of this year.

The rules monitor insurers’ risk exposure to different assets. Insurers with 'comprehensive solvency ratios' (CSRs) lower than 100% – likely those with greater exposure to risky assets ­– will be told to boost capital. Meanwhile, insurers heavily invested in ‘safe’ assets are likely to have high solvency ratios, so may consider adding risk exposure by moving into new asset types.

The biggest mainland insurers, such as China Life and China Pacific Insurance, had CSRs of 329% and 291% as of June this year, as compared to 210% for Ping An, a more aggressive investor. The CIRC said the average solvency ratio for life insurers was 256% in the first quarter.

Chinese insurers, such as China Life and Ping An, have been increasingly moving into overseas markets and outsourcing investments. Moreover, China Life is eyeing private equity funds with dollar exposure this year, having handed out two rounds of public mandates covering global equities, multi-asset and European equities. 

Elsewhere, Taiwan Life is moving to boost its foreign allocation by adding external managers, as reported, while insurers in Southeast Asia are preparing for changes to risk-based capital rules in their own markets.

Cautious approach

Meanwhile, Guo holds a cautious view on allocations this year, arguing that potential market downside is greater than the potential upside margins.

He said investors would need both to diversify assets further by adding alternatives and to use derivatives to hedge downside risk. This reflects a trend among Asian insurers, which are increasing their use of derivatives for de-risking, as reported.

Investors also need to be aware of inflation risk, as commodity prices could rebound, noted Guo, while US treasury inflation protected securities (Tips) are at low valuations and are therefore worth buying.

¬ Haymarket Media Limited. All rights reserved.