However, as it now stands, regulations in some Asian countries strictly constrain the amount that insurance companies can invest in some alternative asset classes. For example, under the Taiwan Risk Based Capital framework, insurers have to meet a minimum capital requirement associated with their private equity and hedge fund investments. This framework already provides a risk management mechanism, in that insurers will have to carry more buffer capital so they are better able to deal with any adverse investment experience, if they increase allocations to these asset classes. Yet, additionally, insurers are also restricted by a regulatory limit such that they can't invest more than 2% of their total assets into overseas private equity and hedge funds.
For years, local insurers have lobbied to have this cap raised.
If insurers' investment management strategies are to evolve appropriately alongside their booming growth, the industry needs engagement with regulators to adopt more flexible oversight of alternative assets.
Insurers need to engage with policymakers to encourage a more conducive regulatory regime in many Asian countries.
For example, a gradual shift from the imposition of absolute caps toward incorporating more flexible, risk-based analysis would be an important step in the right direction. Insurers should be allowed to have greater investment freedom as long as they have enough capital available to satisfy the risk based capital requirement associated with their investment mixes. Having this optionality would allow insurance companies to make investment decisions that suit their circumstances.
To survive and indeed to thrive, Asian insurance companies need the freedom and flexibility to manage their investments with the judgment that suits their unique circumstances and capitalization level. Policymakers should take note.