Peter Ng Yee-ming, vice president of finance at Malaysia National Insurance, spoke with FinanceAsia about the constraints on domestic insurers' investment policy. The M$7 billion ($1.84 billion) MNI is the largest Malaysian-owned insurance company, with both general and life businesses. Its main shareholder is Pramodian Nasional (PNB), a social fund dedicated to Malays, and MNI's business caters primarily to middle- and lower-class bumiputra.

What difficulties do you face in matching liabilities?

Ng: Our non-life insurance business is OK because its liabilities are short term. It's harder for the life side, where our average liability is 18 years, but our average assets are only seven years on a weighted duration basis. Bank Negara puts a lot of constraints on our asset allocation. We have a maximum of 30% exposure to equities, 20% to real estate and 50% to corporate credit. Ideally, we need more credit exposure. We've lobbied for a combined limit between equities and credit of 80%, but so far Bank Negara hasn't been inclined that way.

Has your asset allocation been changing?

There's not much we can do. We've relied on strong equities performance, and we remain overcapitalized. Bank Negara is introducing a risk-based capital valuation model sometime in 2005 or 2006. That will force us to reserve even more capital, and impact our asset allocation, because we'd have to reduce our exposure to equities, and that will hurt our investment performance. We're asking the central bank for more time.

What opportunities do you find in the bond market?

It's developing, but demand outstrips supply. Although with mortgage-backed securities we're now seeing more double-A and triple-A rated bonds, the market is still immature. There's no demand for single-A rated bonds, for example, so issuers don't bother to issue them, and just borrow from banks. But we need more kinds of paper out there.

Another problem is that bonds are now traded in M$5 million lots. We've requested the Securities Commission to reduce this as low as M$100,000, because that would bring in a lot more players. Many life insurance companies are too small to buy many of these big lots, or they get left paying big premiums for odd lots. Reducing the lot size would also bring in the mass affluent retail investor, whose only choice today is to buy expensive bond funds.

Bank Negara said in April that it will let insurers invest up to 5% of their assets overseas. Is that enough to ease the duration problem in your portfolio?

Well, 5% is not enough, but it's a start. Actually this is not something we lobbied for. We were quite surprised when Bank Negara introduced this. The foreign insurance companies are more keen. Our board of trustees wants us to take it easy. We don't have a Hong Kong or New York office we can call for advice. I don't know how to do overseas investing. But we'll put in place a process to select external fund management companies to be our partner.

What is it you want from global fund houses?

Training, a systematic transfer of skill and capability. After two or three years, we might even go out on our own, and benchmark ourselves against our fund management partners. The board is agreeable on this point and I think we'll start next year. We're now putting some manager selection criteria in place.