Asia’s resilient macroeconomic backdrop and robust growth outlook bodes well for the region’s fixed income market. With diversification and performance high on investors’ agendas, it seems a good time for global portfolios to revive allocations in Asian local currency bonds – including Hong Kong dollar (HKD) bonds for the right type of institutions.

Time for fixed income to shine
Bond investors continue to benefit from a rebound in the fortunes of the asset class.  Macro dynamics are supportive of fixed income in general. Yields are attractive, particularly compared with levels following the global financial crisis, and even earlier. If yields continue to fall as inflation ebbs and flows, and amid the possibility of more coordinated central bank rate-cutting, bonds will remain appealing given the extra spread from investing in any credit risk resulting in an attractive all-in yield.

In line with this, the desire among many institutional investors for a defensive stance creates a bias to quality credits, and Asia’s strong and stable growth outlook creates a compelling case for increasing exposure to the region.

Asian local currency bonds – worth another look
A combination of the strong US dollar and misperceptions such as Asian local debt being difficult to access, have meant this asset class has been out of favor in most global portfolios. Yet there are three key reasons why asset owners should rethink their allocations.

Firstly, the fundamentals are healthier in Asia than in many advanced Western economies. Reasonable growth forecasts for most of the region are supported by a stable macro backdrop, in turn creating less need for monetary stimulus.

Inflation is a case in point. Across most of Asia, it has been lower than in other parts of the world, resulting in shallower rate-hiking cycles following the pandemic.

Further, Asian central banks don’t want to see their currencies weaken relative to global peers, particularly at a point when it might be disruptive to their economic prospects.

Secondly, Asian local currency bonds offer an attractive diversifier within global asset allocation. For example, the Chinese, Indian and Indonesian markets are lowly correlated since they tend to follow domestic rate cycles, and local supply and demand conditions. Put simply, this should be beneficial to long-term, risk-adjusted returns.

At the same time, valuations in bond markets in China, India and Indonesia indicate relatively attractive long-term yields. With inflation under control – and broadly within central bank targets – investors can enjoy good levels of real carry.

Figure 1. Correlation in last 5-yr period of Asian local currency bonds (unhedged in USD) versus US and global & emerging market bonds (hedged in USD)

Another potential opportunity in Asia’s local markets that certain institutions shouldn’t overlook is in HKD bonds.

These are particularly suitable assets for investors such as insurance companies, endowments, pension funds and foundations which have liabilities in HKD and are looking for an effective, high quality hedge in investment-grade HKD-denominated assets. Notably also, these institutions benefit from solid credit ratings and fundamentals – a key part of the allure of HKD bonds. Plus, the HKD’s peg to the US dollar minimizes currency risk.

HKD bonds, despite being a relatively low-yielding asset, also offer some potential protection for investors from the risk scenario of a resurgence in inflation in the US, given these assets have a lower level of sensitivity to US economic conditions. That feature therefore potentially makes HKD bonds less volatile than US treasuries.

At the same time, sustainable bonds account for an increasing proportion of the market, issued by the government as well as by quasi-government entities and corporates. This provides investors with a wider variety of issues to choose from than used to be the case.

Renewed demand in Asian currency bonds
Ultimately, local Asian fixed income is in a sweet spot. The global outlook favors bonds in general, and the excess capacity for Asia’s economies to grow strongly over the coming years is supportive of credit markets, especially in the local currency space.

For investors, projections of a weakening US dollar play to the strengths of this asset class. There is also much less of a perception now than in the past that the region’s local markets are difficult to access. As a result, there’s no reason for global portfolios to avoid exposure to Asian currency bonds. And for the right type of buyer with certain requirements, HKD bonds continue to serve as a ballast within the overall allocation.

Find out more about HK dollar bonds
https://www.assetmanagement.hsbc.com.hk/en/institutional-investor/abf-hongkong-dollar-bond

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Asia’s insurers are facing an unprecedented shift in the regulatory landscape. Emerging risk-based capital (RBC) frameworks and updated financial reporting standards are reshaping their investment, underwriting, and capital management strategies. Hong Kong’s new RBC regime went live in July. In South Korea, the dual rollout of the Korean Insurance Capital Standard (K-ICS) and new IFRS standards sent shockwaves through the industry. Meanwhile, insurers in Japan and Taiwan are preparing for new frameworks on the horizon, balancing the requirements of in-force regulations with forthcoming changes.

