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Research Report

29/07/2020 17:30

Lower-for-longer rates drive life insurers' investment mix

[ET Net News Agency, 29 July 2020] Moody's Japan K.K. said in a new report that
lower-for-longer interest rates amid the coronavirus pandemic will drive changes in Asian
life insurers' investment mix.
"Lower-for-longer interests are negative for insurers because they will lower asset
yields and challenge their asset-liability duration management and solvency position,"
said Soichiro Makimoto, a Moody's Vice President and Senior Analyst.
"How Asian insurers change their investment mix as they prepare for this new normal will
be a differentiator of their credit performance," added Makimoto.
Moody's expects broad inflows to the US credit market will continue, with yield
enhancement a key driver of insurers' stronger appetite for US credit risk, given the
recent widening in credit spreads on high-quality US corporate securities and falling
hedging costs for currency risk.
Meanwhile, duration gap management will remain difficult. Many Asian insurers -
especially those in Japan and Taiwan - have relatively wide duration gaps, with the
duration of their liabilities longer than that of their assets.
These insurers will need to continue purchasing long-dated local government bonds to
reduce their gaps, but lower domestic interest rates will discourage them from doing so.
Some insurers in Hong Kong, Japan and Korea, are pursuing more active, non-traditional
approaches - such as the use of swaps, swaptions and reinsurance transactions - to reduce
their duration gaps.
Finally, Moody's expects some insurers - particularly those in the Greater China markets
- will capitalize on the lower equity market valuation brought by current economic
uncertainties to selectively increase their equity portfolios.
Insurers will also focus on alternative investments, such as in infrastructure, private
equity, hedge funds, and real estate, as another source of yield enhancement in the
lower-for-longer interest rate environment. So far, Chinese insurers are the most
progressive in establishing alternative investments as a viable asset class. (KL)

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