S&P Declares Asia Pacific Life Market Stable

Posted on Jun 24, 2011 by Sergio Ulloa (G+)  | Tags: Asia Life Insurance

A new report published today by Standard & Poor's (S&P), the foremost worldwide insurance rating and information agency, affirms the life insurance industry outlook in the Asia- Pacific region as generally stable, although it warns short-term investment risks may arise. S&P now assert that the pronounced economic development in the region combined with macro regulatory improvements regarding solvency requirements, risk management, and corporate governance, will lead to strong long-term growth potential for the life insurance sector in the Asia-Pacific. In the study, Standard & Poor's analyzed 11 life insurance markets in the Asia Pacific region, tabulating the insurance industry and economic risk scores, in addition to their market outlooks. The countries reviewed were Australia, China, Hong Kong, India, Japan, Korea, Malaysia, New Zealand, Singapore, Taiwan, and Thailand. Few statistical changes were made as a result of this report. S&P upgraded Korea's life insurance market outlook from stable to positive, due to increased profitability projections for life insurers in the country. Based on continued weak economic and investment forecasts for the market, Japan's outlook maintained its negative status. S&P left the outlooks stable for all other markets examined. Last month, S&P similarly assessed the performance of non-life insurance markets of Asia-Pacific. Japan and New Zealand's non-life insurance market outlooks were revised to negative from stable, due to the expected impact the recent earthquakes there will have on reported earnings and capital margins. India's market was criticized for questionable underwriting performances while China and Malaysia's markets were upgraded from stable to positive to reflect their solid growth momentum. Paul Clarkson, credit analyst for S&P, explained the agency's appraisal of insurance development in the Asia Pacific: "We believe the region still has tremendous growth potential despite challenges. Risks to our outlooks include high inflation, withdrawal of reinsurance capacity, increased pricing and investment market volatility." S&P acknowledges that the Asia-Pacific region includes a diverse set of life insurance markets all across different stages of maturity. Despite these variances, the ratings agency has observed enough common positive economic, infrastructure and regulatory indicators to support the stable credit profiles of the region's life insurance companies. Despite the generally favorable conditions, the S&P analysis warns however that the current volatile investing environment poses a risk factor for the financial profiles of Asia insurers, as it does in other markets. A shallow investment market combined with a deficit in longer tenor assets to match liabilities will continue to challenge asset-liability management efforts in many Asian life markets, including Japan. At Standard & Poor's 27th Annual Insurance Conference 2011, industry analysts confirmed that life insurance has remained a sector facing undue pressure by the persistently low interest rate environment resulting from asset and liability durational disparity. These low rates have impacted the long-term returns and capitalization life insurers need to sustain their operations. The level of volatility thankfully remains far below that occurring in the aftermath of the 2008-2009 global financial crisis, and S&P reports that multinational insurers have learned valuable fiscal lessons from the event. The further implementation of comprehensive risk management practices and oversight in the insurance industry should mitigate the lasting effects of financial market unpredictability. Many central banks in the Asia-Pacific region have responded to rising inflationary pressures by raising interest rates. In S&P's view, higher interest rates could have both positive and negative connotations on performance for the region's life insurers. A rise in interest rates in mature life insurance markets, where ongoing negative interest spreads impact life insurer profitability such as in Japan, Korea and Taiwan, will result in narrowing the negative carry and improving company earnings. Meanwhile, higher rates could also lead to a spike in surrenders of fixed-interest policies and make liquidity management more complicated for insurers in Asian markets where such policies are popular. S&P concludes that the solid operating fundamentals in both life and non-life insurance markets in the Asia Pacific can overshadow the challenges facing in the region. Economic development throughout the continent, coupled with positive investment performance and favorable overall operating performance has enabled insurers to strengthen their financial profiles and could rebuild balance sheets enough to weather the next market downturn. In addition to the above factors, S&P has given a stable outlook for most Asia-Pacific insurance markets because there is an expectation of continued strong premium growth due to low penetration rates within all emerging markets, and increased demand due to evolving customer needs in the mature insurance markets. Companies Mentioned Standard & Poor's Standard & Poor's (commonly referred to as S&P) is a business branch of publishing house McGraw-Hill. Operating out of 20 countries, S&P provides the investment community with independent credit ratings on important financial vehicles such as stocks, municipal bonds, corporate bonds and mutual funds. In addition to its risk management, investment research and credit rating services, Standard &Poor's is known for its indexes, in particular the S&P 500 index.