With markets now having absorbed the damage from the Covid pandemic, asset owners in the Asia Pacific - and in particular insurance companies - are turning their attention to regulatory challenges, while net-zero targets and hedging issues are also prevalent concerns, a new survey shows.
The ambiguity surrounding the International Financial Reporting Standard (IFRS) 17 framework, the new accounting standard for insurance contracts effective since January 1 this year, is emerging as a major hurdle for the sector.
According to a survey among Asia Pacific insurance companies released on April 12, more than 90% of respondents consider adoption of IFRS 17 and IFRS 9 to be amongst their highest priorities.
Some 71% of insurers, meanwhile, view risk-based capital (RBC) regulation adoption as a high priority.
The survey is a part of the APAC Insurance Investment Landscape report by global asset management firm abrdn and Hong Kong-based financial services strategy consultancy, Quinlan & Associates.
Asia Pacific senior insurance solutions director at abrdn, Xiong Jian, said that some asset classes would likely become favourable due to IFRS adoptions.
Private credit, for example, with its higher yield, contractual cash flow and better diversification was one asset class favoured by the sector.
“Similarly in terms of RBC, there is no difference between investing in private credit and traditional fixed income security for the same credit rating and tenure, like 10 years. Therefore, private credit assets will look more attractive than traditional bonds,” Xiong told AsianInvestor.
Like IFRS 17, RBC regulations are also being implemented across the Asia Pacific.
While IFRS 17 will address how insurance companies classify and measure their liabilities, IFRS 9 addresses how insurance companies classify and measure assets and thus has a more direct influence on investments.
The report surveyed 56 senior executives from 43 insurers across eight jurisdictions in the Asia Pacific, with a focus on risk- and investment-related executives. The eight jurisdictions were Hong Kong, Singapore, Mainland China, Malaysia, Thailand, Australia, Taiwan and South Korea.
More than 60% of these insurers are struggling to implement effective hedging strategies due to high costs and limited availability of hedging instruments. Xiong pointed out that it is very difficult to find long-dated hedging instruments for interest rates risk hedging.
“As a solution to this, we are quite happy to see that more than 50% of the respondents do their hedging activities dynamically,” he said.
He pointed out that one of the two schools of hedging thought holds that some insurers more or less “close their eyes”, hedging their currency or interest rate exposure to match the underlying liability as closely as possible.
“That approach is not ideal in our opinion, so we are glad to see that most insurance companies are trying to implement dynamic hedging. They are going to come to hedging with their views on how currencies and interest rates will move, then they will decide if they will hedge and how much to hedge. That is more cost-efficient,” Xiong said.
Some 50% of the surveyed insurers have not yet started to integrate net-zero into their investment strategies, with data quality and investment management major roadblocks.
Implementing net zero targets is a long-term objective that will take some time, according to Xiong. With milestones for reaching the target ranging from 2035 to 2050, most will have their work cut out for them, he pointed out.
A large workload from regulatory pressure means that insurance companies need to start working on these challenges as soon as possible, he said.
“From the survey results, I would say most of the insurance companies acknowledge that the regulation will become increasingly demanding soon,” Xiong said.