Asian insurers have found possible solutions to a dilemma that they have long faced when investing in the private debt market.

The low rate environment experienced by these traditional fixed income investors has pushed them to search for yield while the latest risk-based capital charges on insurers’ investment assets are capping their ability to allocate the capital to assets perceived as risky.

As two panellists at FT Asia Insurance Summit pointed out last week, many industry participants have been vocal about how this standard will change their current and future investment strategies.

Some insurers are considering taking derivative positions and credit enhancement measures to curb the risk-based capital charge and boost expected returns from an investment.

The expected changes in insurers’ liability profiles prior to the full adoption of a new accounting standard on insurers’ key accounts, known as IFRS 17, include a mark-to-market based valuation methodology on insurance contracts.

Under the latest scheme, insurance companies’ liability-based assets should be based on the risk-adjusted present value of future cashflows.

The scheme, IFRS 17 Insurance Contracts, was officially released by the International Accounting Standards Board on 18 May, 2017, with an expected full adoption deadline of the end of January 2021.

Given the mark-to-market value recognition of their insurance contracts, investors are looking at ultra-long-dated assets for asset-liability duration matching purposes, according to the two speakers. “The asset durations will probably increase to counter the [rising] interest rate risk,” Tao Xing, BOC Group Life Assurance’s head of asset-liability management told the audience.

He expects to see more demand from insurers for derivatives as their efforts to curb the regulation-driven capital charges are expected to continue. “Because of the RBC, and if we follow Solvency II in Europe, probably Hong Kong insurers will use more derivatives and co-op shares over equity to protect the downside risk, which will reduce the capital charge [and] which is quite helpful,” he noted.

Mary Kwan, Fubon Life Insurance’s head of risk management, told the attendees she has seen her organisation’s alternative allocations to private equity, hedge funds and derivatives increase in an effort to diversify the existing portfolio and meet the required returns.

“There is no longer the 80-20, bond-equity portfolios among the insurers,” she said, adding that it is important to understand the risk profiles of these new investment categories and what you are signing up to.

Although further details on their liability durations were not available,  registry records held by the Insurance Authority in Hong Kong show that both BOC Group Life Assurance and Fubon Life Insurance (Hong Kong) Company are classified by the local regulator as long-term insurance businesses, which deal with long-dated liability-based assets such as life annuity and permanent health insurance contracts.

The life insurers in Hong Kong are not alone in seeking to solve this problem. As an investor who attended the Investor Forum in Seoul in May, run by our sister title Infrastructure Investor, told PDI, life insurance companies in Korea and some of their managers are looking at credit enhancement measures as they can reduce insurers’ credit risk burden by providing cash and other qualified collaterals.

As PDI reported in 2017, the banking and insurance industry regulator in Korea will not only increase the current risk-based capital charges but also look through each alternative investment commitment to take into account associated risk factors when calculating the risk charges.

“There is always the pressure of chasing yields and investors have to take investment risks. So, it is really about how to manage the risks and understand them, rather than not taking any [risks] then [the investors] cannot chase the yields,” Kwan added.