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“There is almost a 100% consensus on increasing allocation to alternatives and a step change in Asia Pacific insurers’ commitment towards transition investment and insurers are also seeing a growing strategic role in financing the infrastructure gap, especially in the emerging markets,” said Kimberly Kim, head of financial institutional group, APAC for BlackRock.

In a divergence from global trends, majority of regional insurers expected the economy to stay resilient and wasn’t expecting any landing with core inflation and interest rates expected to stay. Globally, central banks are carefully easing, and insurers are anticipating a soft landing, according to BlackRock’s annual Global Insurance Report that surveyed 410 insurance investors surveyed across 32 markets.

However, Kim noted that regional insurers identified “regulatory changes and geopolitical tension as the macro risk for the sector.

“Insurers are dealing with this rates environment, which is compounded by different issues like regulatory and political uncertainty, escalating to geopolitical tensions, which came out quite strongly in the report,” she said.

Energy transition
Notably, 99% of insurers in APAC surveyed for the report have some form of transition objective in their investment portfolio.

“We are observing that the insurers have very ambitious climate transition goals. Of course, there are opportunities and challenges that they face. They are paying extra focus on renewable energy like wind, solar, energy storage because these investments are aligned with their net-zero targets and also support the transition to low-carbon economy.”

“In Asia, almost two-thirds of insurers told us that they had more conviction in transition investing than they did a year ago. We see that there’s a lot of momentum in this,” Kim said.

There is also growing allocation to green bonds, which help insurers to meet their sustainability goals while providing the stable return.

“Insurers are also more actively engaging with companies to encourage better climate related practices and policies, include voting on the climate resolutions and taking proactive action through the stewardship,” Kim said.

However, investment continue to be going to the US and Europe given the more mature markets there, said Kim, adding “we need to see more opportunities coming from emerging markets or Asia”.

To support their low-carbon transition strategy, clean energy infrastructure such as wind and solar (60%) and technologies such as batteries and energy storage (60%) were identified as the top two thematic areas that insurers plan to target, according to the report.

In places like Australia, there are significant opportunities that makes a lot of sense for insurers, she added.

Certain regulators, notably in Singapore and Japan, have been very proactive in promoting and encouraging green investments, Kim noted.

“One of the biggest challenges is the lack of reliable and consistent data on things like carbon emissions. Insurers definitely need accurate data to measure their progress and make informed choices,” Kim said.

“We also hope to see standardisation of industry metrics, which is crucial for effective decision making. Different ESG rating agencies use varying methodologies, making it sometimes difficult for insurers to compare and prioritise investments.

Private markets
The report noted that there is rapid acceleration in demand for private markets among insurers in recent years, notably in Asia Pacific.

“We have also seen the increased allocation to private investments for diversification as well as need for increased income generation,” Kim said, adding that 96% of APAC insurers said they will increase investment in private market compared with about 91% globally.

Implementation of risk-based capital (RBC) regimes have also helped with the shift towards private markets as under that regime certain asset classes like private debt are relatively very attractive

“I  think it really is a strong reflection of their belief in the benefits of diversification And higher income generation that private markets offer

“There’s also heightened focus on private debt. So the they’re shifting our allocation from public fixed income to private debt. We believe that the shift will come from public to private fixed income because it provides high higher yield and the diversification benefits compared to traditional fixed income.

“The higher rate environment has been a tailwind for private credit investors because they can achieve equity like returns,” Kim said.

The transition from banks to private lenders on the back of banks deleveraging, the insurers and asset owners  are playing a big part and very importantly they recognise that they will get to finance the real economy – consumer financing, energy transition, right, that requires huge capex, she added.

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The often-cited notion that interest rates will “stay higher for longer” during much of 2023 has prevailed, but the additional challenge for chief investment officers this year is that they must also keep track of interest rate expectations that are being constantly reset. The market is now pricing in one to two quarter-point cuts this year, down from an expectation of six to seven cuts in early 2024.

For Asia Pacific markets such as Hong Kong, new risk-based (RBC) capital regime, to be introduced in July, has put more urgency on insurers to match their long-term liability. Market risk capital charge for equity investments, for example, is higher compared to other instruments under the city’s RBC regime.

Adding to the complex macroeconomic and regulatory environment is the new IFRS 9 accounting standard , which has had a wide-ranging impact on how insurers account for and measure financial instruments.

