International insurers operating in Asia need to better improve the communication between their investment and product development teams in order to reduce balance sheet, cash flow and duration risks, senior insurance executives told the audience at AsianInvestor’s 5th Insurance Investment Forum in Hong Kong.

“In the last generation of product development, you just need to give one yield to the product development team and they handled the rest,” Gregoire Picquot, chief investment officer (CIO) of Axa China Region Insurance Company and Axa General Insurance Hong Kong, told the audience at the forum, which was held on March 1.

“Right now, we have full collaboration at inception…We are looking at all the dimensions they want, including liquidity, including duration gap management, convexity management,” he said.

Kevin Singh, head of Asia ALM at Manulife Asset Management, agreed that the two sides need to stay in constant touch, particularly when new insurance policies are being launched. “I think it’s very important that ALM (asset and liability management) is involved in the product development process from very early on, if you wait till the assets and liabilities are on your book and then try to manage it then you’re screwed,” said.

However, Singh and others noted that ensuring such constant communication isn’t always an easy job.

“There’re always the product guys who don’t want to hear from you…It has to be a little bit of trust and communication,” he said.

The need to integrate the product structuring and investment sides of life insurers would seem to be an obvious requirement for the companies to keep a handle of their balance sheet risks, but several participants at the forum said that many companies have work to do in this field.

“Even some of the biggest insurers in the region haven’t had very good communication between the two divisions,” one insurance industry participant told AsianInvestor. “Sometimes the product development side comes up with a new product that offers a certain return and the investment team get told they have to hit that return. It’s not a wise way to run a business, but it’s quite common.”   

The integration among different stakeholders in the business is very important, with the investment function seen as an integral part of the business, said Bin Deng, head of group investment solutions and derivatives at AIA Group.

“[We have been] trying to keep that conversation or dialogue very open and frequent. There’s where the culture is very important. You gain the respect and trust through these daily dialogues and the collaboration,” he said.

DERIVATIVE ILLIQUIDITY

When it comes to investing their assets, global insurance investors said they are concerned about how best to utilise often thin derivatives markets in Asia to hedge themselves.

AIA, which has over $170 billion in assets, is diversifying from local-currency to global currency. But hedging with derivatives is a concern. Developments and regulations in the derivatives markets are different in Asia, Deng said.

“I previously work in North America where the derivatives market is much more developed and liquid. In Asia the situation is different. We use it much less but we are also trying to stimulate and help to develop a more active market,” added Singh of Manulife AM, which had $93 billion AUM in Asia Pacific, according to AsianInvestor’s 2017 AI100.

“Working in Asia is interesting, because we have a limited derivative market, and limited assets in terms of maturity, but we are still selling more life products,” noted Picquot of Axa.

Some speakers were optimistic that the region’s bond markets will continue to deepen, which will give insurers less duration risk and provide them with more investment options. Others were not as hopeful.

“If there is no long-dated [bond] issuance, there is no way to synthetically generate these cash flows. However, I think that the future is bright, because we’re seeing a number of governments starting to push issuance a little bit further,” said Robert Turnbull, Hong Kong-based director of group asset management at Swiss Re, which had over $215 billion in global assets at the end of 2016.

Regulatory change has been seen and regulators like those in China will likely improve the pipeline of deal flow, he predicted.

“With these changes in dynamics on both the government issuance size and the regulatory side, in five to ten years we won’t be having such an issue on ALM side for managing these high-guarantee products.”

But Deng from AIA argued that even increased bond supply might not keep up with mounting demand.

“In Asia we’re going to see hundreds of millions of people buying insurance products. Will capital market, will the supply of the bonds, catch up with the demand? I have a big question mark,” he said.

KEY STRATEGIES

The insurance representatives also offered the audience some insight into how their priorities are when considering ALM.

Deng noted that AIA is conservative in its investment strategy. It sticks to ALM fundamentals: duration matching. Building a long-term curve has been important for the insurer, which operates in 18 markets in Asia.

"When looking to the future, we see no major deviations from the fundamentals. But we are looking at not only duration matching but also cash-flow matching," he said.

Turnbull said Swiss Re also has a conservative strategic asset allocation and is not taking major amounts of asset risk within the portfolio.

“We focus very much on sovereign bonds, very high quality portfolio, our main risks are US credit, UK credit. Recently we are focusing on lower-rated equities, infra and real estate, which are key to long-term earnings,” he said.

But Singh from Manulife raised an interesting point, noting that the right type of investing approach can vary depending on the type of policy it is underpinning.

“Everyone is talking about lengthening duration, minimising interest rate risk,” he noted. “That’s pretty standard. Most long-term insurers do that. But there are differences when it comes to the type of products.

“If it’s more a guarantee-type of products, where the shareholders or [insurance] companies have all the risk, then the insurers will want to minimise interest rate risk. But if you are selling more participating types of product [such as] adjustable universal life-type products, you are more driven by what the customers want in terms of dividends. So your risk appetite may be a bit different,” he said.

Richard Morrow contributed to this story.