One of the few constants in Asia’s diverse and dynamic life insurance landscape is the search for long-dated investments that hedge liabilities. By nature, the industry generates liabilities that tend to have a longer duration than the assets on life insurers’ balance sheets. The resulting duration gap exposes life insurers to changes in interest rates that will soon incur higher capital charges due to the new risk-based capital (RBC) regimes being introduced across Asia. In addition, insurers could face increased volatility in their balance sheets as the new accounting standards in IFRS 17 (and IFRS 9) come into effect on 1 January 2023.
Against this backdrop, there is an urgent need for improved asset/liability management (ALM) practices among the region’s insurers. Here, we outline potential approaches for insurers to reduce the mismatch between their assets and liabilities and to better manage their interest-rate exposure.