Against such a backdrop, chief investment officers are taking positions on long-duration assets to better match their liabilities, as they seek to minimise the interest rate mismatch with the asset side of their balance sheets. Investing in longer-duration assets can help clients lock in the current level of long-term rates, said Thibaut Ferret, head of solutions Asia for HSBC Global Asset Management (Hong Kong).

“Some insurance companies are accelerating their allocation to longer duration assets, as they want to be able to lock in the current level of interest rate and mitigate the risk of rates falling. This makes investment grade fixed-rate infrastructure debt strategy a good fit, as their long duration helps match an insurer’s long-term liability while providing an illiquidity premium compared to listed bonds,” he said.

From a risk perspective, infrastructure debt has historically also delivered lower credit losses compared to similarly rated non-financial corporate bonds.

For chief investment officers requiring FVOCI (fair value through other comprehensive income) classification for their fixed income assets under IFRS9,  fixed-rate infrastructure debt strategies could prove relevant as they are likely to pass the SPPI (solely payments of principal and interest) test.

As the yield curve has inverted since July 2022, insurers that prefer to keep some exposure on the short-end of the curve to enhance portfolio yield could also benefit from shorter-tenor, floating-rate infrastructure debt, he said.

One option would be through transition infrastructure debt – its floating rate and illiquidity premium can provide compelling targeted returns while achieving net-zero, climate change mitigation outcomes.

Insurers have also shown a growing appetite for similar private credit strategies providing targeted equity-like returns and portfolio diversification, while benefiting from a fixed income capital charge.

Derivatives and securitisation

Insurers who have a view that interest rates could eventually go down this year are also taking tactical positions into long-term interest rates through derivatives, such as bond forwards.

They are also using bond forwards to pre-invest future insurance premiums at a pre-determined rate, and manage their overall asset duration more efficiently.

“We can help insurers assess, manage and execute these derivative strategies along with collateral management as these instruments are complementary to the core bond portfolio strategy matching liability that we traditionally manage for insurance companies,” he said.

Bond forwards are often a complementary tool to an insurer’s corporate bond investment, which helps manage their overall fixed-income portfolio efficiently.

“Having both forward and corporate bond could help insurers disconnect the credit spread duration and interest rate duration exposure, and therefore providing them with tools to manage more efficiently their overall portfolio,” he said.

For insurers that are comfortable with more complex securitisation strategies and are open to accessing different risk, return, and maturity tranches, HSBC Global Asset Management has also been offering securitised credits such as collateralised loan obligations, asset-backed securities, residential mortgage-backed securities.

Denominated in US dollar, securitised credits could yield an annual return of 6.5%.

Investment grade securitised credits also offer a complexity premium compared to corporate bonds that are attractive to insurers due to their efficient yield enhancement. These are often floating rate instruments with low spread duration and an external investment grade rating, thereby attracting a low capital charge under RBC.

“They help insurance companies achieve ambitious target yield for their overall portfolios, while at the same time, it is a liquid, investment grade-rated strategy with an acceptable level of capital charge similar to listed corporate bonds of similar rating and tenor,” he said.

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In Hong Kong, the industry has also been lobbying the regulator to recognise such collaboration for lower capital charges, but this has yet to be reflected in the upcoming iteration of the risk-based capital (RBC) regime.  The same goes for the RBC regime In Singapore, although the Monetary Authority of Singapore said in November 2023 that they would soon launch a consultation on proposed capital treatment.

Green infrastructure investing has long been touted as a good match for insurers’ long-term liabilities such as life insurers’ annuity books and life covers. But it is just as relevant for non-life insurers due to the nature of general insurance claims tends to make P&C insurers more exposed to inflation risk than life insurers. Inflation erodes the value of a currency and the immediate impact for (re)insurers would be a rise in the claim amounts.

“Infrastructure equity, particularly renewable energy, is a natural stable growth asset which offers attractive yields and inflation-linked income,” said Matthew Pang, head of institutional business, Hong Kong at Schroders, adding that he expects a return of 10-12% in US dollar terms from such assets.

