APAC insurers consider regulatory adoption as highest priority area

Written by Adam Cadle

12/04/2023

APAC insurers consider regulatory adoption as the highest priority, according to a new report, with over 90% of respondents highlighting IFRS 9/17 as a key area to tackle, and 71% stating RBC regulation as an essential area to deal with.

abrdn and Quinlan & Associates launched the first APAC Insurance Investment Landscape report, exploring how insurers in the region are tackling – and capitalising on – various industry-specific developments, as well as to understand the key priorities in their future investment strategies. The report surveyed 56 senior executives across 43 insurance companies, and also found that on average, 36% of the insurers plan to reclassify their investment assets under amortised cost or other comprehensive income, with insurers from Hong Kong (57%) and Mainland China (57%) progressing relatively slowly on this decision.

In terms of capital risk optimisation, 57% of the APAC insurers surveyed plan to adopt (or have adopted) both security-level and SAA-level optimisation to manage their capital risks, and 32% of insurers prefer to optimise at only the SAA level. Among those insurers who are adopting certain level of optimisation, more than 50% of them consider it difficult to implement.

Amidst a backdrop of declining equity and bond valuations, around 40% of APAC insurers plan to allocate more of their investments to private debt and private equity in the next three years, with 33% planning to decrease their investments in equities. As for real estate, multi-asset, fixed income, and money market/cash investments, around half of the surveyed insurers plan to retain their current allocation levels.

Investment risks, solvency risks, and liability duration/cash flow matching are the top factors driving insurers’ future investment strategies. In terms of preferred markets, 73% of insurers plan to allocate more investments towards international markets, whereas insurers in South Korea, Mainland China, Thailand, and Malaysia still prefer domestic markets.

In terms of risk hedging strategies, embedded option risk hedging is considered as the most challenging hedging strategy to implement, followed by credit risk hedging, among the different varieties of risk hedging strategies. The survey also showed that the major challenges in implementing hedging strategies are costs and limited choices of hedging instruments.

For interest rate risk hedging strategies, more than half of all surveyed insurers directly match asset-liability duration as closely as possible, while 46% of insurers choose to dynamically manage duration.

In response to increased capital requirements imposed by RBC regulations, and given that investment-linked policies (ILPs) are capital-light in nature, 65% of APAC insurers said they are likely to expand their ILP business, particularly for insurers from Thailand (76%), Korea (76%), and Malaysia (73%). Nonetheless, nearly 50% of all surveyed insurers consider creating an appropriate ILP fund advisory model to be a major challenge that they are looking to address. Moreover, as the digitalisation level of ILPs is generally low, more than 75% of APAC insurers have plans to further digitalise client-related operations.

As regulators in APAC have set out rapidly evolving expectations on ESG requirements for regional insurers, focusing in particular on environmental initiatives (e.g., net-zero), as well as risk management strategies in recent years, insurers are incorporating ESG considerations into their operations and investments. The survey findings showed that 70% of APAC insurers have either already integrated ESG into their investment strategies or are in the progress of doing so, while 50% of respondents have not yet started to integrate net-zero. Data quality remains the largest integration barrier for both ESG and net-zero, followed by investment management, which are the starting points of the entire integration value chain.

An average of 62% of APAC insurers believe local ESG regulations will become stricter in the coming three years, and expectations are particularly high in Australia (77%), Malaysia (72%), and Hong Kong (69%). Insurers expressed strong demand to outsource their ESG integration efforts, investment execution, as well as hedging strategies to external partners. When considering partners, 96% of surveyed insurers believe that brand, reputation, and performance track record are very important or important factors, while independence is not a concern.

Xiong Jian, senior insurance solutions director at abrdn, said, “We see regulatory adoption and ESG integration as high priority focus areas for regional insurers amid the current market conditions. The key to gaining a competitive advantage for regional insurers would be to move away from a reactive, compliance-driven mindset to a proactive one, leveraging RBC, IFRS 9/17, and ESG as strategic differentiation points. The rising digital savviness of customers and the limitations of the agent network in effectively pitching ILP products to target customers also suggests that insurers should further digitalise their ILP businesses.”

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