Insurance solvency regimes in Asia-Pacific are being overhauled to better reflect the risk embedded in their balance sheet and enhance policyholder protection, with significant implications on enterprise risk management, product offerings and investment portfolios.

Insurance solvency regimes in Asia-Pacific (APAC) are being overhauled to better reflect the risk embedded in their balance sheet and enhance policyholder protection, with significant implications on enterprise risk management, product offerings and investment portfolio construction. The pace and substance of the new capital regimes differ between countries. However, the underlying approach tends to share similarities to the suite of regulatory changes in Europe, including Solvency II introduced in 2016 and sector frameworks such as IFRS 17 and International Capital Standards.

The aggregate effect in APAC will likely redefine the region’s insurance and reinsurance sector. In this new environment, capital becomes more expensive, so there is more incentive for (re)insurers to manage their balance sheet at a more integrated and granular level, with a stricter lens applied to assessing risk, governance, capital efficiency and reporting. As in Europe, recent regulatory changes in APAC now penalise risks in an investment portfolio that does not align with liabilities. For example, under Hong Kong’s new risk-based capital regime, asset classes such as direct lending may have advantages over equities when expected returns are weighed against capital charges (see Figure 1).

Implications for portfolio optimisation and asset-liability management

While capital requirements in APAC will be more heterogenous relative to Europe, we summarise the general consequences for some asset classes in the following:

• Under the new capital regimes, life insurers will likely need to keep fixed income at or above current exposure levels. They also need to reconsider how to optimise their fixed income portfolio to minimise capital charges, including a more dynamic asset allocation approach. For example, this may be accomplished by adjusting duration, credit quality, optionality and currency exposures. Within fixed income, private debt may hold some capital efficiency advantages relative to public market equivalents.
• On average, equities account for less than 10% of the investment portfolio for European (re)insurers, according to EIOPA Insurance Statistics. However, insurance companies in APAC - particularly those in Australia, Indonesia, and Malaysia - typically have much higher allocations to equities under current capital regimes. The incentive under the new capital regimes is to reduce equities - which carry far higher capital charges than fixed income - or to increase the use of equity derivatives to hedge market risk at a cost.
• All investments outside local currency fixed income may incur additional capital charges due to liability-duration mismatch. The duration gap can be a significant source of volatility in capital requirements and, therefore, corporate profitability. However, diversification benefits can help to minimise capital requirements.

Competitive advantages through enterprise risk management

Capital requirement adequacy rules will direct companies to align their enterprise risk management (ERM) framework with a broader set of risk factors on both sides of the balance sheet (see Figure 2). ERM processes must move away from a siloed approach and be integrated across the entire business, supported by a comprehensive corporate governance structure and reporting system.

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Asia’s changing insurance regulatory landscape (fidelity.be)

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