Steady economic momentum across the economies of Asia Pacific (APAC), led by China, is driving demand for insurance, resulting in a stable outlook for the region's insurance sector for 2018, says Moody's Investors Service.
"The solvency positions of insurers across Asia Pacific remain solid despite increasing capital requirements, while product margins and asset liability management have improved," said Qian Zhu, a Moody's Vice President and Senior Credit Officer.
"The insurers have also adapted to low interest rates by shifting to less interest-sensitive products and increasing their allocation to higher-yielding non-traditional assets, although for some—such as Chinese life and property & casualty insurers—the latter has resulted in rising asset risk."
Moody's, in its presentation titled "Insurance -- Asia Pacific: 2018 Outlook", highlights that along with good growth momentum, aging demographics are also spurring demand for insurance in the region, in particular, in view of still low insurance density and penetration rates in most Asian economies.
Long-term demand for life insurance will also be driven by the region's sheer population size, rising income and wealth, and the existing significant protection gap.
Interest rates have bottomed out across the region, but will remain low by historical standards. To cope with these low rates, life insurers have taken a more conservative pricing approach by offering lower crediting rates and guarantee rates, while also seeking higher yields through non-traditional or foreign assets—thereby raising investment risk.
In the case of Chinese life and P&C insurers, the increased asset risk is also reflected in their rising allocation to alternative investments, with often complex transaction structures and a lack of transparent disclosure standards.
These alternative investments also introduce additional layer of credit risks, thereby weakening asset transparency, return stability and liquidity profiles.
Underwriting performance remains stable across the region. Specifically, for Chinese P&C insurers, loss ratios have increased generally for small to mid-sized players as a result of lower premium rates following the liberalisation in motor pricing, but expense ratios have improved, reflecting the regulator's efforts to reign in excessive acquisition costs.
Meanwhile, Japanese P&C insurers should see their underwriting profitability peak as motor rates retreat after a multiyear uptrend, but this coming adjustment will not reverse the significant improvement in their combined ratio in recent years.
Finally, deeper adoption of technology is changing the industry's business model and operations, as well as the delivery of insurance products. In particular, new technology should ease claims processes and broaden insurers' customer bases and sales channels, says Moody's.