The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2020 Euromoney, a part of the Euromoney Institutional Investor PLC.
Sponsored Content

North Asian insurers: from home players to global leaders

Sponsored by newlogoSC1.jpg

Middle class savers are looking for long-term return solutions to insulate their savings but the artificial suppression of interest rates by central banks has constrained their options. Low rates of interest paid on cash deposits held in bank accounts is forcing people to identify new means by which they can grow and complement their existing income and savings.

600x400SCnotes1.jpg
ryanking999 - stock.adobe.com


Author

160x186BarnabyNelson

Barnaby Nelson

Regional Head of Securities Services for Greater China and Northeast Asia 

This is a global challenge made even more urgent by the expansion of the middle classes in emerging markets. Data from the Organisation for Economic Cooperation and Development (OECD) predicts the “global middle class” will grow from 1.8 billion in 2009, to 3.2 billion by 2020, and 4.9 billion by 2030. (1)

The same report added Asia will account for 66% of the global middle class population and 59% of middle class consumption by 2030, compared to 28% and 23% respectively in 2009.(2) Nearly all other publicly available studies will reach similar conclusions on this topic. That is, the middle classes are increasingly abundant in emerging economies, and this growth is highly concentrated in Asia-Pacific (APAC). 

This swelling wealth in APAC is strongly correlated with investor sophistication, particularly in the Chinese and Korean markets. This is evident by behavioural shifts in these markets as investors increasingly exit traditional, short-term stock-picking activities and move their assets into insurance-linked products. 



Swiss Re, for example, recently predicted emerging market life premiums would enjoy strong growth off the back of emerging Asia demand for savings vehicles.(3) Swiss Re is forecasting 8% growth in emerging Asia for non-life premiums in 2017, and 9% in 2018. Insurers are also expecting a boost with the China One Belt One Road programme, which is likely to generate a significant demand for commercial insurance. (4)



Standard Chartered Bank has seen a significant growth in insurance-linked products in China, Korea, Taiwan and Hong Kong, and many of the originator organizations are looking to invest internationally. But where are these local market institutions generating their returns, and how is this likely to evolve over the next few years? 



Investing in new markets

Insurance companies in China and Korea have a traditional bias to investing in financial instruments and securities in their home markets, but this is changing. Low interest rates in Korea have hurt the performance of insurers, who are now increasingly hunting for investment opportunities abroad. Meanwhile, Chinese insurers are looking to diversify their holdings beyond domestic equities into foreign markets as they try and spread investment risk.   

Korea

The Korean government has recognized that low interest rates are stifling returns for insurers, and it has relaxed the rules around foreign investing. As a result, Korean insurers can now acquire foreign securities approved by a wider range of ratings agencies while restrictions on exposure to derivative instruments and foreign fund managers have been scaled back.(5) The regulator is also encouraging institutions to seek out longer-duration assets, prompting more insurers to hold high-quality, liquid, long-dated bonds that correspond to their lengthening policy and liquidity requirements. 



This has led to flows into US Treasuries but Korean insurers are also monitoring Chinese market liberalization with interest, particularly as the country’s GDP growth has beaten expectations in 2017. (6) With full access to onshore bond hedging tools including forwards, swaps, cross-currency swaps and options in RMB, Korean insurers are fast acquiring holdings in China Interbank Bond Market (CIBM) instruments to not only obtain returns but manage their duration risk. In addition, the stabilization of the RMB in 2017 has also encouraged inward flows into China from Korean insurers.(7)

China

Foreign investing by Chinese insurers is not a new development. The Qualified Domestic Institutional Investor (QDII) scheme has been around for more than a decade and permits Chinese institutions to allocate capital into foreign, offshore securities and bond markets. Chinese insurers have historically used their QDII quotas to invest into the Hong Kong market, but this is changing.



RMB devaluation has driven many Chinese insurers to invest overseas in order to obtain portfolio performance and diversification. There is strong interest from insurers in G8 economies, notably the US fixed income market, although they are not yet investing into exotic instruments or jurisdictions. However, some leading names are investing into highly sophisticated multi-manager frameworks that span more than 40 markets globally. 



This re-alignment of portfolio exposures is partly a result of insurers being allowed to use the Southbound Hong Kong – China Stock Connect mechanism.  A Chinese insurer investing in listed Hong Kong securities through Stock Connect’s southbound channel will not eat into its QDII quota allocation, freeing them up to look elsewhere for returns. Another available outbound channel is through foreign direct investments, which increasingly form part of insurers’ portfolio holdings. Insurers now have greater flexibility to trade internationally than before, but this does bring about new control and transparency requirements.  



Many China-based insurers have now set up Hong Kong-based asset management subsidiaries as a first step towards international expansion. This incubation-type structure is a way to demonstrate to global investors that they can deliver returns and provide operational excellence. Perhaps not surprisingly, many of these subsidiaries start the process by re-investing into Chinese government debt, as the yields are much better than what is offered by US Treasuries or European sovereign debt. However, there is little doubt that the country’s largest insurers are now moving beyond traditional home-bias.

Overcoming limitations

These insurers – despite their treading into international markets – do still face operational, regulatory, reporting and taxation obligations. While it is relatively simple to invest in US Treasury bills, for example, active investments by multiple external managers into multi-asset portfolios across multiple time-zones presents new challenges that few Asian insurers have experience of to date. 



While such global investments will help generate returns, it brings added requirements. Before investing a cent, insurers need to understand the legal, regulatory and tax implications of investments in markets all over the world. This forces insurers to acquire new levels of expertise and insight which may not have been needed when investing in their home markets. 



