China’s life insurers outsourced 19.2% of their investable assets to domestic and overseas managers last year, while small and mid-sized players are tipped to follow, according to Cerulli Associates.
The research firm said the low-yield environment would continue to spur more insurance companies to outsource asset management. So far, the primary reason for big firms such Ping An Insurance Group to outsource investment is to boost returns.
In 2015, life insurers outsourced a total $228.1 billion of assets, or 19.2% of their $1.19 trillion of investable assets. This represents a 38.6% increase year on year, with 2014 seeing the industry outsource $165 billion, or 16.7% of total AUM, Cerulli said.
Smaller players, which lack the affiliated asset-management arms in Hong Kong that the industry leaders use to diversify their exposures, have an even greater need to tap third-party managers, said Manuelita Contreras, associate director at Cerulli in Singapore. “They generally lack investment capabilities and don’t have asset management arms or subsidiaries to help them with their investments amid their growing need for yield,” she noted.
Fixed income is traditionally the mainstay of insurance allocations, but yields have been very low for a long time, including in China, where 10-year bonds currently yield 2.87%. With benchmark interest rates hovering at 1.5% and the economy slowing, insurers need to diversify into new asset classes – and to take greater risk.
That combination pushes insurers more to work with third-party asset managers, Conteras noted.
Jing Lei, CIO for fixed income and institutional investment at Harvest Fund Management in Beijing, told AsianInvestor the firm has been on-boarding new insurance clients from mainland China. They are tapping fund houses such as Harvest for equities and multi-asset exposures. He added that most Chinese insurers, even smaller ones, had in-house expertise in domestic credit and infrastructure bonds.
Cerulli’s research said more insurers were appointing external managers for foreign exposures, but didn’t have data to quantify this. But it expects more small insurers to increase overseas exposure. Many of these asset owners have run aggressive businesses, piling up products such as high-dividend universal life policies with liabilities as high as 8% promised over the past several years. They will need to jump into overseas markets in order to diversify their assets.
A total of nine insurers (life and non-life) received regulatory approval for overseas investment in 2015, including Beijing-based China United Property Insurance, which has Rmb53 billion ($7.7 billion) in assets, and Xian-based Yongan Insurance, which had assets of Rmb12 billion at the end of 2015.
China United Property Insurance appointed Taikang Asset Management, JP Morgan Funds (Asia) and Invesco (Hong Kong) last March; while Yongan Insurance appointed Taiping Asset Management (HK) and China Life Franklin Asset Management last July, according to Cerulli.
Tay Rui Ming, Singapore-based analyst at Cerulli, noted a total of 15 Chinese insurers that do not have overseas investment arms had received approval to appoint external managers for overseas mandates.
On top of these market developments, regulation is adding more pressure on how insurers invest. China’s new risk-oriented solvency system (C-Ross), a local version of European Solvency II capital requirements, will encourage insurance companies to invest in new assets such as alternative investments, in order to better manage their asset-liability matches.
Under the new regime, private assets, both equity and debt, require less risk capital than “riskier assets” (as defined by C-Ross) such as public equities. “The largest two [Chinese] insurers [China Life and Ping An] have started in this new field, and some mid- to small-sized insurers will follow,” said Janet Li, Hong Kong-based director of investment for greater China at Willis Towers Watson.