For life insurers, the new regimes intensify the challenge of asset-liability management, with duration and currency mismatches between assets and liabilities driving up risk-based capital requirements. Asian insurers, unlike their US and European peers, often face a scarcity of high-quality, long-dated local-currency bonds, limiting their options for building capital-efficient liability-backing portfolios.

To diversify their exposures and meet their investment income targets, insurers may need to explore less-familiar assets, such as private credit and collateralized loan obligation (CLO) tranches. In a shifting macroeconomic and regulatory landscape, these asset classes offer potential for generating capital-efficient returns and boosting portfolio resilience.

New approaches for a new regulatory regime
The latest regulatory changes across Asia are reshaping insurers’ balance sheets, hitting life insurers particularly hard with steep capital charges for duration mismatches between assets and liabilities. This pressure is pushing life insurers to either lock in lower yields with long-dated domestic government debt or turn to reinsurance to reduce the duration and volume of their capital-intensive liabilities.

We expect reinsurance activity to persist in developed Asia as life insurers seek to alleviate the capital strain of their liabilities, potentially benefiting Bermuda reinsurers, which are facing increasing regulatory hurdles in Europe and other regions.

On the asset side, the new capital regimes present challenges in many Asian markets, where local corporate debt markets often lack the depth and duration to meet life insurers’ appetite for long-dated income. To overcome this challenge while maintaining portfolio diversification and meeting yield targets, insurers can use a barbell strategy combining short-dated, higher-spread assets on one end with lower-yield, ultra-long-dated government bonds at the other.

Regulatory Convergence in Europe and Asia: New and Emerging Risk-Based Capital Regimes

*National risk-based capital regimes developed based on the International Association of Insurance Supervisors (IAIS) Insurance Capital Standard (ICS). Source: PineBridge interpretation of draft and in-force national insurance regulations.

Expanding the asset universe: private credit and CLOs
To implement a capital-efficient barbell strategy, insurers may need to venture beyond the comfort zone of domestic fixed income. Traditional life insurers, which benefit from more predictable long-dated liability profiles, are well positioned to harvest the illiquidity premium in private credit, which historically shows low correlation with traditional fixed income. For those prioritizing liquidity, CLO tranches offer attractive spreads over similarly rated corporates without the rates-driven volatility associated with long-dated bonds.

While the many flavors of illiquid and alternative credit have gained some traction across the region in recent years, APAC life insurers are still well behind their global peers. According to a recent Moody’s estimate, APAC insurers’ average allocation to illiquid credit (including real estate debt private placements of corporate debt) stands at 6.4% – a stark contrast with the 35.7% average for life insurers in the US and Canada, 23.6% for the UK, and 13.1% for Europe ex UK.¹ And averages never tell the full story: For private equity-influenced US life insurers, allocation to private credit and other illiquid assets stands close to 50%.²

Similarly, CLO tranches remain an exotic foreign specialty for many APAC insurers. This is not the case in the US, where CLOs comprise 3.4% of insurers’ cash and invested assets in aggregate³ (5.5% for private equity owned insurers).⁴

The appeal of private credit for insurers is clear: illiquidity risk does not carry a regulatory capital charge under an RBC regime; at the same time, it is typically compensated with a spread premium. Unlike banks dependent on demand deposits and short-term funding, many insurers – especially life insurers – can leverage their stable, predictable liabilities to invest more in illiquid credit. When reporting their investments on a fair value basis, insurers also stand to benefit from stable spreads on private-market debt investments translating into lower profit-and-loss volatility.

Today’s volatile rates environment also strengthens the case for floating-rate CLOs. Compared with corporate bonds, investment grade CLO tranches offer higher spreads, historically negligible credit loss rates, and shorter interest rate duration, along with diversification benefits, while maintaining a similar level of secondary market liquidity. This makes CLO tranches particularly appealing for non-life insurers, which generally have a lower appetite for illiquidity than their life insurance counterparts.

Regulatory Capital Efficiency of US CLO Tranches and Private Credit by Risk-Based
Capital Regime

Source: PineBridge Investments analysis based on ICE Data Platform (bond indices), JPMorgan (CLO indices), and Cliffwater (senior direct lending index) as of 30 June 2024 and PineBridge interepration of local risk-based capital requirements by country. Risk-Based Capital Efficiency is determined as the ratio of FX- and credit-adjusted index spread to required capital for spread risk and – where applicable – credit risk of fixed income investments under the relevant jurisdiction’s risk-based capital regime.

