Commentary: Insurance investment restrictions in some Asian countries should be refitted for industry's future

Powered by an exploding middle class, the Asian insurance industry is one of the region's most prominent structural growth stories.

For example, total assets of the Taiwan life insurance industry have been growing around 10% a year in the five years through 2017, resulting in total assets of about $797 billion, according to Taiwan Insurance Institute data.

As this swelling industry manages ever more assets, insurers' investment needs and the accompanying regulatory requirements are becoming more complex, bringing challenges.

In some Asian countries, there is an urgent opportunity for policymakers to help better ensure that regulatory frameworks governing insurance investment strategies are fit for purpose.

Insurance companies by nature are conservative investors — they seek a relatively predictable stream of income to cover liabilities without undue risk. Insurers need to invest such that they're able to meet their obligations, and maintain a surplus buffer of capital to absorb any reduction in the value of their assets due to market movements.

As these insurers grow, the need for greater investment diversification to generate returns and meet investment objectives is becoming an imperative. This is especially true for Asian insurers with relatively high liability guaranteed rates.

By incorporating some exposure to a broader range of asset classes in their strategic asset allocation, insurers can reduce their home-bias concentration risk and potentially improve their expected returns. For example, incorporating alternative asset classes, such as private equity, can serve a variety of functions, including expected return and diversification enhancement.

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.

Alan Yip is a managing director in the Hong Kong office and head of Asia insurance strategy at J.P. Morgan Asset Management. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.