Key themes for Asian insurance investments in the post-Covid world
The global insurance industry entered 2020 in good shape; in fact, 2019 global insurance premium enjoyed the strongest growth rate in five years. Then, Covid hit the world economy and reshaped the insurance industry in many ways.
The pandemic presents a long-term paradigm shift to insurance investment in Asia, with low interest rate and regulatory reforms being one of the key drivers; that creates opportunities for insurers to reposition their businesses and build resilient investment portfolios in a post-covid world.
Despite the setbacks in 2020, we believe the secular growth drivers of the insurance industry remain intact, and Asia insurance will recover faster and stronger from Covid. By 2030, the Asia region is expected to account for over 40% of global insurance premium. Against this backdrop, we have identified some key themes for Asian Insurance investments.
Regulatory reforms across Asia
The global convergence of insurance regulations such as the risk-based capital (RBC) rules and new accounting standards will add to the complexity of insurance investments. Meanwhile, we also see a trend of local regulators relaxing investment limit in markets such as China, Korea and Thailand.
Japan has been working on modernizing the solvency regime for over a decade. In June, the Financial Services Agency (FSA) study group published a report on the “Economic Value-based Solvency Framework” and recommended implementation in 2025.
China has introduced new measures to further liberalize the insurance industry, and is finalizing the updated capital framework for the second phase of China Risk Oriented Solvency System (C-ROSS Phase II) by the end of 2020. The China Banking and Insurance Regulatory Commission (CBIRC) also issued new guidelines on the insurance asset management products and relaxed rules on equity investment in July 2020.
In Singapore, the Monetary Authority of Singapore (MAS) rolled out the new RBC2 framework, effective in Q1 2020, which has fundamentally changed the way insurance companies invest.
In Korea, the Financial Services Commission (FSC) has relaxed overseas investment limit, allowing life insurers to invest up to 50% of their total assets in overseas investments.
In Taiwan, the Insurance Bureau laid out a five-year plan to guide the insurance companies in adopting the new accounting rules IFRS 17 by 2026.
Search for yield
The prolonged low-rate environment and extreme asset volatility have hurt Asian insurers’ earnings, profits and solvency positions. Regional insurers are reviewing strategic asset allocation and risk appetites in order to enhance yields. Whilst insurers across the region have different risk preferences and appetite, the common goal is to generate stable income, improve portfolio diversification and build stronger capital positions.
Within fixed income, while some investors are strengthening the credit quality of the portfolio, other investors are increasing allocation for selective high-yield bonds and Asian credit, which have shown resilience and are positioning for recovery. At J.P. Morgan, we believe the role of core fixed income will be fundamentally transformed. Insurance investors will not just focus on yield and diversification, but RBC capital efficiency and IFRS 9 compliance will be critically important. By implementing better asset-liability matching and maximizing capital efficiency with core fixed income, we believe insurance companies could save significantly amount of RBC capital and could also reduce accounting and solvency volatility. With the capital saved, insurance investors could deploy to risk assets for higher yield, such as alternatives.
In a low interest rate world, alternative assets are evolving from optional to essential. We believe the alternatives allocation in Asia will increase from today’s low single digit, up to 15-20% of total invested assets in the next five years. By optimally allocating to diversified alternatives strategies such as infrastructure, real estate, private debt, and private equity, we believe insurance companies will be able to achieve higher risk-adjusted return, lower accounting volatility, and optimal RBC capital efficiency.
In the face of prolonged low rates, regulatory reforms, and prevailing macro and market uncertainties, Asia insurers are taking actions to transform the way they invest. By expanding investment opportunity set, reviewing strategic asset allocation and risk appetites, and adopting new Asset Liability Management and RBC solutions, we believe Asian insurers will be able to continue to lead the global insurance growth in the new paradigm post-COVID.