*In Japan and Taiwan, implementation of new national risk-based capital regimes based on the International Association of Insurance Supervisors (IAIS) Insurance Capital Standard (ICS) is currently underway and is due to be completed in fiscal 2025 (Japan) and fiscal 2026 (Taiwan). For these jurisdictions, we estimated risk-based capital requirements based on the latest available technical specification of the IAIS April 2024 ICS Data Collection Exercise of the Monitoring Period Project.

**As an element of prudence, CLO tranche investments are assumed to carry a 50% fixed risk charge under Singapore RBC as structured products. Alternatively, an insurer may apply a look-through aproach with a 50% premium on the derived market risk requirement.

Taking an active approach
Allocating across a broader asset universe requires a proactive approach to portfolio construction. Amid heightened political risks and geopolitical tensions, elevated rates, stubborn inflation, and persistent market volatility, insurers must closely monitor and actively manage their investments. For alternative assets, this means engaging closely with asset managers who can collaborate with insurers to enhance their in-house scenario analysis and stress testing.

In the illiquid credit space, investors tend to put their money on experience: established managers account for over 80% of recently raised private debt fund capital.⁵ We believe insurers seeking stable investment income should partner with prudent managers whose focus on capital preservation and risk management is evidenced by a solid track record.

Alternative Credit: Dispelling Common Misconceptions
Misperceptions about private credit continue to weigh on some insurers. These may stem from media headlines proclaiming excessive risks in these assets given their rapid growth in recent years, leading to questions about origination and underwriting standards.

The reality is more nuanced. Within the broad private credit universe, traditional lower-middle-market direct lending (which we define as loans to companies with EBITDA of US$7.5 million to US$30 million) has so far demonstrated resilience, low default rates, and limited mark-to-market losses in periods of market stress. Attractive deals in this market segment would typically feature conservative structures, strong covenants, borrowers from traditional sectors, and experienced private equity sponsors. In PineBridge’s experience, lower-middle-market companies with long operating histories, leadership positions in their market segments, and seasoned management teams have demonstrated durability through both strong and weaker environments. Borrowers that benefit from real cash generation and a competitive “moat” – businesses that provide distinct relevance and value to their clients – are more favored. When paired with a conservative approach to portfolio construction and underwriting, investors who target these types of opportunities have historically stood to garner durable risk-adjusted return potential across macroeconomic environments.

Insurers should also look beyond the headlines when considering CLO tranche investments. While “structured credit” is often perceived as a high-risk asset class that left many investors reeling in the aftermath of the 2008 global financial crisis (GFC), the vast amount of data accumulated by rating agencies shows lower historical credit losses on CLO tranches than on same-rating corporates. On top of that, modern CLO structures introduced in the wake of the GFC have significantly boosted protections for investors in senior tranches. Finally, the introduction of risk retention requirements for securitization managers in the US and Europe means that the experience of the GFC is highly unlikely to be repeated in the future.⁶

For additional insights from PineBridge’s insurance investment specialists and other expert perspectives, please visit here.

About PineBridge Investments
PineBridge Investments is a private, global asset manager focused on active, high-conviction investing. We draw on the collective power of our experts in each discipline, market, and region of the world through an open culture of collaboration designed to identify the best ideas. Our mission is to exceed clients’ expectations on every level, every day. As of 30 June 2024, the firm managed US$169.7 billion* across global asset classes for sophisticated investors around the world.

*AUM as of 30 June 2024 includes US$69.5 billion (US$40.3 billion equities, US$22.3 billion fixed income, US$6.8 billion multi-asset and US$49.1 million alternatives) of assets managed by joint ventures or other entities not wholly owned by PineBridge Investments. Includes PineBridge Benson Elliot Real Estate AUM of US$4.0 billion.

To learn more about PineBridge Investments, please visit here.

¹ See Exhibit 2 in Moody’s report, “Insurers’ private credit holdings will grow, with benefits outweighing risks” 4 June 2024.

² See Figure 4 in International Monetary Fund’s “Global Financial Stability Note: Private Equity and Life Insurers”, 19 December 2023.

³ See Exhibit 2 in Moody’s report “Life Insurance – US: CLO holdings rise as regulators review capital charges”, 1 March 2024.

⁴ PineBridge estimate based on Moody’s data as of 1 March 2024.

