Asian insurers look to Europe for portfolio guidance

Sep 4, 2018

Insurance firms in Korea and elsewhere in Asia want to know how best to deal with looming risk-based capital rules, which their peers in Europe have already had to come to grips with.

Asian insurers look to Europe for portfolio guidance

Insurance firms in Asia are tracking how their European peers cope with Solvency II and hoping to take a lead from them, where possible, as similar capital requirements take hold in parts of the region.

That includes seeing how the 33-month old regulatory regime helps reshape investment portfolios, say European asset management professionals who have liaised with Asian insurers over the summer.

“A key area of discussion we are having with insurers in [Asia] is how have we worked with European companies on solvency requirements and the low-yield environment,” Stefan Gans, a senior sales executive at DWS Investments, formerly Deutsche Asset Management, told AsianInvestor.

“We’re being asked how insurers have implemented Solvency II,” he said last month after visiting Asia in July. "We find insurers in the region looking at what might be next; the next iteration of [risk-based capital [RBC] rules] and how it will work.”

For instance, Korean insurers have asked DWS to benchmark what German insurers’ experiences have been in the preparation phase for Solvency II, Gans said.

Andries Hoekema, HSBC

Andries Hoekema, London-based global head of insurance at HSBC Global Asset Management, made similar points following a visit to China, Hong Kong, Japan and Singapore in July.

Insurers in some Asia countries have been looking at what European insurers have done to their portfolios as a result of Solvency II “on what they need to get prepared for”, Hoekema noted.

That includes the likes of UK-based Aviva and US insurer AIG’s European business, where Solvency II has certainly had a big impact on the investment portfolios.

The European Union's Solvency II Directive came into effect at the start of 2016 and some Asian regulators have followed suit by introducing their own rules – in some cases rather similar requirements (as in Hong Kong and Singapore).

South Korea is also due to bring in its own Solvency II-like requirements in 2021.

Such RBC regulations specify different levels of capital that insurance firms must hold against different types of assets on their balance sheets, which has an impact on the returns those investments provide. Riskier assets, such as equities and notably private equity, attract higher risk capital charges.

"Different Asian jurisidictions have different solvency capital rules but in general they are all moving towards a framework that is more sensitive to risk," said Alan Yip, Asia head of insurance strategy at JP Morgan Asset Management, based in Hong Kong.

DURATION CHALLENGE

A key issue in Asia, however, is that long-term bonds (those with maturities of 10 years or more) are far scarcer than in Europe.

Hence European insurers have been able to build up much longer levels of portfolio duration in the past year than, for instance, their Korean peers, DWS’s Gans said. “This is very important, because closing the duration gap between assets and liabilities helps reduce capital charges – and will thus free up risk budget to invest in other things.”

As a result, Korean insurers have been seeking guidance on how best they can close that gap, he said.

One thing European insurers have done in response to Solvency II is to reduce their already-small equity allocations and allocate more funds to alternative credit and direct lending, Hoekema noted.

“The effect of Solvency II [in Europe] has been clear: significant disinvestment from active equities," he said.

European insurers tend to have equity allocations of around 5% but in Asia that figure is more like 15% to 20%, and Hoekema expects it to remain higher.

“The dynamics of the market [in Asia] in terms of products that get sold likely means that they will continue to have much higher equity allocations than we see in Europe. And they may just eat the additional capital and compete on that basis.”

But increasingly Asian insurers may have to consider reducing their equity exposure and adding alternative credit for certain products “so that they can sell attractive returns on that basis”.

A full feature on how Asian insurers are allocating these days appears in the latest (August/September) issue of AsianInvestor magazine.