Standard Life Investments

Inside Global Insurance Investment

Business and regulatory developments in Asia-Pacific insurance

Recent corporate newsflow shows that European Solvency II regulations are having a major impact on insurers operating in Asia.

July 2016

In early April, Allianz announced the sale of its South Korean life insurance business to the Chinese insurer Anbang. The average guaranteed interest rate on this business is believed to be in excess of 4%. So, when Allianz consolidates its South Korean business at the level of the Group in Munich under SII, these guarantees generate large, and appropriate, capital charges. The scale of these charges means that such high guarantees are no longer viable under economic risk-based regimes like SII.

For similar reasons, Allianz is also selling a part of its life insurance portfolio in Taiwan to local insurer Taiwan Life Insurance. Allianz stated, "The sale of this portfolio is in line with our efforts to focus on capital-efficient life insurance and our successful unit-linked products.”

This is an interesting example of European SII having a material impact on the other side of the world. As Asian solvency regimes become more economic and risk-based, it seems likely this type of capital pressure will also begin to affect domestic Asian insurers.

The Monetary Authority of Singapore (MAS) is expected to introduce its new Risk Based Capital 2 (RBC2) regime next year. This will likely increase the capital charge on equity investment from around 16% to at least 40%, and potentially up to 60%, depending on the type of equity investment involved.

As a consequence, Singaporean insurers are beginning to consider alternatives – such as diversified growth funds and absolute return funds – to capture equity-like returns but without seeing their capital requirements increase dramatically. Importantly, MAS RBC2’s look-through approach for funds allows this lower risk to be reflected in appropriately lower capital requirements.

Meanwhile, in Australia, insurers have been adapting their investment strategies within the existing risk-based capital regime LAGIC, which was introduced in 2013. Declining yields, combined with traditionally conservative asset allocations, have reduced insurance profitability in recent years. Insurers have explored alternative investment strategies (including market-neutral, alternative risk premia, and absolute return funds), targeting improved returns that diversify well with their existing portfolios and are capital efficient.

Chart 2: Asset risk capital – a comparison of SII and LAGIC for two absolute return funds Profitability

Asset risk capital – a comparison of SII and LAGIC for two absolute return funds Profitability

Source: Standard Life Investments

Standard Life Investments’ Insurance Solutions team was in Sydney in early June to present at an insurance investment roundtable.