Asian insurers’ alternatives allocation nears $1trn – report

Insurers in the region that have increased their exposure to alternative assets face regulatory changes that may hinder future investments.

Insurance companies in Asia are deploying more capital to alternatives in the hunt for higher yield and greater diversification of assets.

Insurers in China, Taiwan, Korea, Singapore, Indonesia and Malaysia had a four-fold increase in their alternatives allocation in the last five years, hitting $973.8 billion last year, according to The Cerulli Report–Asian Insurance Industry 2018: Focusing on Long-Termism, from research and consulting firm Cerulli. Year-on-year (2016-17) figures show a 22.3 percent increase.

Alternative assets as a percentage of investable assets have also seen an upward trend – from 12.4 percent in 2013 to 25.2 percent last year.

The report noted that infrastructure, real estate and private debt fit nicely within life insurers’ portfolios because assets in these strategies are “long-dated and can better match their liabilities, while also generally providing stable cashflows”.

In China, for example, China Life Insurance Company, China Reinsurance Group and China Taiping Insurance are among investors backing infrastructure, transportation and energy deals along the One Belt, One Road Initiative. Taiwan’s largest insurer, Cathay Life Insurance, has committed 25 percent of the almost $260 million Cathay Sustainable Private Equity Fund, which will invest in domestic renewable energy projects and is managed by its subsidiary Cathay Securities and Investment Trust.

Boston-headquartered Cerulli also noted that co-investments could gain traction among Asian insurers as they allow the asset managers to share risks, align interests and learn about various aspects of an investment.

Total insurance assets continued to grow last year with China leading at $2 trillion, Taiwan at $823.2 billion and Korea at $782.9 billion.

A slew of revised capital and regulatory frameworks may present challenges to insurers in the near-term. Taiwan, which continues to have the highest proportion of insurance assets invested offshore, could see a change in the rules governing insurers’ overseas investments, announced by its Financial Supervisory Commission in August. Chinese insurance companies, meanwhile, are prohibited from investing in domestic private equity schemes that offer fixed returns on their equity investments.

Korean insurers also face two major regulatory changes due to be implemented in 2021: the International Financial Reporting Standards 17 and a new capital adequacy calculation framework. IFRS 17 will require insurers to measure the liabilities of their policies at current interest result value, meaning they must set aside higher levels of capital reserves. IFRS 17 is estimated to affect around 535 trillion won ($481.5 billion; €422 billion) of life insurance liabilities, according to a Bank of Korea report.

Ken Yap, managing director for Asia at Cerulli, noted in a statement accompanying the report that insurers are by nature conservative investors – generally more so than other institutions like sovereign wealth funds.

“They typically take considerable time to evaluate investments or potential deals before plowing in money, and may look mostly for safer assets, even within alternatives,” he said. “For instance, public-private partnership infrastructure projects or senior debt.”