⁵ Source: Preqin data as of 18 June 2024, PineBridge Investments interpretation and analysis.

⁶ For more on CLOs for insurers, see PineBridge Investments’ thought piece “The Case for Collateralized Loan Obligations for Global Insurers”, 22 May 2023.

Disclosure
Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.

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In the dynamic landscape of emerging markets, the middle class stands as a pivotal force driving economic growth and societal change. This is particularly true for emerging Asia, the world’s most dynamic and vibrant economic powerhouse. Over the last ten years, emerging Asia chalked up an impressive real GDP growth by 5.6% per annum, faster than advanced economies and any other emerging region.[1]

Strong economic growth and an expanding middle class go hand in hand. In 2020, an estimated 2 billion Asians were part of the middle class, projected to increase to 3.5 billion by 2030 and account for 65% of the global total.[2] This burgeoning segment has played a vital role in driving domestic consumption and economic growth. Middle-class consumers are exemplified by their increasing purchasing power, aspirations for a better quality of life, and a growing demand for diverse financial products and services. As income increases, these consumers are able and willing to spend on things like better housing, long-haul travel and quality education for their children.

The coming into the age of emerging Asia’s middle class is not just reshaping the region’s economic landscape but will also have significant implications for the future of insurance. With increasing asset ownership, there will be expanding demand for different types of insurance products, from insurance against property damage to protection against large medical expenses or the loss of household breadwinners.

Old-age care: preparing for thefuture
One of the challenges facing many middle-class households in the region is ageing. Population ageing in Asia is happening at an unprecedented rate due to factors including falling fertility rates, changing societal norms, medical improvements, and rising life expectancy. It is estimated that the percentage of Asian population aged 65 or over would double in 20-25 years, while it took more than 50 years for that to happen in most European markets.[3] Notably, fast population ageing is affecting not only those more developed economies in the region but also emerging markets like China, Thailand and Vietnam.

As many emerging Asian markets will fast transit from an “ageing” to an “aged” society, preparing adequately for old-age retirement is a pressing challenge. Research has demonstrated that existing pension schemes are either insufficient or only partially funded.[4] In addition, not many markets have fully considered the additional financial requirements arising from the need for old-age care. Indeed, governments’ ability to fund additional old age-related social security services is limited. Public sector fiscal flexibility has shrunk significantly in recent years, partly due to pandemic-related excess spending. The debt-to-GDP ratio has increased, in some cases, to alarming levels.

Middle-class households are increasingly shouldering the financing burden of old-age care, for themselves as well as that of their parents and parents-in-law. The availability of old-age care insurance solutions is limited so far. Long-term care insurance is limited chiefly to state-sponsored ones and available only in developed Asian markets like Japan and South Korea. Furthermore, traditional long-term care insurance, which focuses on financing institutional care at the terminal stage, is not cost-efficient nor popular with Asian consumers.

“The coming into the age of emerging Asia’s middle class is not just reshaping the region’s economic landscape but will also have significant implications for the future of insurance. With increasing asset ownership, there will be expanding demand for different types of insurance products, from insurance against property damage to protection against large medical expenses or the loss of household breadwinners.”

Shifting disease patterns alongside changing lifestyles and ageing, coupled with the rise in the cost of care and pressure on public coffers, is giving rise to New Care Models.[5] These models emphasise disease prevention and health promotion, proactive management of chronic diseases, coordinated care delivery covering physical and mental well-being of the elderly, and often utilising community- or home-based services. Under the New Care Models, families play an important role in supporting the delivery of old-age care.

Women in the workforce: a rising consumer segment
Indeed, families often rely on their female members to care for the elderly. This has a long tradition in many markets but is facing increasing challenges. With shrinking family sizes, more women have joined the labour force in recent decades, thus increasing the opportunity cost of forfeiting a career to become a family caregiver.

Indeed, women’s increasing financial clout has given rise to expectations of them playing an increasingly important role in driving consumer demand, as more women have control over their finances. According to McKinsey, women’s empowerment could add 30% to Asia’s consumption growth, and insurance and other financial services will be among the major beneficiaries.[6]

It can be expected that the more active economic roles of women will also bolster their influence on household financial decisions. Increasingly, insurers have developed tailored insurance products for different women segments.[7] Most popular are health insurance products that offer coverage for illnesses that are more prevalent among women. Some of those are also coming with maternity benefits and wellness programs. At the same time, insurers have designed products for women entrepreneurs that not only just offer insurance protection (against business interruption or property damage) but also provide support services like business coaching.

