Asian insurers face QE conundrum
That level of risk appetite is significantly higher than a year ago, driven by the continued low-rate environment, but the same survey also reveals that insurers are worried about the end of quantitative easing and a normalisation of interest rates. It is a complex environment.
“When you start to knit the picture together it’s fascinating,” says David Lomas, global head of the financial institutions group at BlackRock. “Bond market liquidity is challenged and we’re worried about rate volatility, and QE has a big part to play in that. But, on the other side, if you’re buying risk assets, QE has been a positive driver of returns, so Asian insurers are looking to take advantage of that.”
The challenge is partly caused by divergent monetary policy around the world. With a shortage of high-quality and long-duration assets at home, Asian insurers have been forced to look to international markets for investments — assets denominated in dollars, euros, yen and sterling, principally.
Needless to say, the central banks in each of these markets are independent from one another and following separate policy agendas depending on their own circumstances, making it particularly difficult for insurers sitting in Asia.
“If you’re an Asian insurance company and you’re looking overseas to find yield, but don’t have a large staff, aren’t locally positioned in these overseas markets, and you find that bond market liquidity is difficult and dealer inventories are much lower, then that is a cause for concern,” says Lomas.
The majority of insurers are planning to use derivatives and exchange-traded funds to access the kind of liquidity they need in fixed-income markets, according to the survey.
This lack of liquidity is also pushing insurers towards alternative investments. A whopping 82% of respondents to the survey said they plan to increase holdings in one or more income-generating alternative credit asset classes such as commercial real estate debt, direct lending to small and medium enterprises, and direct commercial mortgage lending.
The survey also revealed that insurers are increasing their cash holdings as they prepare to move into these new asset classes. Moving outside their traditional competence is creating demand for external advisers to help navigate unchartered waters.
“We’re seeing a lot more demand for education around asset classes,” he says. “That creates another dilemma: I’m holding cash back but am I ready with my governance model and structure to really deploy? So we’re encouraging insurers to really make sure they’ve got the right framework to move into those deal flows when they become available.”
New solvency rules don’t help. In addition to having fewer high-quality assets available to buy in the market, insurers are also facing the prospect of much more complex rules and greater restrictions on what they can put on their balance sheets.
“Solvency II is making it more difficult for insurance companies to actually acquire or hold these assets,” says Lomas. “So not only do you have a governmental issue, you have a policy issue and a regulation issue that is also creating challenges for insurance companies in buying suitable fixed income portfolios as well.”
There are challenges around every corner, it seems.
The survey was conducted by The Economist Intelligence Unit and included the opinions of 248 senior executives in the insurance and reinsurance sectors with estimated assets under management of US$6.5 trillion.
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