The seven asset intensive reinsurance (AIR) deals which have been publicly announced so far in Asia this year have vindicated global reinsurers’ decision to allocate larger amounts of dedicated capital to the Asian life market over the previous three years.
The size of these deals has not been made public but a report by the IAIS at the end of 2023 said that since 2021 there had been US$9bn worth of deals in Japan, and US$6bn in China, and Hong Kong over the previous two years.
Even this combined total is less than the estimated US$26bn worth of UK pension risk transfer (PRT) deals which took place in the first half of 2024 alone, according to London-headquartered Legal & General.
The UK PRT market has been in rude health for several years and this is set to continue in the near term.
Legal & General predicts deals worth US$50bn will be signed by the end of the year meaning a total of more than US$230bn worth of pension’s related AIR activity will have taken place in the European country since 2020.
But the source of these deals – defined benefit pension schemes – is finite. Data from the UK’s Pensions Regulator shows that just 20% are open to new members and it’s a similar story in the US.
While Legal & General predicts that combined PRT volumes in the UK and US market will be about US$250bn over the next three years it also says that demand will remain ‘elevated’ for the next decade.
Matthew Rose
Managing Director at Guy CarpenterThe search for new markets is — one — reason why reinsurance capital has been redeployed to Asian markets according to Matthew Rose, Sydney-based Managing Director for brokers Guy Carpenter.
“There’s an end in sight to the UK and US markets and reinsurers want to expand their opportunities and they have a huge amount of appetite for Asian risk” he tells (Re)in Asia.
Unsurprisingly for a sector which is dominated by North American firms, Rose says reinsurers are more interested in Asia AIR transactions when the underlying currency is US dollars.
“A number of the products that were sold in Hong Kong, for example, are actually US dollar denominated. And the US reinsurers and Bermuda reinsurers prefer US dollar products,” the Managing Director says.
Asia may have been a latecomer to the AIR sector but it’s home to some of the biggest life insurers on the planet which hold substantial amounts of life-linked liabilities. Data from S&P shows that six of the 10 largest life insurers by life & health, and accident reserves are headquartered in the region.
While China and Japan are the second and fourth largest life insurance markets globally with combined premiums of over a trillion dollars in 2022, according to Swiss Re.
China may be the bigger beast of the two, but Japan’s mature life sector is more likely to drive Asian AIR transactions, and transmute into a market worth tens of billions of dollars in the near future.
In July RGA signed an AIR deal with Tongyang Life, which was the first cross border transaction in that market, and Rose says that more Korea opportunities will also emerge.
“The largest Asian asset intensive reinsurance (AIR) deal so far has been in Hong Kong and more will happen in Asia. There will be quite a few more coming from North Asia, as there is a huge number of insurers there which are looking at asset intensive reinsurance.
Opportunity exists in Japan because of its size of the market. In terms of asset under management (AUM), Japan is the second largest life insurance market globally,” Rose says.
Matthew Rose
Managing Director at Guy CarpenterThe nail that sticks out
Japan may offer the biggest potential market for AIR deals but it’s monetary policy is also an outlier compared with regional and global peers.
Japan’s newly installed Prime Minister Shigeru Ishiba’s opposition to further interest rate rises surprised the market because of a consensus view that rates would continue to head north.
Monetary policy in major Asian life markets such as China, Hong Kong, and Korea is more certain to follow the dovish path advocated by Ishiba and according to Hong Kong-based actuarial consultant Greg Solomon this complicates the analysis of how macroeconomics will impact AIR demand across the region.
The Bank of Japan’s March decision to switch to positive interest rates may mean a ‘new era for Japanese lifers’, but Solomon says that different firms took idiosyncratic approaches to asset liability management (ALM) during a near two decade period of no rate rises.
“Japan is likely to remain the focus of AIR activity in Asia but the problem is it’s difficult to assess the impact of rate rises because we don’t know what individual companies have done with their ALM.
A key aspect of matching assets and liabilities is to immunise the impact of interest rate movements and, depending on their approach, different Japanese life firms may indeed be vulnerable to further rate rises. Or they could benefit from them in certain ranges,” says Solomon.
Greg Solomon
Actuarial ConsultantAccording to Solomon a period of looser monetary policy could increase the incentive for life insurers in Korea, Hong Kong, and Singapore, (ranked seventh, eleventh, and twentieth globally in terms of size by Swiss Re), to consider inking an AIR deal.
“The other markets where we are likely to see more AIR deals coming through are South Korea, Hong Kong, and Singapore as they are likely to follow a more global macroeconomic pattern of either stable, or reducing interest rates,” he says.
Rose, however, is confident where the locus of Asian AIR transactions will be.
“While there is potential activity in Singapore, asset intensive reinsurance is more of a North Asian opportunity due to the market size,” he says.
Regime change
Rose also says that Japan’s April 2025 introduction of a risk based capital regime (RBC) and IFRS 17 — the global accounting standard which is one of four options available to Japanese firms to publish their accounts — will boost the economic case for using AIR.
Both IFRS 17 and Japan’s economic value-based solvency (ESR — which is based on the IAIS’s insurance capital standard) value both assets and liabilities on an economic basis, unlike the prevailing approach which uses book value for assets.
“The main driver of deals is regulatory change, specifically the move to risk-based capital and, in this respect, there are developments in North Asia.”
“Risk-based capital regimes are more important to the asset intensive reinsurance market than changes to accounting rules. But IFRS 17 may change the relative economic impacts of a transaction, because higher interest rates potentially have a better accounting treatment,” Rose says.
