Protection Products Drive Value

 

September 20, 2019  The US Federal Reserve cut interest rates this week as concerns about a global recession continue to grow. The move was widely expected but will put even more pressure on life insurers’ guaranteed savings products.

 

With large legacy books to manage and weakening growth, companies in Asia are accelerating efforts to re-focus their strategies towards products that emphasise protection rather than savings, and those that have been most successful at making this shift are already seeing improvements in the value of their businesses.

 

“As yield curves remain at historically low levels throughout Asia, it is the companies that have successfully transitioned away from the traditional guaranteed long-term savings products that have typically reported the highest growth in EV [embedded value] and VNB [value of new business],” said Milliman principal and consulting actuary Paul Sinnott, commenting on the results of the firm’s latest annual study of EV across Asia.

 

“This has been significant in both China and India, markets that lead EV growth in Asia, primarily as a result of companies selling more protection-oriented business.”

 

Life insurers’ published results in Asia for year-end 2018 show growth in reported EV of 5.3% to US$756 billion and a VNB growth of 1.5%. Of the 52 major multinational and domestic life insurers across Asia included in the study, China Life, Ping An Life and AIA reported the highest values.

 

China’s regulatory clampdown on the sale of high guarantee short-medium term universal life products last year seems to have been good for the industry, with the increased focus on protection business helping to drive positive EV growth.

 

Meanwhile, India’s solid economic growth, favourable demographics and improving insurance penetration helped all companies included in Milliman’s analysis to post double-digit growth.

 

Markets with large books of guaranteed business and unfavourable interest rate environments performed worst. EV in Korea fell by 15%, Taiwan was down 5% and Japan down 2%.

 

In Korea, for example, investment return assumptions have been downgraded significantly, with the 10-year government bond yield down to 1.96% at year-end, from 2.47% a year earlier. In Taiwan, all insurers posted declining EV results, with Fubon Life reporting the greatest fall of 9%, followed by Mercuries Life, which reported a reduction of 7%.

 

In Japan, risk-free yields are declining severely and some companies have large, long-duration legacy liabilities with guarantees in some cases of more than 5%. At the same time, Japanese life insurers’ expansion into Asia and the rest of the world has made them more sensitive to currency movements, the effects of trade wars and a growing shift towards protectionism.

 

“In this environment, reporting with greater detail and transparency, coupled with effective corporate communications, will be essential if Japanese companies are to achieve the market recognition they deserve,” said Milliman in the report.

 

Total reported VNB for Asia stood at US$52.6 billion in 2018, compared with US$51.8 billion in 2017, representing a growth of 1.5%.

 

At 22% India produced the highest VNB growth, on a constant currency basis, across Asia in 2018 mainly as a result of companies’ continued focus on writing profitable protection business, according to Milliman.

 

Hong Kong, Taiwan and Malaysia reported the highest new business margin growth of 7%, 5% and 4%, respectively, in 2018.

Milliman warns that comparing EV across Asia is challenging due to the variation in reporting and disclosure requirements. So far, only AIA provides a detailed EV report similar to European insurers, but Milliman expects that reporting will become more detailed over the next few years as Asian insurers “increase in scale, complexity and sophistication, not only in EV methodology but in investor relations as well”.

 

That should be good news for investors and analysts who are interested in gaining better understanding of the inherent values and strengths of companies in the region.