Asia ex-Japan managers deem traditional fixed income as the most sought-after strategy by regional insurers over the next 12 to 18 months, followed by alternative strategies including private debt, infrastructure, and private equity, according to Cerulli’s latest report, Asian Insurance Industry 2020: Knowing Your Insurance Client. Insurers’ survey responses echo managers’ expectations, as global non-investment-grade (high-yield) fixed income is the strategy that most insurers (35.7%) want to increase, followed by domestic multi-asset and alternative strategies, including infrastructure and real estate.

The lower-for-longer interest rate environment has gradually become the new normal that Asian insurers have had to deal with in recent years. It has been aggravated by uncertainties resulting from the COVID-19 pandemic, along with market turbulence and global interest rate cuts resulting from central banks’ quantitative easing programs. Cerulli understands that the low-rate conditions could hurt insurers’ revenues, profits, and solvency positions. “Regional insurers hope to generate sufficient alpha through active management,” said Ye Kangting, a senior analyst with Cerulli Associates, “but this is not easy, as they also need to comply with regulations, such as risk-based capital (RBC) rules and new accounting standards.”

Although fixed income and alternatives tend to be the most sought-after assets under current circumstance, insurers across Asia hold different risk appetites and strategy preferences. In terms of fixed income, Taiwanese insurers could be more aggressive as some have reportedly increased high-yield corporate bond allocations by more than 10% in mandates around March and April 2020, hoping to profit from widening spreads, especially in the U.S. market. In Hong Kong, insurers could be more risk adverse. Some have been cautious about credit downgrades and turned to investment-grade bonds, because such safe haven vehicles come with higher credit quality and lower risk charges under RBC requirements. There are also many insurers in between, seeking high-quality emerging market bonds to capture additional yields while making sure the associated credit risk is manageable.

In alternatives, insurers favor long-dated features of the asset class to match their liabilities, but they seek returns in a prudent way. For example, infrastructure debt can offer stable yields and diversification; they have been reportedly gaining traction among Korean insurers since the second quarter of 2020. However, foreign real estate could lose its shine in Korea, given tightened rules introduced by the Financial Supervisory Service in June this year.

The report also cites insurers’ demand for other asset classes such as equities and multi-assets for returns and diversification. “Going forward, regional insurers are expected to continue seeking portfolio resilience, diversification, and return enhancement,” said Ye. “Knowing their short- and long-term demands, building strong relationships, taking holistic portfolio views with knowledge of regulations, and possessing capabilities that are complementary to insurers’ existing strategies are crucial for managers to win mandates.”