Homegrown Asian insurance firms – and often non-Asian companies operating in the region – tend first and foremost to develop products they believe will sell, assuming they will be able to buy assets to match the liabilities they have taken on.
This remains the widespread approach, and one that is unlikely to change any time soon. But some firms recognise that a stronger focus on asset-liability management (ALM)* may be wise if they are to avoid the kind of ALM mismatch issues they have had in the past, and which many still face, most notably in Korea and Taiwan.
(These mismatches arose from issuing products before the 2008 crisis with guaranteed returns referencing high interest rates. When those rates subsequently dropped heavily in certain markets, insurers were left struggling to achieve returns to match their liabilities.)
The move to start focusing more on ALM is partly driven by regulation and moves to diversify portfolios more into investments such as alternative and overseas assets.
For example, Chinese authorities have been urging domestic insurers to place more focus on areas such as ALM. Early last year, the China Insurance Regulatory Commission (CIRC) set up a division to monitor the industry’s ALM activities, to develop a framework for ALM and assess the key problems in this area, among other things.
“The CIRC knows that the link between assets and liabilities is missing, and they plan to change that,” says Patrice Conxicoeur, global head of insurance coverage at HSBC Global Asset Management, based in Hong Kong. “But there is an element of reality there – you can’t ask insurers to buy 50-year bonds if they’re not on the market.”
The CIRC has also taken significant steps to liberalise what insurers can invest in offshore, but to make a real difference the foreign exchange rules need to change to facilitate currency hedging, says market participants.
One senior investment executive at a big Chinese insurer says risk needs to be incorporated as a more prominent part of the investment process among mainland players. “Typically insurers in Asia have been very bad at this,” he notes.
Korea’s insurance industry – with W700 trillion ($655 billon) in assets, of which $513 billion is in life assets – seems to have a better handle than many Asia peers on ALM, out of necessity perhaps. Insurers are still having to guarantee the performance of policies sold 20 years ago when domestic interest rates were in double digits.
It is the liability structure that defines Samsung Life’s asset allocation, confirms Jeon Young-muk, head of asset portfolio management at Korea’s biggest life insurer. And since the firm has more than 80% of its $150 billion portfolio in fixed income, that’s a concern, especially as it can’t reduce that allocation until at least 2016, Jeon admits.
Meanwhile, regional legacy ALM issues are probably most severe in Taiwan, where life insurers have found it so tough to bridge the duration gap that they have tended instead to issue short-term products and chase yield.
In the past, Taiwan insurers had offered average guarantees of 7% to 8%, but yields on 10-year government bonds are now closer to 1% than 7%.
Hence they are very heavily invested offshore, with an average 44% in foreign investments as of end-2013 – and the figure has risen further in recent years, up from 38% in 2011 and 41% in 2012. The total amount invested by life insurers is NT$14.8 trillion ($13.8 billion).
Bond yields in the domestic market are too low and shallow, notes Daniel Teng, executive vice-president at Cathay Life in Taipei. As a result the firm has sought higher returns by boosting its equity and offshore allocations. It also made more use of domestic loans, such as mortgage instruments, because they have floating rates, so are better suited to a low-rate environment.
Issuing shorter-term products is one way to approach the issue, but is unlikely to be a long-term, sustainable solution. Fund managers can continue to expect Taiwanese firms to seek exposure to offshore and alternative assets for yield, and at some point duration will inevitably become more of a focus.
ALM clearly remains a less fashionable topic in Asia than in Europe or the US, but it’s moving up the agenda.
*See the April 2014 issue of AsianInvestor for an extended feature on insurers' asset allocation and ALM.