Insight

What’s next for Asian insurers?

What’s next for Asian insurers?

Jaijit Kumar, Head of Asia Insurance Solutions, shares his views on the macroeconomic outlook for insurers, lessons from the Covid-19 pandemic, the evolving role of an insurance CIO and what keeps insurers awake at night, as part of a wider panel at a seminar hosted by Insurance Asset Risk in partnership with Invesco in Hong Kong in late June 2023. Below are some excerpts from this insightful discussion.  

Q: How is the current macro-outlook impacting your strategic asset allocation (SAA)?

A: In the last 18 months we’ve had three sea-changes in the market environment. For insurers, the ‘lower for longer’ rate environment had been almost built into a lot of base cases, but that’s now given way to a ‘higher for longer?’ – with the question mark being the important component here.

What certainly is refreshing is to see that the headline banner on a lot of insurance-related panel discussions is no longer ‘the hunt for yield’. The low interest rate environment has made insurers look more intensely at all sources of return. And non-traditional asset classes worked out at the forefront of that.

However, the ability to at least have non-traditional asset classes for SAA purposes still remains important in the long term. Insurers can still extract some premium from that [though it is] maybe less essential from a tactical perspective amidst the current backdrop.

So, the adage that the more things change, the more they stay the same, resonates at least a little bit, when it comes to these non-traditional asset classes.

Q: We’ve learned several lessons in the last three years in the context of the Covid-19 pandemic, can you explain why the need to remain nimble has been a key takeaway for insurers?

A: Certainly, there were periods of severe volatility over the last few years which forced some insurers to make modifications to their allocations at short notice, but these market dislocations did result in a lot of opportunities as well. And the lesson was that you do need a process, which for most insurers may not have been there, to ensure that you are able to capture these very short-term opportunities, more from an operational procedural perspective.

In terms of liquidity, obviously insurers have stress tests, lapse concerns on the liability side, haircuts on the assets side, and so on.

The use of derivatives among insurers to hedge risk has also been increasing and there needs to be more focus on ensuring that all that is well managed.

Insurers may also need to renegotiate their credit support annexes (CSAs), expand the range of eligible collateral, and make sure they have credit lines, should they need to mobilize liquidity quickly.

Q: The role of a CIO has become more multi-dimensional in recent years given the level of volatility in the markets and the evolving regulations both from an accounting and sustainability perspective. How has this changed the nature of how you talk to your clients?

A: I completely agree. The discussions I’ve had with insurance CIOs in recent years have really gone beyond just pure economics or strategies. All that was ancillary is not ancillary anymore. Capital implications obviously are at the forefront, with accounting issues as well, how to structure mandates, looking at different alternatives, even down to some new product development. This has really expanded from the more traditional approach that these CIOs would have taken in the past, which is certainly refreshing.

Q: You’ve mentioned how insurance investing conferences used to be held under the banner of the 'hunt for yield' and rejoiced that it is no longer the case. But what does it mean for insurers' allocation to illiquid assets? Do they still play a part in an insurer’s portfolio in a high interest rate environment?

A: Insurers have lived through this 'lower for longer' [environment] for quite some time, and they have added alternative, illiquid assets to their portfolio - not as a replacement to the core assets, but as a complement, to make the portfolio more efficient. So, they've built up the expertise and experience. Once you've tasted 'the good stuff', it's difficult to give that up. Obviously, we're in a different environment now. But for insurers, especially bringing new products to market, they need to remain competitive. And so they often need to stretch beyond just the more public markets. Private markets, obviously, are a good candidate for doing that.

Rising rates, inflation and recessionary risk are not necessarily a bad thing for such asset classes, because it really makes the insurer go back to the basics. They're looking for businesses, or strategies that are sustainable in the long term. And not just using low-cost leverage.

Q: Are regulations and evolving accounting standards worrying for insurance clients in the region?

A: They are not really a worry, but certainly another consideration. While low interest rates have made insurers look for returns, regulatory changes have made them look at how efficient those asset classes were. So, it goes in sync. At the risk of making a sweeping generalization, the changes we have seen in accounting and regulation seem to be moving [the insurance industry] towards a more economic framework. Previously, accounting, and regulatory considerations could have been at loggerheads, and now that is changing for the better. Hence a better asset liability management (ALM) strategy doesn't adversely impact your financial statements.