Demand for structured reinsurance solutions continues to grow across APAC as the imposition of risk-based capital (RBC) and other capital rules bite and as the cost of capital remains stubbornly high.
Last month, South Korea’s Financial Supervisory Service announced plans to introduce a mandatory capital solvency requirement for insurers of at least 50%.
Indonesia’s financial regulator, OJK, is also overseeing a staggered increase in capital reserve requirements for insurers through to 2028 under the P2SK Law, which will create the highest minimum capital reserve environment in Asia.
These regulatory initiatives, and other similar ones across Asia, will also help focus insurers’ minds on the need to do more to make sure they are using capital efficiently.
While many large life insurers in the regional hubs of Singapore and Hong Kong have spent the past few years optimising their balance in anticipation of the new rules, smaller regional players are still trying to work out the best way of strategically positioning themselves.
This may involve ramping up asset liability matching (ALM) capabilities, adjusting their mix of products to reduce long-dated exposures, or —increasingly—turning to the reinsurance markets.
Furthermore, several markets in APAC have not yet fully implemented RBC rules, meaning that their domestic insurers are still in the process of adjusting to what is coming.
This includes Taiwan and Japan, where RBC will only be rolled out in 2026. India is yet to announce a timeframe for its implementation of RBC, but this is also a country to which significant change could be coming.
Improving ALM
The high cost of capital makes adjusting to new RBC rules all the more painful, since cost-effective ALM options become more limited.
“The great thing about ALM is that it is all under the insurer’s control, so this should be the number one option for balance sheet management. The insurer can act quickly to unlock capital and improve the resilience of its portfolio to changing market conditions via strengthening its ALM,” says Pierre-Emmanuel Brard, Head of APAC Insurance Solutions at Fidelity.
“But there are two important things to be considered,” he added. “Firstly, how far can ALM be improved through strategic asset allocation and portfolio construction? Secondly, whatever can’t be matched by physical instruments, because they are not long enough or are not of high enough credit quality, will have to be matched using derivative instruments. This means insurers will have to evolve and reinforce their liquidity framework.”
Pierre-Emmanuel Brard
Head of APAC Insurance Solutions at FidelityLife insurers operating in APAC have long suffered from a shortage of high-quality instruments that are of sufficient duration to match their liabilities, which can easily extend to 20 years or even longer.
As a result of this market limitation, many of the larger and more sophisticated insurers have used interest rate swaps to help with ALM, managing the risk of these instruments internally. But smaller players often lack the resources and insight to effectively play in the derivatives market. Higher cost of capital can also make some of these instruments prohibitively expensive.
Reinsurers are sensing an opportunity.
Structured solutions
“The weighted average cost of capital for many insurers is higher than it was a few years ago, which can make reinsurance more competitive, so we would generally be positioning reinsurance as a capital alternative against sub-debt,” says Alison Drill, Head of Property and Casualty Structured Solutions for Swiss Re, Asia Pacific.
An alternative to raising debt would be for insurers to raise equity, or to ask for a capital injection. In some situations such as joint ventures, neither solution is appealing for existing shareholders, since this may effectively result in dilution of their own stake in the company.
“This is why equity is usually viewed as the most expensive form of capital,” says Drill.
Alison Drill
APAC Head of Property and Casualty Structured Solutions at Swiss ReThe core offering of Drill’s team is to make reinsurance an integral part of insurers’ capital strategies on a long-term basis.
“This is the first significant theme that we talk to clients about,” she says. “The other theme is around underwriting volatility and earnings volatility, which becomes more important as clients stop looking primarily at top-line growth and start focusing more on other key performance indicators (KPIs).”
A third area that Swiss Re’s strategic solutions can help with is in the run-off space, addressing existing liabilities from businesses that they are exiting and transferring them on to the reinsurer’s balance sheet.
Drill says that demand for solutions in all three areas has been increasing across Asia.
“As the regulatory regime changes, insurers are assessing whether their current reinsurance arrangement is fit-for-purpose, and in many cases there is interest in finding new and efficient ways of managing cost-of-capital,” says Drill.
Clement Bonnet, Principal and Consulting actuary at Milliman in Hong Kong, has also noticed rising interest in these kinds of solutions.
“There is definitely interest from both insurance and reinsurance companies in the region,” says Bonnet. “There is interest from major Asian reinsurance companies and global reinsurance companies, as well as reinsurance companies based in Bermuda.”
He says that there has been a particularly large amount of interest in Hong Kong recently, because of the size of the insurance market in the region, and because Hong Kong is a US dollar-denominated market.
Using reinsurance to strategically manage the balance sheet can come with its limitations, however, depending on the position taken by domestic regulators.
“Regulators can often become quite concerned about foreign companies taking on risks on behalf of domestic insurers, since it is the local company that is ultimately responsible to the policyholder,” says Bonnet.
Indonesia and India, for example, have previously taken a fairly dim view of risk being transferred overseas – and thrown up barriers to prevent this.
Clement Bonnet
Principal and Consulting actuary at MillimanProduct mix
Optimising strategic capital is a crucial part of dealing with Asia’s new capital rules. However, the way in which it is done is likely to vary from market to market, depending on the products that are being offered.
For example, many insurance products in Hong Kong have a participatory component, meaning that insurers have significant exposure to long-term volatile assets that need to be carefully risk-managed.
“There is a competitive angle to all of this, too,” says Bonnet. “By reducing capital for interest rate risk, insurers can better allocate capital to asset classes that have higher returns, so ultimately they can offer products that are more attractively priced.”
Insurers who struggle to reduce the cost of capital on their balance sheet may consider adjusting the product mix instead. This appears to be happening to some extent in Singapore, with fixed indexed annuity (FIA) products, previously popular in Japan, starting to take off in the market.
“The RBC framework serves as a catalyst for these kinds of products,” says Brard from Fidelity. “Traditional savings products are very capital intensive, but we are living in a world where clients still need savings. They always ask for capital protection, but more and more they want to enjoy the upside as well. FIA products offer this balance.”