These women contribute significantly to household incomes and actively engage in financial planning and investment. The insurance sector must recognise and cater to the unique needs of these women, offering products that support their roles and financial aspirations.

Enabling emerging Asia middle class
These are some of the key trends that will shape the future of insurance in Asia. Yet, meeting the needs of middle-class consumers requires a more detailed understanding of their profile, preferences and risk attitude. At the same time, there could be significant differences across different emerging Asia markets. What are middle class’ expectations of governments to support elderly care? What are the care services they will need when they get old? Are there major differences in terms of financial literacy between working mothers and independent women?

It is estimated that the percentage of Asian population aged 65 or over would double in 20-25 years, while it took more than 50 years for that to happen in most European markets. Notably, fast population ageing is affecting not only those more developed economies in the region but also emerging markets like China, Thailand and Vietnam.

Since 2022, Peak Re has conducted extensive annual consumer surveys to better gauge the risk preferences and behaviours of the emerging market middle class. The aim is to help close the protection gap emerging Asia’s burgeoning middle class faces. The 2024 survey edition will focus on the need for old-age care and the rise of women’s consumer sectors. These will be instrumental in informing insurers on how to better devise products, engage with them, and meet their service expectations.

Conclusion
The insights from our consumer survey underscore the urgency for the insurance sector to adapt and innovate. Middle-class consumers in emerging markets navigate a complex landscape of financial responsibilities, health concerns, and family dynamics. Insurance companies can develop products that are comprehensive, affordable, and easy to understand and access.

As we prepare to announce the detailed findings of our large-scale consumer survey in September 2024, it is clear that the middle class in emerging markets represents a significant opportunity for the insurance sector. By understanding the unique needs and challenges these consumers face, insurance companies can develop targeted solutions that address their concerns and aspirations.

[1] IMF World Economic Database, April 2024.

[2] The rise of Asia’s middle class | World Economic Forum (weforum.org)

[3] Population Ageing | Demographic Changes (population-trends-asiapacific.org)

[4] Bridging-asias-pension-gap-july-2019_final.pdf (eastspring.com) 

[5] New Care Models: How insurers can rise to the challenge of older and sicker societies (genevaassociation.org)

[6] Beyond income: Redrawing Asia’s consumer map | McKinsey

[7] Innovative Financial Products and Services for Women in Asia and the Pacific (adb.org)

Authors:

Franz-Josef Hahn       CEO, Peak Re

Clarence Wong Chief Economist, Peak Re

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Private equity-backed reinsurers’ appetite for Asian life insurance assets is unlikely to be sated any time soon, as there is US$2 trillion of assets/liabilities under management that are currently providing sub-par capital returns. Shareholder pressure and new capital standards are likely to drive companies in Japan to move first.

Matthew Rose Managing Director, Practice Leader Life & Health, Asia Pacific Email: Matthew.Rose@guycarp.com

Victor Hai Senior Vice President, Life & Health, Asia Pacific Email: Victor.Hai@guycarp.com

 

[1] 2024 Global Insurance Survey by Goldman Sachs Asset Management, quoted in Asia Investor. https://asianinvestor.net/article/asian-insurers-plan-to-add-duration-credit-risk/495380

[2] Insurance Newsnet article, January 9 2024. https://insurancenewsnet.com/innarticle/private-equity-stake-in-life-insurers-draws-new-round-of-critical-reports

[3] KPMG report into Life/Long-Term Structures in Bermuda. https://assets.kpmg.com/content/dam/kpmg/bm/pdf/2021/04/kpmg-life-industry-bermuda-web.pdf

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Tackling contentious issues by applying the learning from the industry’s collective experience is key to improving the claims experience, writes CCi’s Steven Horne.

Following recent cases in North America (South Capitol Bridgebuilders v Lexington and Archer Western-de Moya Joint Venture v Ace American Insurance Co), many discussions have taken place and much has been written about the London Engineering Group’s LEG3/06 defect exclusion.

The LEG committee is understood to be redrafting LEG3/06 to clarify what constitutes the mere existence of a defect from what is the manifestation of damage. Underwriters will also be eager to double-check that damage is defined within their policies.

Other than the definition of damage, there are several related issues that we hope the LEG committee will address.

