After the Chinese authorities late last year relaxed restrictions on domestic insurers investing overseas, foreign asset managers have been busier than ever courting them*.
The most obvious goal for these fund houses is to win offshore investment mandates, but that is not all mainland life companies are looking for. There is a good deal more for an insurer to consider when buying its first foreign assets than simply choosing the type of instruments or products.
For example, they have the issue of foreign exchange risk to contend with. A senior executive at one of the biggest Chinese insurance firms says he expects to build up a currency hedging team, and anticipates rivals will do the same.
“You can only make educated hedging decisions if you know the entire portfolio structure,” he says. “And it’s highly unlikely that any Chinese institution will give a third party that information.”
Meanwhile, large mainland life insurers have been making regular visits to BNP Paribas Investment Partners’ head office in Paris, notes TF Cheng, the firm’s Asia-Pacific head of institutional business. Earlier this year the fund house conducted a six-day training seminar in Hong Kong for one of the largest.
The insurer sent more than 20 delegates from various functions – risk management, legal, compliance, investment, asset allocation – and the fund house flew staff from locations including London and Amsterdam. Topics covered included asset allocation, liability-driven investment (LDI), asset-and-liability management (ALM) and risk management.
"[The Chinese insurance executives attending our seminars] are very well qualified people, but there is so much information they need to put together," says BNPP IP’s Cheng. “And they’re not just borrowing from models elsewhere, but starting from first principles.”
The fund house has responded 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.
In fact, the French firm won AsianInvestor’s institutional product/strategy of the year award in May for its work on LDI for one of the biggest (non-Chinese) life insurers in the region.
BNPP IP’s LDI team is headquartered in Amsterdam, and Hua’s focus there was on LDI and investment modelling. “We are now bringing more of this expertise to bear for insurers in China, Korea and elsewhere in Asia,” says Cheng. “It’s a different kind of financial engineering from what we’ve had here before.”
This is signaling a shift in the insurance industry in the region, with a greater focus on risk-based capital frameworks, with which firms in Europe are already familiar.
Asian institutions have now come to the point where they are becoming global players themselves, in that they need to be model-setters rather than model-takers, argues Cheng.
In the past Asian institutions typically imported CFA Institute risk models and the like, but now they are asking more about dynamic asset allocation, benchmarks, and to an extent LDI, he notes. Traditional, long-established risk assumptions may no longer hold true, so it makes sense to build new models from an Asian basis.
“They want to know about thinking behind how we define a benchmark, the thinking and technology behind that; the tools for putting in place a framework for asset allocation”, says Cheng.
*A feature on Chinese insurers’ moves to invest offshore appears in the September issue of AsianInvestor magazine.