APAC insurers turn to private debt to combat inflation, regulatory changes

Sep 28, 2023

Insurers in the region are turning to private debt markets, as they adapt to a challenging macro environment amid lingering fears about inflation and recession, according to BlackRock's annual global insurance report.

APAC insurers turn to private debt to combat inflation, regulatory changes

Insurance companies in Asia Pacific are increasingly looking to private debt to find attractive investments in an economy spooked by high inflation, rising interest rates and fears of a recession.

That's according to BlackRock’s annual Global Insurance Report released September 28. The report showed that 89% of Asia-Pacific insurers surveyed said they are going to increase allocations to private markets, and are prioritizing private lending with 62% planning to boost their allocation.

This intent is higher than the global 60% and thus higher than US-and-Europe-based peers.

Private debt ticks boxes for having relatively low risk capital charges in new regulatory regimes, while infrastructure debt supporting transition to renewable energy also helps insurers to fulfil climate objectives.

Kimberly Kim,

BlackRock

“Generally, the insurers find themselves underallocated to private assets. But given the market volatility and disruptions within private equity and real estate, the insurers are also being more selective,” Kimberly Kim, head of BlackRock’s financial institutions group for Asia Pacific, told AsianInvestor.

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Based on BlackRock’s estimates, the potential of high-grade alternative credit or investment-grade private debt is a market of about $40 trillion. This market includes direct lending, infrastructure debt, real estate debt and asset-based financing, which provide an attractive pickup over public high-yield fixed income assets, Kim pointed out.

“There will be very attractive investment opportunities in private debt driven by the combination of private debt market growth and continued de-risking by banks. This trend will also accelerate the outsourcing of insurance assets,” she said.

BENIGN CAPITAL CHARGE

Beyond the attractive risk-adjusted returns, private market debt also help Asia-Pacific insurers navigate new regulatory frameworks.

Many of the region’s regulators have implemented IFRS 17 and other changes to risk based capital (RBC) from 2023, and more will come into effect in the coming years.

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“In 2025, the new International Capital Standards regulatory framework will start in Japan, changing the capital standard to an economic-value basis. We have worked for several years to shift our asset allocation in various ways to prepare for the transition,” Masao Aratani, director, deputy president and representative executive officer in the investment division at Meiji Yasuda Life Insurance, stated in the BlackRock report.

“For example, we reduced our equity exposure after we looked closely at the surplus on an economic-value basis and evaluated it against risk,” he elaborated.

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Within the new capital frameworks, private debt is looking to get a very attractive capital treatment, Kim pointed out.

“On a standalone market risk capital charge basis, private debt is estimated to have an average capital charge that is lower than public high yield [fixed income],” she said.

Historically, direct lending has a 50% lower default rate and a 50% recovery rate against public high-yield fixed income, a point noted by insurers across Asia Pacific.

Also read: China Life, Manulife emphasise fixed income tilt amid rate, regulatory shifts

“Private credit makes a lot of sense for insurers, and we do see an increasing intent to allocate more to this asset class,” Kim said.

According to BlackRock’s survey, two-thirds of the respondents from Asia Pacific said they will need to reallocate assets because of the implementation of RBC regimes. In response, half of these respondents stated that they would be prioritizing risk management.

CLIMATE PERKS

Within private credit, infrastructure debt has additional attractiveness for insurers. The energy transition into renewable sources will provide investment opportunities, and insurers are looking to get their piece of the pie.

“Infrastructure allocation will continue to increase, on the back of energy transition. We see more insurers in Asia Pacific approaching infrastructure debt for its generally low risk, given many of them are backed by contracted income streams,” Kim said.

In BlackRock’s report, two-thirds of respondents (62%) globally expect the greatest investment opportunity from this transition to be in clean energy infrastructure, with the highest percentage from insurers in North America (74%) compared to EMEA (62%), Asia Pacific (57%) and Latin America (56%).

“The clean energy infrastructure is seen as the largest investment opportunity from the ongoing supply transition and recent policy developments worldwide. These factors will create tailwinds for more allocation, as these investments also help insurers to reach their climate objectives,” Kim said.

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Interviews for the survey used in the BlackRock report, BlackRock Global Insurance Survey 2023, was carried out during June and July 2023. In total, 378 interviews were conducted across 27 markets, of 113 (30%) were insurers spread across 10 markets in Asia Pacific.

The total assets under management for the surveyed insurers $29 trillion, with Asia Pacific representing $11 trillion.