The need to address asset-liability mismatches and return gaps is prompting Asia Pacific insurers to turn towards alternative investments, particularly infrastructure and private equity, according to a survey commissioned by European insurance asset manager Standard Life Investments.
The survey is based on 51 interviews with senior insurance investment executives in six markets in Asia-Pacific, covering a combined $4 trillion, or around 60 percent of total insurance assets in the area.
Nearly 80 percent of respondents intended to increase their exposure to infrastructure over the next three years, with 75 percent looking to add to private equity and 64 percent to real estate.
Infrastructure debt was seen as especially attractive as it can increase asset durations, helping to reduce asset liability mismatches.
Currently, external managers oversee less than 20 percent of Asia-Pacific insurers’ assets. More than three-quarters of the firms interviewed expected their increased allocation to alternatives to result in the greater use of external managers.
“Asia-Pacific insurers see increasing exposures to alternatives and going global as a way to seek extra return, diversification and better duration matching of liabilities. However, with the lack of in-house capability, many of them are increasingly open to the use of external managers, through barriers exist that external managers will need to navigate,” said David Peng, head of Asia at Standard Life Investments.
“The significant asset allocations shift taking place in Asia-Pacific is leading insurers to consider outsourcing more complex investment mandates to external managers,” he added.
Although Chinese and Hong Kong insurers are delivering higher returns of 5.4 percent and 5.6 percent respectively, their peers in Japan, South Korea and Taiwan are facing return deficits that need to be plugged. More than half of the survey’s respondents said asset-liability mismatches are an issue and solvency regulations a challenge to their investment strategy.
Cash, bank deposits and fixed income securities currently make up almost 71 percent of insurers’ total invested assets, with current allocations to alternative assets standing at 8 percent, according to Standard Life Investments.