(Re)insurers are also feeling a growing urgency to support infrastructure projects, as governments’ attempt to fulfil their net-zero goals has significantly raised the finance needed to transition carbon-intensive sectors into new low-carbon infrastructure. About US$50 trillion in incremental investments are required by 2050 to transition the global economy to net-zero emissions to avert a climate catastrophe, according to a report co-authored by the World Economic Forum and Oliver Wyman.

Initiatives such as the Principles for Sustainable Insurance (PSI); and disclosure frameworks such as the Task Force on Climate-related Financial Disclosure are propelling (re)insurers to invest more in sustainable, long-term assets, as they underwrite more renewable energy infrastructure and decarbonisation technologies that tick the boxes on environmental, social and governance (ESG).

These green assets include combined cycle power projects, hydroelectric power projects and renewable energy projects, including wind, solar, and battery energy storage systems.

“Over the past decade, the majority of P&C insurers have been transitioning away from insuring fossil fuel projects, particularly those involving coal. As a result, their risk profiles have gradually shifted towards other non-fossil fuel projects,” said Jim Qin, chief executive of general insurance at Zurich Insurance (Hong Kong).

Higher yield, lower vol
Interest among (re)insurers on infrastructure investing appears to be on the rise. If investment into private debt is used as a proxy for their interests in infrastructure, insurers’ investment into private debt through third-party managers has grown to US$270 billion in 2021 from US$20 billion in 2015, according to data from Clearwater Analytics.

Insurers prefer investing in private assets, such as through private debt or private equity, as their spreads generally benefit from a premium associated with their lower liquidity compared to publicly traded securities, according to Xiong Jian, senior Insurance solutions director for UK-headquartered global asset manager abrdn.

“Additionally, issuers are more willing to tailor the investment cashflow of the private instrument to match the insurers’ liability profile. The insurer may also be able to negotiate for terms that give them better investors’ protection compared to a conventional public bond,” Xiong Jian, senior Insurance solutions director for abrdn based in Singapore.

Floating-rate infrastructure debt gives insurers an access point to attractive returns without taking on undesired interest rate risk and its related solvency capital requirement, said Pang at Schroders.

“Floating-rate loans can be issued across the credit risk spectrum, giving investors a range of options from investment grade to high yield and even hybrid investments with debt and quasi-equity elements. Currently, we see spreads of 200-600 basis points (bps) above risk-free rates in USD terms depending on the type of instrument, seniority, and level of risk,” said Pang.

Infrastructure assets also provide stability and resilience to insurers’ portfolios. Long-term studies by Moody’s found that the 10-year average loss rate of BBB-rated infrastructure debt over the last four decades was more comparable to A-rated corporate debt, said Ruolin Wang, insurance solutions manager at Schroders Investment Management.

Bridging the gap
But among all different types of investors, insurers’ asset allocation to the sector appears insignificant to their total assets, amounting to just 1.5% of their assets under management in 2019, a World Bank report released in 2021 shows. A 5% allocation of insurers’ gross written premiums into infrastructure investments could close nearly half of the annual investment gap, the World Bank said.

In April 2023, the Hong Kong Federation of Insurance (HKFI) has asked the government to allow the use of internal ratings for infrastructure and recognise the diversification benefits from infrastructure debt and equity under the risk-based capital (RBC) regime.

While the Hong Kong government has accepted one of their proposals in giving a discount to the capital risk charge for green bonds, capital charges for long-term infrastructure or real assets have not been spelt out, an HKFI spokesperson said in an email response to InsuranceAsia News.

This puts Hong Kong behind China, where under the China Risk-Orientated Solvency System (C-ROSS II) regime, concessions are given in the primary risk factor used to calculate capital risk charge for infrastructure equity is 12%, compared to 31% for listed equity in general. For private infrastructure debt, there is also a 50 bps reduction compared to a double-A-rated publicly issued corporate bond, according to Xiong.

Instead, governments are dishing out other incentives to encourage more (re)insurers’ capital into green infrastructure.

In Singapore, Bayfront Infrastructure, backed by Clifford Capital and Asian Infrastructure Investment Bank, has already structured four infrastructure asset-backed securities that offer investors a portfolio of infrastructure loans and bonds extended by five participating banks to project owners in and outside the region. The Government of Singapore has provided guarantees to these deals.

“For now there has not been any favourable capital risk charge given in the risk-based capital regime of Hong Kong and Singapore. But as the RBC regime continues to evolve this may be reconsidered in the future,” said Xiong.

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