Asian insurers pivot to private credit and ESG as returns dive

Asian insurers are rewriting their investment playbook amid record-high interest rates and market turbulence, shifting toward private credit and ESG investments in their search for stable returns. As revealed at the Insurtech Insights Asia Conference 2024 in Hong Kong, this strategic pivot comes as the global investment landscape grows increasingly complex, with a widening East-West market divide made even trickier by China’s economic headwinds.

“China, Taiwan, Korea…we’ve seen markets diverge more than ever within Asia,” said Dominic Wong, HSBC Insurance’s Head of Portfolio Management, Hong Kong Investment. “Historically, we always use a broad-based index to direct allocations, but more and more we are finding we need more market-specific tactical allocations.”

For institutional investors like HSBC, ESG integration has become fundamental to the investment process. “As a long-term insurer, we obviously think very deeply about ESG, but it’s not a separate problem. It’s part of your investment process,” said Wong. “We spend a lot of time working with our asset managers now on these public data and how that will trend over time.”

“ESG is essentially looking at the companies and sustainable development… assessing the management in their ability to develop based on different perspectives [and] regulations,” said Martin Lau, Head of Hong Kong at Principal Financial Group. “That’s where the long-term return is going to be generated from.”

Against this backdrop, Taiping Reinsurance’s CEO Xiaodong Yu pointed to a drastic shift in Chinese markets. “Just this week, the 10-year Chinese treasury bond yield has been below 2% – the first time in history. The average return for new money can be below the guaranteed average liability cost for money insurance products,” he said.

The tough environment has pushed insurers toward alternative investments. “A lot of insurers are increasing the allocation to private equity, credit, real estate [and] infrastructure,” noted Lau.

HSBC has been ahead of the curve, according to Wong. “We’ve started our private asset programme more than eight years ago, so we are quite along the road on that,” he said. “We launched a product [with the] majority backed by private assets. You can innovate using these private assets.”

Rather than fixed-income securities, Yu advocated for private credit investments as a way to better match long-term obligations while securing higher returns. “There’s been an increasing interest in private equity or private credit. The first factor is duration match because private credit investment can better match the liability of life insurance,” he said.

This shift, however, raises concerns about market liquidity. “In the past, the banks can help to offset some of those because they would buy the secondary market from them and create what private banks need… but they don’t do it anymore because of capital requirement,” said James Chu, Founding Director of Tricio Investment Advisors.

Within the insurance industry, there is a cautious stance on digital assets. Insurers tend to favour technology infrastructure investments over direct crypto exposure. “Unless we start seeing these digital assets as a currency and less an asset class, it may be more difficult,” noted Wong.

When it comes to digital assets, there are both the allure and risks. “The lobby behind investing in digital assets… the first point is a higher rate of return potential, because, in this way, it may be a speculative investment,” said Yu. “If we consider the investment in digital assets, it also must match the liability behind. For example, for predictable products, you shouldn’t invest in digital assets.”

“Mr [Donald] Trump seems to be very pro-crypto, and also his friend, Mr [Elon] Musk, obviously is very pro-crypto. There’s a lot of deregulation track,” said Chu. “So even if we don’t consider digital assets as something in the asset allocation side, we have to understand the impact [with] regards to the whole market.”

And it’s not just about crypto. Asian insurers are caught in the middle as they weigh local market pressures against the need to spread their investments globally, especially with the U.S. market’s continued appeal for its dollar-denominated returns.

“The biggest problem we have is the dominance of the US market perspective. There is no alternative, because where else have you got the growth? Where else [do] the liquid stock markets have technology exposure?” said Chu.

The challenge is particularly acute for insurers in emerging capital markets. “In Asia, a lot of the insurers have to go offshore…given the lack of smaller capital markets domestically,” noted Lau. “In these small countries, risk restriction is quite a challenge to source those types of investments.”

Adding to the complexity are the regulatory capital requirements, especially under risk-based capital (RBC) frameworks. “The more detailed disclosure you report on the credit, the more benefit you can enjoy from the new RBC law,” said Yu. “After the implementation of RBC, some life insurers are finding reinsurers to transfer their info to release capital instantly.”