Sequis Life, AIA weigh impact of evolving regulations on investments
Regulations play a key role in how insurers make investment decisions and two insurers recently decscribed how new and upcoming regulations are defining their approach to traditional and non-traditional investments.
For Sequis Life, the introduction of more stringent risk based capital (RBC) regulations is significantly impacting the Indonesian insurer’s investment approach — particularly in private markets, according to Muhamad Umar Johan Sidik, chief investment officer at the $1.5-billion life insurer.
Johan Sidik
Sequis Life
"A new stricter RBC regime basically limits our allocation of traditional funding in private markets," Sidik said during a panel discussion at AsianInvestor’s 5th Insurance Investment Briefing in Singapore on September 3.
"The adoption of IFRS 9 and 17 also enforces more transparency through mark-to-market, which limits our allocation to private markets just because it may bring volatility to our P&L [profit and loss account],"
IFRS 9 and 17 are International Financial Reporting Standards that deal with financial instruments and insurance contracts, respectively and aim to increase transparency and comparability in financial reporting.
The RBC regime is a method used by regulators to ensure that insurance companies maintain a minimum level of capital to support operations and protect policyholders.
In Indonesia, the regulatory minimum capital adequacy ratio for insurance companies is generally set at 120% by the regulator.
However, Sidik emphasises the importance of maintaining an even healthier RBC ratio.
"For us in Indonesia, or some parts of ASEAN life insurance companies, we have a rule of thumb: if we have more than 400% RBC, then we have more room to invest in the private market or alternative assets," he said.
This cautious approach extends to the life insurer’s overall investment strategy.
"Basically, we tend to put alternative assets not as ALM (asset liability management) for our traditional fund, but as a profit enhancer for our shareholder funds. Any diversification will start from regulatory standpoints, and any diversification will need to be accompanied by a healthy level of risk mitigations," said Sidik.
EMBRACING INFRA
For AIA Singapore, upcoming proposals hold the potential of opening new opportunities, particularly in infrastructure investments and sustainability, according to Liu Chunyen, CIO at the life insurer.
"In the past year or two, I think the regulator has perhaps engaged some of our life insurance companies here about infrastructure investments. It could be infrastructure equity or debt ... on the debt side, it's probably more promising," Liu told AsianInvestor’s panel.
AIA Singapore
Liu highlights the potential for IFRS-related regulatory changes to incentivise certain types of investments.
"We were promised that a consultation paper will come soon, so we're all looking forward to that. In a way, that [will] also help us to decarbonise our balance sheet, so working with the regulator is important in terms of development," she said.
The focus on sustainability is becoming increasingly important in Singapore's regulatory landscape.
"The regulator here really would like to see a movement towards decarbonisation. That's why infrastructure debt is next on their list to look int0 -- to see if we can learn a bit from the European regulators to give some sort of capital incentive to encourage companies to invest more into infra debt."
AIA is also preparing for new environmental risk management guidelines. Liu described these as "an attempt to encourage monitoring and measurement, and furthermore, perhaps pave the way for disclosures.”
“So that is going to impact how we look at our investments and also bring more concrete, direct sustainability assessments into our investment process."
LEVERAGING NEW RULES
Tim Antonelli, managing director and head of multi-asset strategy in insurance at Wellington Management, discussed how insurers can use new regulations to their advantage, particularly IFRS 9.
Wellington Management
"IFRS 9 provides two really useful tools. We're seeing more companies choose the irrevocable election to put dividend equities through income and not put mark-to-market volatility through the P&L. I think we're going to continue to see that employed, particularly as dividend yields get more attractive relative to fixed income and rates normalise," said Antonelli.
IFRS 9 aims to make financial reporting more relevant and useful for investors and other users of financial statements, said Antonelli.
"IFRS 9 removed that 80-to-125 hedging effectiveness band. I think what that's allowed insurers to do is to say, 'Can I set up a relatively simple but systematic overlay and limit what the drawdown would be on something like a global equity solution?'" he said.
These strategies can serve as "useful return on capital levers, but also for P&L management," allowing insurers to optimise their investment strategies within the new regulatory framework, according to Antonelli.
As insurance companies continue to adapt to evolving regulations, it's clear that a strategic approach balancing risk management, sustainability, and opportunity will be key to success in this evolving landscape.