The insurance industry thinks of Asia as the next frontier for growth, with demand rising. But the picture isn’t as glowing as it may seem.

Asian insurers face many of the same pressures as their counterparts elsewhere, plus some extra ones.

Monetary Authority of Singapore Deputy MD Jacqueline Loh has given eager global insurers a reality check in a speech to an investment conference in the city last week.

“Asia has often been singled out as the bright spot in the global insurance industry, as rising incomes and lower-than-average insurance penetration in many markets offer rosy opportunities for growth,” she said.

“However, in terms of seeking investment returns, Asian insurers are operating within similar market trends as their global counterparts.”

She says that aside from the lower investment returns that persist globally, Asian insurers also face a lack of long-duration assets to match their liabilities.

Investment returns are down by an average of 50-300 basis points on levels achieved before the global financial crisis and insurers face increasing costs of capital, compounding the pressure to generate higher returns.

“Addressing the duration mismatch between assets and liabilities has been a persistent challenge for insurers in Asia, due to a shortage of long-dated instruments as well as restrictions on investments in some jurisdictions,” Ms Loh said.

Some governments have responded by issuing long-dated bonds and easing restrictions on the investments insurers can hold, but the supply of high-quality government and corporate bonds is limited relative to demand and insurers can get “crowded out” by other investors seeking safe-haven assets.

Ms Loh says insurers are responding by investing more widely and diversifying their fixed-income portfolios, with the investment mindset changing over the past year to reaching for yield with less focus on conservative asset allocation and matching of liabilities.

Allocations to alternative assets have risen from 10% of funds under management in 2011 to 15% this year. She warns that as insurers switch to higher-yielding instruments, their risk will increase.

“There is no free lunch. Insurers’ risk profiles will be distributed across a wider and more complex spectrum of asset classes.”

This will increase the importance of risk management and elevates the position of chief risk officer to a strategic role under the direct oversight of insurers’ boards and senior management.

“The ability to manage investment risks skilfully is even more essential in the Asian context, due to its rapidly growing share of insurance business and attendant risk exposures,” Ms Loh said.

Munich Re has forecast Asian premium growth of about 8% a year and predicts the region will account for almost 40% of global premium by 2020.

Ms Loh says lower returns are the “new normal” and although bond yields are forecast to rise, it is likely insurers will have to settle for much lower returns from fixed-income investment in the years ahead.

She says insurers can play a role in Asian societies and economies by helping plug the retirement funding gap and fuelling long-term growth.

They can provide savings products and also invest in long-term and less-liquid assets, such as infrastructure investments and clean energy.

Banking regulation has curbed banks’ appetite for infrastructure projects, but banks and insurers have collaborated to jointly finance infrastructure projects.

Ms Loh warns Asian insurers’ profitability is under pressure from three sources – premium income affected by weak economic growth and excess capacity; lower investment income amid a low-yield environment and higher market volatility; and higher claims and expenses from increasing natural catastrophes.

Insurers are reacting by focusing more on underwriting profitability, since they can no longer rely on investment income to compensate for poor underwriting results.

They have moved to close data and risk modelling gaps so exposures can be better managed, are working to optimise investment and product portfolios, and are streamlining processes to reduce operating and claims expenses.

“There is no doubt that a longer-term and more sustainable approach is needed to achieve long-term profitability,” Ms Loh said.