The Canadian pension fund plans to increase its allocation to the region from 10% to 15% over the coming four years, even as its total assets under management rise.
Asian insurers have been enjoying some strong growth in recent years, courtesy of higher insurance penetration within an expanding middle class.
The compound annual growth rate (CAGR) of insurers’ general accounts (GA) assets in the region was 12.9% between 2013 and 2018, but this accelerated to 16.5% during 2018, to reach $551 billion, according to research firm Broadridge. It predicts GA assets, which includes life assurance premiums and fixed annuities, will keep growing by 11.2% until 2023, eventually reaching $937 billion.
But an ongoing increase in assets is offering insurers a perennial challenge: how to match investment returns to pay-out promises. And changes in the regulations they follow are set to make this more challenging in the months and years to come.
To date insurers in this region have enjoyed some investment advantages over those in other areas. One has been the relative ease to get decent fixed income returns.
“The assets you can find in Asia are attractive [for insurers] … when you look at the type of assets you can source, hedged back with the same type of ratings,” said Andries Hoekema, global head of the insurance segment at HSBC Global Asset Management.
He noted that this is because European and US investors tend to favour developed markets.
But that relatively pleasant backdrop looks set to change, as long-anticipated risks and regulatory changes come to pass. For a start, Asia’s insurers face mounting longevity risk, given a growing and increasingly long-lived population and a dearth of long-dated regional assets.
In addition, most large markets will introduce new capital rules regimes in the coming few years will affect the cost-effectiveness of different asset classes.
Some companies are also facing the consequences of needing to pay for guaranteed investment return policies. Taiwan’s life insurers have been particularly exposed.
These factors will likely cause changes to insurance business and investment priorities in the years to come. They will need to source better returns, and yet do so without seeing their capital costs spiral. It won’t be easy.
RULES AND REWARDS
By far the biggest task facing insurers is how to adapt to changes to their regulatory capital regimes.
Countries across Asia have largely been following the European Union and looking to implement systems that share some DNA with its Solvency II regulations. This system has changed how it measures asset risk, marking it to market and changing the amount of capital that has to be held against varying types of assets.
Regional countries will adopt the overall structure but are bringing their own twists to this system.
As of today, the longstanding RBC rule systems in Hong Kong and Singapore have yet to offer any beneficial capital treatment to such assets. However, Singapore is set to roll out its risk-based capital II rules later this year, and there are not yet any indications if the new rules will be lighter touch.
Thailand, which introduced its new capital rules in January, lets insurance investors to allocate more than European regulatory limits into infrastructure funds and real estate investment trusts (Reits).
China’s Risk-Oriented Solvency System (C-Ross) is a little different to most of the region’s other RBC systems, because it doesn’t directly link interest rate risk on the asset side and the liability side. However, it is expected to strengthen that link in the second phase of these rules, which is expected to be rolled out later this year.
Swiss Re estimates that total assets managed by insurers operating in China will reach Rmb22 trillion this year. Meanwhile, new guidelines around insurance asset management products will present these insurers more choice of investment vehicles and duration matching.
Other countries such as Hong Kong, Korea and Japan will take more time to introduce their new rules. Hong Kong isn’t likely to do so for another three years. Japan is working on a system similar to Solvency II, but it’s likely to take up to five years to implement.
South Korea, meanwhile, is likely to introduce its version of RBC 2 by 2022, although there is set to be a grace period of 10 years for insurers to comply with the new rules.
However, the country looks likely to tread a path similar to Thailand when it introduces an updated IFRS 17 accounting standard for insurers in 2023, suggesting its capital rules will adopt a similar perspective, said Hoekema.
In addition to capital regime changes, the region’s insurers also face a shift in international accounting standards, and particularly IFRS 17, which affects the liability side of their businesses.
Insurers typically book their fixed income portfolios on an amortised cost accounting basis. As long as they discount (or amortise) their insurance assets and liabilities using a stable curve, they will face low profit and loss volatility.
But IFRS 17 is set to change the how insurer liabilities are calculated. One likely outcome is that this is that insurers will suffer greater interest rate volatility on their liabilities. That is going to be an important consideration for Asian insurers.
Mark Konyn, group chief investment officer at AIA in Hong Kong, says this could affect investment decisions in a variety of ways.
“Every insurance company is assessing how the changes in accounting standards are likely to impact their reported financial metrics and whether or not changes to product offerings, services and investment strategies are required,” he told AsianInvestor.
Konyn noted that interest rate volatility has increased through the Covid-19 crisis. The move to RBC in Asia and subsequent refinements require insurers to carefully assess how regulatory requirements will be impacted by rate volatility post the changes in solvency regimes.
“Dependent on the specifics of each company and their capital requirements: changes in products, investment strategy and balance sheet management may result,” he said.
The new IFRS updates are set to be adopted across the region over the coming two to three years (Korea is expected to have it by 2023, for example). Hoekema believes the shift will increase volatility in insurers’ P&Ls, which could force them to more actively invest in fixed income assets instead of just buying and holding them.
“They are going to have to think more carefully about active asset-liability management around the balance sheet because it’s going to be tough to exactly match the volatility and offset it between assets and liabilities,” he said. “There are other risks that may come through when you start combining IFRS 17 and the new risk-based capital systems.”
This article was adapted from a feature on life insurance that originally appeared in the 20th anniversary edition of AsianInvestor, which was originally published in June.
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