Asian insurers abandoning liability matching in the hunt for yield

Ultra-low rates forcing companies to shift focus from asset-liability matching

Low interest rates are forcing insurers in Asia to consider abandoning asset-liability matching, despite government efforts to increase the supply of long-dated instruments.

Duration matching has traditionally been a challenge for insurers in Asia because of the limited supply of long-duration government bonds, particularly those in Taiwan and South Korea.

But the low yield environment is putting further pressure on companies to reconsider the extent to which they attempt to duration match. Across Asia, interest rates have been falling as governments have sought to boost consumer spending. In May, the Central Bank of Korea cut the base rate from 2.75% to 2.5%, its third such cut in less than a year.

This comes despite moves by some governments in the region to issue more long-dated instruments. Singapore has also released a series of progressively longer-dated bonds on to the market, which has pushed the tenor of the yield curve out to more acceptable levels. And in September, the South Korean government issued a 1.6 trillion won (£942 million) worth of 30-year Treasury bonds in a bid to increase the supply of longer-dated instruments.

William Cokins, the chief financial officer and also chief risk officer of Allianz Life Korea, based in Seoul, says the government's issuance of more long-dated assets is helpful, but the supply of longer-dated instruments still remains limited relative to the strong demand, which further depresses yields.

"In a low-interest rate environment, this [lack of matching instruments] forces us to address the question: to what extent should we be sacrificing yield in order to achieve better matching?" says Cokins.

The demand for the government's issue was so high that Allianz Life Korea was unable to buy any, he adds.

Companies in South Korea have traditionally given very generous interest rate guarantees and now have long-duration liabilities that are extremely difficult to match in the current market, as well as an increased exposure to interest rate risk.

Bankers say insurers had hedged interest rate risk ahead of the falling interest rates, but with ultra-low rates, this was no longer a priority for many companies.

"The need to hedge interest rates was to prepare for the [period of ultra-low rates] that we are now seeing, but there isn't really a consensus about what should be done now that we are in this situation," says Peter von Richthofen, head of insurance solutions for Asia at Bank of America Merrill Lynch in Hong Kong.

"The extreme low-rate environment that we are now in means duration matching is no longer the key issue for many insurers," he adds.

Insurers have been looking to offshore bond markets for long-dated, high-yielding instruments. But the cost of hedging the exchange risk using cross-currency swaps can make it uneconomical.

Some local regulators have been easing restrictions on insurers holding foreign assets, while other regulators are examining ways to encourage interest rate hedging.

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