Capital strength determines competitiveness of Asian insurers

Capital strength has become a key factor in determining the competitiveness of insurance companies in the post-global financial crisis period, says the Hong Kong-based financial magazine, The Asset.

Insurers with relatively strong balance sheets, a minimal legacy book with products offering high guaranteed returns, and more assets invested in stable, long-term fixed-asset investments are poised to benefit from the current environment to increase their business and market share in the region either organically or by acquiring the assets of weaker players.

“The growth order for life insurers in the region would depend on the balance sheet of the individual life insurance companies. Insurers with better balance sheets will gain market share at the expense of weaklings,” said Bob Leung, Head of Asia-Pacific Insurance Research at Deutsche Bank.

“Weaker players that do not want to exit the market must lower the pricing of their products as they can no longer be aggressive in chasing market share, which means the products they offer will have to be capital-light.”

The macro environment for life insurance companies in Asia is stabilising now, as markets in the region return to strong growth mode. Insurance companies have moved into de-risking mode as a result of the flattening yield curve and tightening regulatory environment at present. The overall investment in equities, as a proportion of their total investments, is declining.

Consequently, the insurance companies’ investment return overall is shrinking significantly, says Mr Leung. Life insurers are taking increasingly less risk by offering more and more investment-linked policies to policyholders.

“The overall result is that the life insurers are faced with higher costs of capital and lower asset yields,” he said. “Life insurers’ ability to grow their liabilities will be limited because they are seriously restrained on the asset side, a situation which could well be prolonged.”

In Asia, the lack of long-term fixed-asset classes is another factor that constrains life insurers in growing their liabilities. De-risking by insurance companies is seen as likely to stay for some time, especially for those that had their fingers badly burnt during the crisis.

During the global financial turmoil of 2008 and early 2009, the life insurance industry in Asia was battered, in particular in markets such as Japan and Taiwan, where insurers had aggressively pushed high-yield guaranteed products and been heavily exposed to equities.  “During the crisis, it dawned on numerous major life insurance companies, especially in Japan, that it paid not to be overexposed to equities,” says Jeffrey Liew, Senior Director at the Asia-Pacific insurance team of Fitch Ratings.