Fitch Ratings says life insurers in the Asia Pacific, including Australia, have “sufficiently deep” liquid assets to cover derivative exposures.

However, the rating agency says they are unlikely to face liquidity risks from derivative exposures of the sort faced by UK pension funds last month.

Fitch says the UK pension funds’ problems were largely linked to liability-driven investment (LDI) strategies but this is not the case for its rated life insurers in the region.

Fitch says the use of LDI to fully match asset investments to long-term liabilities is not common for Asia-Pacific life insurers.

“Notably, our analysis and conversations with issuers indicate little, if any, exposure among Fitch-rated APAC insurers to leveraged derivative trades as part of such strategies,” the rating agency says.

“We view the liquid assets of our rated issuers as sufficiently deep to cover associated liquidity pressures.”

But Fitch says the region’s life insurers still face challenges reconciling duration gaps between assets and liabilities in their portfolios. They also face a range of exchange rate and interest rate risks.

“In some markets, derivative investments are used as part of policies to manage these risks, which could expose them to margin calls amid an environment of sharp interest rate increases and exchange rate movements,” the rating agency says.

Fitch says in Australia, one insurer uses swaps to reduce the need for frequent trades to match assets and liabilities on an underlying portfolio of government bonds.

“However, we view its liquidity support for these funds as high,” Fitch says.

“Any margin calls are likely to be limited, given the availability of assets with sufficient duration to match the liabilities, which reduces the need to leverage a derivative strategy to achieve duration-matching.”