The next big investment theme for insurers: Infra debt

Infrastructure funding is likely to gain traction among insurers in Asia Pacific as regulators move towards giving such assets favourable capital charge treatments to promote eco-friendly infrastructure.

That sentiment was also emphasised in a recent BlackRock survey, which noted that infrastructure debt will likely attract more investments from insurers as they seek to fulfill net-zero or decarbonisation goals.

 That's because transition financing is very often related to infrastructure opportunities.

‘This [infrastructure] is a perfect asset class to handle asset-liability management [for insurers]. Funding infra projects via debt can provide stable and long-term returns for insurers,” Kimberly Kim, head of the financial institution group  for APAC at BlackRock, told AsianInvestor.

That sentiment dovetails a broader desire by insurers globally to invest in private markets, according to BlackRock's 2024 Global Insurance survey.

The survey also showed that 60% of insurers are targeting clean energy infrastructure investments for low-carbon and transition goals. Wind and solar technologies, including batteries and energy storage, were identified as the top two thematic areas of interest.

About 30% of the 410 survey respondents were from the Asia Pacific.

The survey noted that 99% of respondents had set some sort of transition objective within their investment portfolios.

"This near-universal commitment across regions, including APAC, underscores the industry’s recognition of the importance of sustainability as well as climate action," said Kim.

HONG KONG, SINGAPORE PUSH

In Hong Kong and Singapore, especially, insurance executives and regulators have expressed interest in sustainable infrastructure investmentse.

"One possible change/proposal that the industry has been studying and discussing with the HKIA is the potential to provide favourable capital treatment on infrastructural and sustainable investment assets under the Hong Kong risk-based capital [regime],” William Chan, global CIO and head of investments at HSBC Life, told AsianInvestor earlier this year.

“This will serve to encourage insurance companies, which collectively own significant investment assets, to invest in such assets and ultimately benefit infrastructure development and help achieve ESG objectives.”

Hong Kong Chief Executive John Lee, in his October 16 policy address, said the Insurance Authority will initiate a review next year to examine capital requirements for infrastructure investment, to boost  investments in infrastructure.

Singapore has also undertaken a similar initiative: The Monetary Authority of Singapore released a consultation paper recently that seeks to finetune, among other things, the risk-based capital framework to bring in more favourable treatment for infrastructure investments.

The period for seeking public comments on the paper ends on November 24.

“It’s very encouraging to see how regulators are being so thoughtful about enabling insurers to invest in infrastructure debt,” noted BlackRock’s Kim.

MAS was also working on a pilot scheme to help insurers make investments in sustainability-related infrastructure projects in Asia, according to media reports in November 2023.

QUALITY DATA NEEDED

The stable and long-term cash flows of infrastructure assets naturally align with liabilities of insurers, particularly life insurers. Creating an ecosystem around sustainable infrastructure finance and different types of market players remains critical.

Still, making sustainable investments in general remains a slow process for institutional investors, frequently hampered by a lack of quality data.

Integrating ESG factors into investment strategies can be hindered by inconsistent and incomplete data," said Kim.

"We note insurers' need for reliable data to make informed decisions and meet regulatory expectations"

"Standardising the ESG matrix is also crucial for effective decision making as well as having technology to enhance transparency in terms of risks and understanding the risks of investments and how they can manage them," she added.

PRIVATE MARKETS BOOST

Overall, the BlackRock survey also confirmed the high interest that insurers continue to have in private markets, in particular private debt.

About 91% of survey respondents intend to increase investments in private assets over the next two years, particularly in private debt, including private placements, direct lending and opportunistic strategies.

“There is a strong recognition in the benefits of diversification as well as higher income generation that this asset class offers them,” said Kim.

Several insurers including HSBC Life, AIA and Transamerica Life Bermuda have told AsianInvestor over the past 12 months that they intend to raise private market allocations.

Shusi He contributed to this story.