Insurance company executives are eyeing the developing markets of Asia for future growth, but despite the bright outlook there are particular challenges for insurers entering the region.

Rising affluence in Asia will fuel demand for insurance but insurers will have to manage their funds skilfully, according to a report by ANZ Research.

The report by ANZ’s Hong Kong-based Senior Economist Raymond Yeung and Head of Greater China Economics Li-gang Liu says the low-yield environment and exchange rate risk are particular obstacles to the growth of insurance companies in Asia.

They point to the difficulties experienced by Taiwan’s insurers, who have invested abroad heavily only to be slugged by the falling US dollar.

Taiwan has experienced low interest rates since the dotcom bubble burst in the early 2000s so life insurers there, and also in Japan, have looked abroad to boost returns.

“In recent years, the weakness of the US dollar has caused a mark-to-market loss in local currency terms, as well as losses related to cross-currency hedging or interest rate swaps.

“This currency risk exposure, driven by a domestic low yield environment, has been a major concern to Taiwan’s life insurers,” it notes.

The report warns that insurers will be caught up in the global move to tighter supervisory standards and says the combination of the weakening dollar and a new accounting standard requiring insurers to report a loss could result in a technical insolvency in Taiwan. It says that as Asian currencies appreciate, regional insurers will need to rethink their investment basket currency mix.

The economic rise of Asia has spurred the development of an insurance market and the region’s total insurance premiums now account for about 38% of the global premium pool. 

ANZ argues that insurers will need to think how they invest their growing assets.

It notes the eurozone sovereign debt crisis and US debt ceiling debate have highlighted the possibility of government bonds being downgraded and argues for investment in the Chinese currency, which trades inversely to the US dollar.

“Insurers will need to expand their geographical coverage and turn to asset classes that have solid fundamental support.”

It says insurers should consider investing in the Chinese renminbi (RMB), via offshore RMB products. The Chinese government is gradually allowing the currency to be traded internationally and RMB deposits in Hong Kong have grown from RMB90 billion ($12.65 billion) in June 2010 to RMB549 billion ($77.2 billion) in May this year.

The report says insurance asset managers could benefit from the growing offshore RMB market as well as by investing in asset classes that move closely with Asian inflation and China’s economic growth.

“In the end, policyholders will benefit,” it says.