Southeast Asian regulators – most notably the Monetary Authority of Singapore (MAS) – have been urged to make changes to risk-based capital (RBC) rules for insurance firms' investments, to make it easier for them to diversify their portfolios and boost yields.

For instance, lawmakers could set different levels of risk charges within the alternative asset universe rather than using a one-size-fits-all approach under current RBC proposals, said Alan Yip, head of Asia insurance strategy at JP Morgan Asset Management.

In some Asean markets there is a cap on offshore allocations and restrictions on alternative investments by insurers, such as a 15% allocation limit in Thailand. As a result, local insurers area pushing for deregulation, as reported.

Even in Singapore, where a wider range of asset classes is available to insurers, the upcoming RBC2 rules will make it more challenging for them to make riskier investments such as equities and alternatives.

“By putting all alternative assets into one category, [RBC2] regulations are restricting the investment freedom of some insurance companies,” he added.

But it is possible for MAS to enhance the draft RBC2 framework by taking a more granular approach to the capital risk charge for alternatives. 

MAS has issued consultation papers seeking feedback on the RBC2 draft, the latest of which was published last month. The rules are expected to be a guideline or benchmark that other Asean regulators will follow. Thailand's regulator, for one, is seen to be awaiting the outcome of the Singapore consultation.

Under proposed capital rules in Southeast Asian countries, alternative assets are sometimes entirely classified as private equity, for which there may be quite a high RBC charge, noted Yip. But relatively less risky investments should attract a lower charge, he said.

For example, infrastructure funds investing in brownfield projects – ones that have already had some work done on them – are less risky and provide more predictable revenue streams than greenfield – or newly started – projects, Yip noted. 

In addition, he said, insurers will have more room to invest in alternative assets if their diversification benefits can be reflected in the RBC regulation.

Such changes would help Southeast Asian players better cope with their asset-liability management challenges, argued Yip.

“Despite the low-yield environment, policyholders are demanding certain levels of guaranteed yield and product features, so there is an imbalance there,” he noted. “Insurers may need to take on more risk to attract clients.”

Indeed, alternative investments can not only help boost yields but also provide greater stability in terms of asset valuations, given the less liquid nature of private markets. Life insurers generally have relatively stable and predictable future liability cashflows, which means they are well suited to take on more liquidity risk, noted Yip.

However, there hasn’t been a big move by Asian insurers into alternatives, as many of them are still in the learning phase, he said, hence many are likely to outsource those investments to external managers.

As for foreign investments, Yip noted that some Southeast Asian insurers’ investment portfolios were relatively concentrated in domestic assets and to access certain asset classes they would need to go offshore.