APAC insurers relatively shielded from liquidity risks

Life insurers in Asia-Pacific are unlikely to face liquidity risks from derivative exposures of the sort faced by UK pension funds in late September, according to a report by Fitch Ratings. The global ratings agency said that its rated issuers’ liquid assets are sufficiently deep to cover associated liquidity pressures.

The problems of the UK pension funds were mostly driven by liability-driven investment (LDI) strategies. However, Fitch Ratings noted that the use of LDI to fully match asset investments to long-term liabilities is not common in Asia-Pacific, and that there is minimal exposure among Fitch-rated APAC insurers to leveraged derivative trades as part of such strategies.

Despite this, Fitch said that life insurers in Asia-Pacific still face challenges reconciling duration gaps between assets and liabilities in their portfolios, as well as various exchange-rate and interest-rate risks.

“In some markets, derivative investments are used as part of policies to manage these risks, which could expose them to margin calls amid an environment of sharp interest-rate increases and exchange-rate movements,” the report said.

Among insurance markets in the region, Japanese life insurers have among the highest derivative-related exposures, due to hedged foreign-exchange risks, mainly against the US dollar. Around 50% to 90% of these currency risks are hedged, and transactions are collateralised with Japanese government bonds, Fitch Ratings said.

On the other hand, Chinese life insurers face very little exchange rate risk, as their investments in foreign currency-denominated assets are small relative to their overall invested portfolio or equity capital. According to Fitch, Chinese insurers also tend to adopt a “buy-and-hold” approach in managing duration between assets and liabilities and are not active users of hedging to manage interest rate risk.