The survey found cash, bank deposits and fixed income securities currently make up almost 71% of total investments, while guaranteed products bought by policy holders represent 51% of the asset mix of the insurers questioned.
SLI said solving the return gap is most pressing in Japan, South Korea and Taiwan where investment returns are insufficient to meet the promises made to end customers.
The survey covered 51 senior insurance investment executives in six Asia Pacific markets, representing a combined US$4 trn (£3.1trn, €3.5trn), or around 60% of the total insurance assets in the region.
Mind the gap
SLI concluded that insurers in the region urgently needed to address these return gaps and switch towards more risk-based, outcome-oriented investment approaches.
“Asia Pacific insurers face an increasingly difficult investment challenge,” it said in a report on its inaugural Asia Pacific Insurance Survey, released on Monday.
“Lower bond and cash returns make it difficult to generate the investment returns needed to deliver guaranteed returns to policy holders. At the same time, regulatory change is exposing the asset-liability mismatches in current investment strategies.”
Mismatch
Bruce Porteous, investment director, insurance solutions, at SLI said asset-liability mismatches are posing a big challenge for insurance companies globally.
“Asia Pacific insurers currently allocate nearly half of their investments (46%) to domestic sovereign and corporate fixed income. The current low yield on these investments means they are likely to struggle to meet target returns and guarantees.
“The insurers in China and Hong Kong have delivered the required return to date, however it is important not to overlook the significant duration and liquidity mismatch between their assets and liabilities.”
Asset allocation shift
The survey did find that insurers in the region were gradually increasing their exposure to alternatives and going global as a way of seeking the extra returns needed.
“The significant asset allocations shift taking place in Asia Pacific is leading insurers to consider outsourcing more complex investment mandates to external managers,” said David Peng, head of Asia for SLI.
“This offers unique opportunities for active managers, who are expected to deliver alpha, demonstrate knowledge of local regulations, and fill the investment knowledge gaps,” he said.
Greater transparency on risk is also driving the region’s insurers away from guaranteed savings to investment-linked products,
Current solvency and accountancy regulations, along with the introduction of international accounting standards IFRS 9 and 17, which will move profit & loss reporting towards a more market-based approach, were also behind this change.
Nearly 90% of insurers stressed the need for closer collaboration between actuarial and investment teams as these regulatory changes kick in, SLI said.
“Investment portfolios need to be more outcome-oriented and risk-based, as opposed to the traditional benchmark, targeted return type of strategy. Insurers’ investment decision making processes are set to change fundamentally,” said SLI’s Porteous.
