Amid challenges, insurers see silver lining in region's low penetration

The hunt for yield in a low-interest- rate environment is now a constant in the insurance industry. But how low can rates go before things become unsustainable? If it's any comfort, industry players and observers say the situation is bearable even as economic and political uncertainties loom.

Ask Swiss Re's chief economist Kurt Karl and he would point to the case of Japan, where its central bank has set its interest rate range at between 0 and -0.1 per cent.

"Well, we've seen more than 20 years of low interest rates in Japan. So it's sustainable for quite some time, unfortunately, for the insurance industry," he said with a chuckle, adding that it is not all doom and gloom given that Asia is doing well in the growth department.

Typically, insurers rely on investment income to support their business but low interest rates - and therefore low yields, coupled with a generally conservative investment strategy - have placed their businesses under much stress.

In Japan's case, the large players survived because "they have a bigger, diversified book of business - not just interest rate guarantees but other kinds of savings products, mortality and disability, and larger capital base", said Dr Karl.

Already, in Japan and some Asian markets, life insurers are shifting towards the sale of more protection products which are less dependent on the interest-rate level and "typically have higher margins and higher persistency rates", he said.

Going forward, another key issue in the scheme of things is central bank policy around the world.

And this is at a "very critical state now", Munich Re's outgoing chief executive Nikolaus von Bomhard told The Business Times.

"The question is: What do you try to achieve? Is the target defined correctly? The famous 2 per cent in most countries with inflation - a big question mark. Two, if it was the target, are the tools you use to get there right? Not even a question of "no". That is our understanding.

"So, it's a very fundamental discussion about the monetary tools that we have in the first place. Here, we already deviate; some of us have certainly questioned severely the conventional wisdom of today's monetary policy of big central banks - Japan, the European Central Bank, and the United Kingdom," Dr von Bomhard said.

What has further complicated matters in recent months are the shifts in the various political landscapes that escalated with Brexit in June, amid slowing growth in global economies.

With real estate mogul Donald Trump elected as the next US president, credit rating agency S&P has said in its research report that it anticipates "a low and uncertain impact" on the insurance industry in Asia-Pacific.

So far, analysts are near-certain that the US Federal Reserve will move to raise interest rates when it meets next week.

"Higher interest rates may benefit insurers through higher investment yields and reserving assumptions, but capital market volatility could affect profitability and capital strength," said the S&P report.

Against a backdrop of depressed bond yields, slowing economy and geopolitical uncertainties, insurers have turned to riskier investments in recent years to seek returns and the trend is only set to grow further, said David Lomas, global head of BlackRock's insurance asset management business.

BlackRock's fifth annual global insurance survey of 315 senior insurers found that only 8 per cent of respondents plan to reduce their exposure to investment risk, while 47 per cent expect to increase it, and 46 per cent intend to maintain it over the next 12-24 months.

"The uncertain macroeconomic environment is creating a number of tensions and apparent contradictions in fixed-income allocation. Insurers are stockpiling cash reluctantly, in order to move opportunistically when periods of market volatility allow. They also convert excess liquidity into additional income by pursuing riskier and less liquid forms of credit," said Mr Lomas.

The problem with this is that as insurers ramp up their exposure to riskier assets in order to sustain current business models, higher capital buffers would be required, especially with Solvency II in Europe taking effect and the revised risk-based capital framework (RBC 2) to be rolled out in Singapore.

In a tougher and more competitive environment, insurers' smart and efficient management of investments will be an increasingly important differentiator for success, Mr Lomas added.

In the year ahead, the key theme in Asia would be for insurers to grapple with demographic changes led by an ageing population, said Swiss Re's Asia-Pacific chief economist Clarence Wong.

"In terms of provision for retirement income, for healthcare, for long-term care, most markets in the region are still not prepared. Even in the case of Japan, for example, where the government is already providing a lot of services, the whole structure is unsustainable," he said.

Going forward, this would have important implications on the insurance industry in terms of the product structure, legal system, and consumers' expectations.

Currently, it is easier for the insurer to provide basic insurance at a fixed amount but, in reality, consumers prefer to have value-added services, said Mr Wong. For example, in healthcare, customers would like to have a second doctor's opinion, regular medical checkups and rehabilitation programmes, among other things.

While it was difficult for insurers to offer such services in the past due to the complex logistics and high costs, technological developments have made it easier for them to do so, Mr Wong said.

So, despite the headwinds insurers face, the low insurance penetration rate in the region spells growth opportunities and has insurers thinking about the products they can develop and that would suit the needs of consumers, industry players noted.

Hopefully, insurers' investments in financial technology (fintech) and partnerships with startups will bear fruit - sooner rather than later.

This article was first published on December 07, 2016.
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