Modern insurance companies and pension funds constitute a large part of the institutional investor space. With combined industry assets of approximately $40 trillion, these institutions play a fundamental role in fixed income markets. Following the financial crisis, these institutions face significant changes in the regulatory framework and accounting standards. On top of this, their balance sheets are exposed to the environment of extended low interest rates with all the implications this has on their duration gap.
Today's global risk management environment is framed by economic effects of globalisation and interconnectedness of markets. A disaster hitting one Asian country can have costly and contagious implications for a multinational's global operations. The 2011 floods in Thailand have highlighted these themes and brought into focus the fragility of the region and its exposure to natural risk. It also sent ripples through the global supply chain, affecting automotive giants Toyota and Ford, as well as technology companies such as Toshiba, Dell and others.
The regulatory environment remains in a state of flux. As insurance companies adopt various accounting standards, we may expect greater transparency, but also greater volatility in their balance sheets. This year's move to IFRS 4 Phase 2 will aim to harmonise accounting models for insurance contracts, while requiring that future cash commitments be discounted in each reporting period using a yield curve that reflects current asset returns or a risk-free rate adjusted for a liquidity premium.
Concerns have been voiced regarding accounting volatility which may affect company valuations, market assessments. It may also have adverse effects on an insurer's access to capital. Possible consequences for investment strategies can then arise from increased pressure from markets to de-risk asset holdings with the aim of mitigating volatility in profit and loss.
At the same time no two regulatory regimes in Asia-Pacific are the same. Across Asia, multinationals encounter varying cultures, diverse business practices and local conventions. This is reflected in the lack of consistency in the regulatory environment across the region and the wide spectrum of regulations that are in place.
Against this backdrop of a rapidly changing and unpredictable regulatory landscape insurers also face added complexity while managing their risks across multiple markets. Additional factors such as ageing populations, especially in China and Japan, and greater scrutiny and accountability of management teams, make Asia-Pacific a uniquely fascinating challenge - and opportunity.
For more information on the Asia-Pacific insurance market, see the latest research: Asia-Pacific Insurance Market
Source Companies and Markets.com
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