Letting Insurance Asset Data Speak for Itself

In late 2016, the Society of Actuaries (SOA) commissioned a paper on asset allocation trends of Asian life companies. Two FIAA’s who co-wrote the paper “Letting Insurance Asset Data Speak for Itself”[1] highlight its key findings here. 

SOA commissioned the paper from Coherent Capital Advisors Ltd (based in Hong Kong). It can be accessed in full here. This paper will be relevant to Australian actuaries who have an interest in life insurance business in Asia and in particular the asset management aspects. The life insurance market in Asia is significantly different to the Australian market – distribution is still by and large via agency channel whereas more traditional products (such as whole-of-life, endowment and universal life) are dominant. The asset allocations of Asian life companies reflect these differences.

Data Sources and Aim

At the time, we had accumulated a database of asset allocation data of major life insurers across eight Asian markets (China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, Taiwan and Thailand) over the four years to 2015[2].  This information was collected from various regulatory and audited sources and enriched with subjective commentaries from market practitioners particularly where data was lacking.  Based on this information, we sought to explain some high-level trends in asset allocation.

Low interest rates and high growth

Given the paper was prepared for an American audience, we started with a “compare and contrast” of some aspects of the above Asian markets with the United States.  Unsurprisingly, business growth rates, product mixes and investment market features vary across geographies.  However, one global theme is the low interest rate environment that has proven a fundamental challenge to life insurers in sourcing long-term assets with decent yields and acceptable risks to back liabilities.  Asian insurers can be heavily constrained: explicitly in what and how much assets they can invest under the local capital regime, and implicitly by the lack of depth and breadth in their respective asset markets. As an example, in Taiwan the entire government bond market is less than half the size of life insurance industry assets. Such lack of depth is not seen in developed markets such as the United States[3].

With an impressive annualized growth of 14% from 2012 to 2015, the assets under management (AUM) for the covered insurers in the markets reached US$2.4 trillion. Over the period, China recorded the highest annualized growth of 17%.  Taiwan and South Korea managed to grow AUM at broadly the same pace as developing/emerging markets in the Association of Southeast Asia Nations (ASEAN).

Hunting for higher yield – more risky assets, less government bonds

The data shows signs of insurers shifting relative exposures from low-risk government bonds to riskier asset classes to generate sufficient returns to meet guarantees to policyholders and their reasonable expectations. Over the three years to 2015, the AUM for equities and real estate grew at 28% p.a. and 19% p.a. respectively – far outstripping that of government bonds at 8% p.a. Yet the demand for government bonds is expected to remain strong, given the relative regulatory advantages in terms of credit risk capital and the role of bonds in interest rate risk management.

Venturing into alternatives

Another theme that has emerged is the demand for alternative investments domestically and internationally — for example, infrastructure debt and foreign investments.  We see potential for growth in real estate investment, given this asset class represents a lowly 2.7% in 2015.  The recent wave of deregulation in several Asian markets and the growing size of AUM allow insurers to consider investing in large illiquid assets. The paper examined insurers’ allocations to real estate investments in the Taiwan and South Korea markets as case studies.

Looking ahead

Lastly, regulatory frameworks are converging toward risk-based capital regimes in Asia and have strengthened the capital positions of various markets along the way.  Duration mismatches continue to expose insurers to interest rate risk and higher risk capital charges, particularly in low interest environment.

[1] https://www.soa.org/research-reports/2018/2018-asia-insurance-asset/  published Q1, 2018 by the Society of Actuaries

[2] The database has been expanded to include Vietnam (insurer level) as well as Australia and New Zealand (country level only) and updated to 2016 and 2017.

[3] Data on the size of the Taiwanese government bond market from Central Government Bonds Issued, Repayable and Outstanding Balance Sheet, Central Bank of the Republic of China (Taiwan), 4th December 2017, https://www.cbc.gov.tw/public/data/71251548871.pdf. Data on Taiwanese insurer AUM from Table14: The Balance Sheet of Insurance Industry, Taiwan Insurance Institute, 9th February 2018, https://www.tii.org.tw/opencms/information/information1/000001.html  

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