This paper seeks to explain high-level trends in asset allocation of major life insurers across eight Asian markets (China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, Taiwan, Thailand) over the last four years to 2015, using data collected from various regulatory and audited sources, enriched with subjective commentaries from market participants.
This research aims to compare and contrast some aspects of these Asian markets with the United States. Unsurprisingly, the growth rates, product mixes and investment markets vary across geographies, but one global theme is the current low level of interest rates. This leads to a fundamental challenge in sourcing long-term assets with decent yields and acceptable risks to back life insurance liabilities. Asian insurers can be heavily constrained in what and how much assets they can buy and by the lack of depth and breadth in their respective asset markets. As an example, in Taiwan, the entire government bond market is less than half the size of life insurance industry assets, which is usually not the case for developed markets such as the United States.
With an impressive annualised growth of 14% from 2012 to 2015, the assets under management (AUM) for the covered markets reached a recorded $2.4 trillion (in U.S. dollars). Within the same period, China recorded the highest annualised growth of 17%, while Taiwan and Korea managed to grow AUM at broadly the same speed as developing/emerging markets in the Association of Southeast Asia Nations (ASEAN).
Our data shows signs of decreasing relative exposures to low-risk government bonds, and a shift to riskier asset classes to generate sufficient returns to meet policyholders’ reasonable expectations. Over the three years to 2015, the annualized AUM growth for equities and real estate allocations were 28% and 19%, respectively, much faster than that of government bonds at 8%. Yet the demand for government bonds remains strong, given the regulatory advantages and the role of government bonds in interest rate risk management.
Another theme that has affected the asset allocations is the demand for alternatives domestically and internationally—for example, infrastructure debt and foreign investments. We see potential for growth in real estate, given the relatively low allocation into this asset class (2.7% in 2015). The recent wave of deregulation in several Asian markets and the growing size of insurance portfolios allow insurers to invest in large illiquid assets. These emerging topics will be discussed in the case studies of this report, featuring local stories in Taiwan and Korea markets.
Lastly, regulatory frameworks have converged toward risk-based regimes and have strengthened the capital positions of various markets along the way. Duration mismatches continue to expose insurers to interest rate risk and higher-risk capital, particularly in the environment of low absolute levels of interest rates, which may continue for longer than expected.