The outlook for most of the life insurance markets in Asia Pacific is stable, said S&P Ratings Services in a report published last week.
Although the region consists of diverse life insurance markets at different stages of development, S&P sees common positive factors supporting the credit profiles of the region's life insurers. These factors are strong long-term growth potential amid continued economic growth and enhanced regulations for solvency requirements, risk management, and corporate governance.
On the other hand, S&P views existing volatile investment conditions as a risk factor for the financial profiles of Asia-Pacific insurers.
However, the level of volatility is still much lower than that in the 2008-2009 global financial crisis, and, for many insurers, lessons learned from the financial crisis and the implementation of more sophisticated risk management practices should moderate the impact of the financial market volatility.
Meanwhile, the shallow investment market and a lack of longer-tenor assets to match long-term liabilities continue to present a challenge for asset-liability management in most Asian markets, including Japan. In S&P’s view, interest rate risk resulting from asset and liability durational mismatches represents a key risk to capitalisation for many of the region's insurers.
In response to rising inflationary pressures, many of the region's central banks are raising interest rates. Higher interest rates could have both positive and negative implications for the region's life insurers. In markets such as Japan, Korea, and Taiwan, where negative interest spreads have been a drag on the life insurers' profitability, higher interest rates will narrow the negative spreads and improve their earnings.
At the same time, a rise in interest rates could trigger a hike in surrenders of fixed-interest, deposit replacement-type insurance policies, which have grown rapidly in recent years in many markets and may make liquidity management more complex for the life insurers.
In a comprehensive review, S&P analysed the industry and economic risk scores, as well as the market outlooks, of 11 life insurance markets: Australia, China, Hong Kong, India, Japan, Korea, Malaysia, New Zealand, Singapore, Taiwan, and Thailand.
S&P revised the outlook on the Korean life insurance market to ‘Positive’ from ‘Stable’, based on its expectation that the profitability of life insurers there will improve. S&P maintained a negative outlook on Japan's insurance sector to primarily reflect weak economic and investment outlooks for the market. For the other markets, S&P kept the outlooks at ‘Stable’.