Malaysian life insurers are taking advantage of higher interest rates to make strategic adjustments to their portfolios.
Heavily focused on fixed income, industry investment heads speaking at AsianInvestor’s Malaysia Global Investment Forum in Kuala Lumpur on November 7 said they are looking to improve asset-liability management by lengthening the duration of their fixed income portfolios to match that of liabilities.
“I would prefer the interest rates to stay high for longer. I think it will be positive to the insurance funds as long as rates don’t keep moving up. From that perspective higher interest rates translate to higher bond coupon income which will enhance future reinvestment return, and that will benefit the policyholder in the long run,” Alex Chin, head of investment, Generali Life Insurance Malaysia, said.
If interest rates stay high for longer, he believes government bonds will be the better choice over corporate bonds.
“We will likely lengthen the duration for the government bonds, but might want to shorten the corporate bonds duration in balancing the current uncertainties in the economic and geopolitical fronts with the risk premium in yield pickup,” Chin said.
Life insurers have historically been big buyers of fixed income assets, and many have been experiencing negative duration, or where their liabilities often have longer durations than their assets, according to Amar Ramachandran, director and head of investment at Manulife Insurance Malaysia.
Fixed income allows insurers to match liabilities the best, and there is relatively more volatility in other asset classes that insurers traditionally invest in.
He agreed that insurers with a balanced portfolio and a conservative investment outlook would probably gain from taking “a bit more” duration in the current interest rate environment to better match duration of liabilities and assets.
“Rates are at a historical high, notwithstanding the fact that global growth is actually not great. There is a lot of challenges there. Rates have gone up in relation to inflation, and that inflation was not really driven by traditional economic growth and demand as the normal source,” Ramachandran said.
On November 2, Malaysia’s central bank, Bank Negara Malaysia, kept its benchmark interest rate at 3%, where it has been hovering since May 2023 when it was increased from 2.75%.
TIME TO MOVE
Chin emphasised that asset-liability management and duration matching are the most important factors for investment decision making.
“In this high interest rate environment, it will be much more efficient and better for us to invest in fixed income instrument especially in terms of the competitive pricing perspective when we develop insurance products,” Chin said.
Ramachandran pointed out that although the current interest rate environment will endure for a while and might last throughout 2024, the scenario probably has to give eventually. As the underlying economies are not really booming, the existence of high, inflation-dampening rates will be relatively short-lived, he said.
“I think that if insurers have a chance to lengthen duration, they should probably be doing it. Not all at once, but some now and then also in the first quarter of next year,” Ramachandran said.
Once sentiment changes to easing liquidity and central banks pursue interest-rate cuts again, Chin expects to see better appreciation for fixed income instruments.
“This high interest rate environment is very constructive and positive for the insurance funds at the moment,” he said.