Asian insurers need to think outside the low-yield box and take on greater risk across the full spectrum of asset classes, according to the Monetary Authority of Singapore.
Low yields should not be seen a cyclical phenomenon but the “new normal”, Jacqueline Loh, deputy managing director of the $262 billion central bank, told the inaugural Asian Investment Management Summit in Singapore yesterday. The event was hosted by the Asia Insurance Review.
Loh stressed that insurers could not simply count on bond yields rising from current low levels, saying they need to factor in lower returns from fixed income investments in future.
This will challenge them to meet the prospect of more insurance claims on the back of an increasing number of natural disasters occurring in Asia, most recently exemplified by the super typhoon Haiyan, which ravaged the Philippines in early November.
Loh pointed to this change in the investment landscape, saying it will drive insurers to raise their risk exposures across a variety of asset classes, namely emerging markets, infrastructure, trade finance, structured credit and alternatives.
“Insurers’ risk profiles will be distributed across a wider and more complex spectrum of asset classes,” she told the forum. “This will call for more sophisticated and robust management of individual investment risks, as well as [management of] correlation between the range of investment risks within a more diversified, complex portfolio.”
MAS notes that regional insurance companies’ average allocations to alternatives as a percentage of overall AUM has increased by five percentage points to 15% since 2011.
This push towards riskier, higher return-generating assets has already led to a number of insurers setting up their own internal fund management arms to oversee their growing investment portfolios in Asia, noted Loh. Both Standard Life Investments and Allianz have been building out.
Loh also pointed to a shortage in long-dated, quality government and corporate bonds, adding to the challenge of insurers in Asia meeting the duration mismatch between assets and liabilities.
She highlighted, too, restriction on investment in some jurisdictions, while noting that China, Korea, Singapore and Taiwan had all responded by issuing long-dated bonds and easing restrictions on the asset classes that insurers can hold. China’s insurance regulator, for instance, has expanded the scope of foreign investment for insurers.
Loh added that there will be a need for insurers to strengthen their internal risk management and research capabilities to better understand market risk. At present many are relying on external sources for risk advice, such as banks and fund houses.
But she described insurers as an ideal source of long-term funding to finance a country’s economic growth, by investing in long-term illiquid assets such as infrastructure and clean energy.
“This role has never been more critical at a time when banking regulatory reforms have crimped banks’ appetite and ability to play a long-term financing role,” he says.
She notes there are already encouraging signs of global insurers collaborating with banks to provide debt financing for infrastructure products, such as Allianz, Ageas and Swiss Re.
Zurich Insurance Group also recently made its single largest investment in green bonds, which fund products to help mitigate climate change in local communities.
Globally, insurers represent some of the largest institutional investors in terms of AUM, managing over $25 trillion in AUM.
Some governments in Asia, including China, Korea, Singapore and Taiwan, have responded by issuing long-dated bonds and also easing the restrictions of specific asset classes that insurers can hold. (China’s insurance regulator for example relaxed rules in late 2012, expanding the scope of mainland insurance firms’ foreign investments.)