New solvency and capital requirement regulations are changing the way chief investment officers work at insurance companies.

New risk-based capital regimes (RBC), in particular, are adding to CIO responsibilities at regional insurers, delegates at AsianInvestor’s 5th Insurance Investment Forum in Hong Kong heard on Thursday.

“The changing regimes are having a fundamental impact on the role of CIOs and their investment teams," Mark Konyn, group CIO at AIA Group, told the audience during a panel discussion.
 
Under the current rules in Hong Kong assets can be valued at either the amortised cost or at fair value, allowing for assets and liabilities to be measured differently on balance sheets. This means the underlying investment risks are not fully reflected in the calculation of capital requirements, John Leung, chief executive of the Hong Kong Insurance Authority (HKIA), said in an earlier keynote speech.
 
But under the incoming RBC regime, both assets and liabilities will be valued on a consistent, economic basis for solvency purposes.

“It will embrace a more risk-sensitive approach and it will help insurers properly identify, understand, measure, and manage the risks they face,” Leung said.

Hong Kong is relatively late to the game insofar given how other jurisdictions in the region have already implemented RBC regimes. Examples include China’s China Risk-Oriented Solvency System (C-Ross) and Australia’s Life and General Insurance Capital Standards (Lagic).

As a result, CIOs at regional insurers are already feeling the impact.

“I’ve had to spend a lot of time reading regulations that 10 years ago I would not need to,” Paul Carrett, group CIO at FWD Group, said at the conference. “It’s meant we’ve needed to be much closer to our [chief financial officers] to make sure we’re using up the capital in a very efficient way.”

The point was reinforced by AIA's Konyn, who noted how the investment function used to be a bit more isolated from the rest of the business.

“I think that is no longer the case," he said. "The real-time dynamic between what investors do within the insurance company and what others do around product and liability management and balance sheet management is very much an interactive process.”

RECRUITMENT AND HIRING CHANGES

The growing integration and cooperation between the investment side and the product structuring, liability management, and balance sheet management teams have also influenced how insurance companies identify and hire their staff.

“The profile that we would recruit is definitely changing,” Arnoud Miroudel, Asia CIO at BNP Paribas Cardif, told the audience. “We need people who can discuss with all these players within the company.”

It’s a transition from someone who has deep technical expertise to someone who has that expertise but also has the strong communication skills to reach out to other parts of the organisation, Konyn agreed.

The HKIA aims to implement its new RBC regime in 2021, Leung said. The regulator’s chief executive, who was seconded from the now defunct Office of the Commissioner of Insurance (OCI) to head the HKIA, will step down in late June when his secondment period ends.

ALTERNATIVES INVESTING

Insurer interest in alternative investments is also growing based on the economic circumstances and market outlook, the conference was told.

“We have seen private debt become far more prominent than before in allocation because interest rates have been so low globally. Similarly, private equity is trying to pick up that illiquidity premium, relative to where other markets are positioned,” Konyn said.

There is definitely a trend for Asian institutional investors to invest more in alternatives, Fabrice Chemouny, head of Asia Pacific at Natixis Investment Managers, told AsianInvestor in an interview last month.

“[In] more sophisticated markets like Singapore and Hong Kong, you can see some more demand for sophisticated alternatives,” he said.

A recent survey of institutional investors showed that 52.3% of Asian institutions believe investing in alternatives is necessary to outperform the broader market.

A senior executive at a Hong Kong-based insurer, who declined to be named, told AsianInvestor separately last month that his firm had begun investing in alternatives—including private equity, direct lending, and alternative credit—in the last two years.

The performance of those investments, the executive said, accounted for about half of last year’s returns.

However, the increasing popularity of private markets, particularly in the area of private debt, is a cause for concern, FWD’s Carrett said. “When the less experienced managers suddenly start becoming active and can raise real money in that space, then that makes you think it’s extremely crowded and it’s probably not a place you want to be in.” 

There are still opportunities in private debt, Carrett said, but it requires very selective strategies and doing your homework on the specifics of those transactions.

INFRASTRUCTURE STILL LAGGING

He is also circumspect when it comes to infrastructure investments, which is striking given the excitement being whipped up as a result of China's Belt and Road Initiative.

“The fundamental tension is a lot of these might be great deals, you might think it’s roughly BBB or A-type credit risks, but if it’s unrated it may well have a very high capital charge,” Carrett said. “There are a million conferences talking about what’s going on in infrastructure, but very few investible deals that we see.”

Infrastructure is a hot topic right now, AIA’s Konyn agreed, but he hasn’t really seen much assets coming out of insurers for these kinds of projects. 

“Insurers are long-term investors and players in that space in terms of corporate bonds, but in terms of real exposure to some of these projects, that remains to be seen,” he said.