Take cash, for example. Insurers need to be able to fund and manage their trading continuously, and this may require them to establish enhanced global cash management systems which include pooling structures and optimization mechanisms. Insurers’ operational frameworks will need to transform from being wholly domestic-centric to becoming ones that are multi-centred and multi-time zone platforms which can help them manage their global investment mandates. Not only will the model become more complex, insurers will find themselves dealing with greater transparency demands, and they will have to make sure they have total visibility into their global investments. 



Chinese insurers need to be able to submit information on their increasingly sophisticated global investments to their home regulators including the State Administration of Foreign Exchange (SAFE) and China Insurance Regulatory Commission (CIRC). With increasing scrutiny over the sector, insurance companies are under huge pressure to accurately convey the true value and risks of their international investments to domestic regulators. 



These shifting expectations are putting major pressure on insurers to make sure they handle domestic regulatory reporting obligations but also deal with the increased intricacies associated with international financial markets. 

The evolution of NE Asian insurers

Regional insurance companies are no doubt pushing the boundaries of what they know, as they move from predominantly local market investments to full, global market exposure. As they increasingly get to grips with international investment, Standard Chartered expects these organizations to increase their equity allocations and use of derivatives, and spread their exposures across more markets. 



Few organizations are able to help support this growth: combining global expertise in cross-border investments with close familiarity with local regulatory requirements onshore in Asian jurisdictions. Standard Chartered is a natural and proven partner to insurance companies across Asia. 



Leveraging the best of Standard Chartered’s global expertise and technology in securities services and cash management, its award-winning platform has helped many of Asia’s largest insurers to acquire the knowledge to rapidly expand their global foreign investment portfolios over the last three years. 



Partnering with major market leaders, Standard Chartered has helped Asian insurers to invest over $100 billion into the global financial markets, through some of the largest asset transitions in the Asian insurance industry.  



These are challenging but exciting times for Asian insurance companies as they transform into truly global leaders in their industry. Standard Chartered is excited to play a unique role in supporting this growth: as a truly Asian partner at home and as a leading global partner across the world’s financial markets.

(1) Pezzini, Mario. (2012). An emerging middle class 

(2) Pezzini, Mario. (2012). An emerging middle class 

(3) Swiss Re. (2016, November 22). Sustained insurance sector growth in 2017 largely based on demand from emerging markets

(4) Swiss Re. (2016, November 22). Sustained insurance sector growth in 2017 largely based on demand from emerging markets 

(5) Pulse. (2016, April 25). S. Korean insurance firms to benefit from eased regulations on overseas investments

(6) CNBC. (2016, April 16). China Q1 GDP growth accelerates at faster than expected 6.9% annual pace

(7) Bloomberg News. (2017, February 28). China Opens Currency Derivatives to Lure Overseas Bond Investors



About the Author 

 160x186BarnabyNelson
 Barnaby Nelson
Barnaby Nelson is Regional Head of Securities Services, Greater China and North East Asia, for Transaction Banking at Standard Chartered.In this role, he leads the end-to-end delivery of Standard Chartered Securities Services proposition in several of the Bank’s largest custody businesses across product development, sales, client servicing and operations. 

Barnaby is also responsible for driving the business agenda amongst institutional investor and financial intermediary clients across North East Asia and Greater China, with a focus on supporting clients’ growth aspirations across Asia, Africa and the Middle East.

Barnaby joined the bank from BNP Paribas, where he was Head of Client Development - Asia for the Securities Services division. Prior to this, he worked as Business Owner for Thomson Reuters’ information and market data feeds in Asia-Pacific.



sponsor-SC-article-footer-600










Disclaimer
This material has been prepared by Standard Chartered Bank (SCB), a firm authorised by the United Kingdom’s Prudential Regulation Authority and regulated by the United Kingdom’s Financial Conduct Authority and Prudential Regulation Authority. It is not independent research material. This material has been produced for information and discussion purposes only and does not constitute advice or an invitation or recommendation to enter into any transaction.

Some of the information appearing herein may have been obtained from public sources and while SCB believes such information to be reliable, it has not been independently verified by SCB. Information contained herein is subject to change without notice. Any opinions or views of third parties expressed in this material are those of the third parties identified, and not of SCB or its affiliates.

SCB does not provide accounting, legal, regulatory or tax advice. This material does not provide any investment advice. While all reasonable care has been taken in preparing this material, SCB and its affiliates make no representation or warranty as to its accuracy or completeness, and no responsibility or liability is accepted for any errors of fact, omission or for any opinion expressed herein. You are advised to exercise your own independent judgment (with the advice of your professional advisers as necessary) with respect to the risks and consequences of any matter contained herein. SCB and its affiliates expressly disclaim any liability and responsibility for any damage or losses you may suffer from your use of or reliance on this material.

SCB or its affiliates may not have the necessary licenses to provide services or offer products in all countries or such provision of services or offering of products may be subject to the regulatory requirements of each jurisdiction. This material is not for distribution to any person to which, or any jurisdiction in which, its distribution would be prohibited.

You may wish to refer to the incorporation details of Standard Chartered PLC, Standard Chartered Bank and their subsidiaries at http://www.standardchartered.com/en/incorporation-details.html.


© Copyright 2017  Standard Chartered Bank. All rights reserved. All copyrights subsisting and arising out of these materials belong to Standard Chartered Bank and may not be reproduced, distributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written consent of Standard Chartered Bank

 

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree