The Asian insurance landscape is heterogenous. The practical realities of each market vary significantly because of differences in the nature of the insurance products, the prevailing regulatory regime, the maturity of the industry and the level of market penetration, as well as the limited availability of suitable investments in the region’s domestic capital markets.
Yet one common theme runs through the region: the strong demand from life insurers for investments to match their long-dated liabilities. Most of the region’s life insurers find themselves in a position where their asset exposures are meaningfully shorter duration than their liabilities, which makes interest rates one of the largest drivers of risk on Asian life insurers’ balance sheets, exposing them to the resultant economic and accounting risks arising from movements in rates.
The problem is driven by the short-duration nature of much of Asia’s domestic capital market in comparison with the long duration of the life insurers’ historic guaranteed insurance products. The introduction of risk-based capital (RBC) regimes across the region and the new IFRS 9 and 17 accounting standards will make these duration mismatches both capital intensive and volatile for earnings.
Against this backdrop, there is an urgent need for improved asset/liability management (ALM) practices as insurers will be subject to more market-value-based accounting and regulatory frameworks. Here, we outline a number of approaches for insurers seeking to reduce the mismatch between their assets and liabilities and better manage their interest-rate exposure.