For more than 25 years, CCi, a Rimkus Company, has been at the forefront of Delay in Start-Up (DSU) analysis, shaping how DSU delay analysis is undertaken. We remain the only company that provides a truly global perspective on DSU, with experience in the application of LEG2/96 and LEG3/06 and their respective market positions across the globe.

Whilst progress and a common understanding have been achieved over that period, the application of LEG2/96 and LEG3/06 has been an enduring point of contention and the cause of many protracted claim settlements.

This was illustrated perfectly last year, as the drafting committee of the Insurance Institute of London’s (IIL) Delay in Start-Up Insurance textbook was unable to narrow it down to a single position. Instead, the textbook presented two separate opinions on the practical application of these defect exclusion clauses.

From a “delay analyst’s-eye view”, there are three main issues that I hope can be addressed, along with the definition of damage:

1) Should the LEG defect exclusions exclude delay?

The most common point of difference is whether LEG2/96 and LEG3/06 should extend to exclude delay resulting from the rectification or improvement of a defect. I will not attempt to articulate the different schools of thought here – the IIL’s Delay in Start-Up Insurance publication does a great job of that and is an excellent read -– but on the face of it, this appears a fairly simple fix that could help a claim settlement save months or even years of protracted discussions.

2) What exactly is meant by “put in hand”?

This question is specific to LEG2/96 and fairly self-explanatory. What does it mean for a defect rectification to be “put in hand” immediately prior to damage? In the case of a design defect, does it mean just the time taken to physically rectify the defective design, given the project’s status immediately before the damage occurred? Or does it infer a scenario where the defect has been identified immediately before the damage occurs? If the latter, the time excluded would be extended to cover the time required to design the rectification, procure any resources necessary, and the time taken to physically rectify defective design.

3) What exactly is an “improvement”?

This final common point of debate, delay-wise, concerns LEG3/06 and the definition of an “improvement”. What appears as a fairly simple concept has in fact held up the settlement of dozens of claims. It is understood that LEG3/06 offers a greater degree of indemnity than LEG2/96 and therefore an improvement must consist of more than the scope needed to just rectify a defect.

In the case of a design defect, the design must be changed in order for it to be rectified. A change cannot in itself be seen as an improvement, otherwise, there would be no operational difference between LEG2/96 and LEG3/06.

So, how do you improve a defective design? Does it need to increase production capacity? Or improve efficiency to minimise running costs of the future business under construction? In my experience, these situations are incredibly rare and would mean LEG3/06 would never exclude anything in operation. In practice, it can take a significant amount of time for discussions to resolve the point at which a rectification becomes an improvement.

The above are issues that have been widely and commonly encountered and given that LEG2/96 is now 26 years old, and 18 years have lapsed since the roll-out of LEG3/06, it is perhaps time to apply the learning from the industry’s collective experience, provide resolutions to these issues, and improve the claims experience for policyholders.

About the Author

Steven is Managing Director for CCi’s global insurance operations. Having started his career as a Planning Engineer with a building services contractor, Steven moved to CCi in 2011 and for the past 13 years has specialised in analysing DSU claims, becoming recognised as one of the most experienced DSU focused delay experts. He has advised insurance markets in the UK, Europe, Middle East, Africa, North America, Latin America and Asia Pacific on more than 150 losses.

Steven has shared his experience and knowledge of DSU delay analysis at industry conferences across the UK, Europe and Asia, having been invited to speak at events hosted by the Chartered Institute of Loss Adjusters (CILA), London Engineering Group (LEG), the Onshore Energy Conference (OEC), the Singapore Institute of Insurance (SII), the South East Asia Property and Energy Conference (SEAPEC) and the International Association of Engineering Insurers (IMIA). In 2022, Steven was a co-author of ‘Delay in Start-up Insurance’ a textbook published by the Insurance Institute of London (IIL) and the Chartered Insurance Institute (CII).

Steven Horne Managing Director – Global Insurance Operations Email: steven.horne@cci-int.com

Media Contact

Joanne Worman
Marketing Director EMEA and APAC
joanne.worman@cci-int.com

This publication presents the views, thoughts or opinions of the author and does not purport to reflect the opinions or views of Capital Consulting International (CCi, a Rimkus Company). This article does not, and is not intended to, constitute legal advice or advice of any kind.

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With an abundance of data and our own experiences, it’s clear that humanity is at a critical juncture. The transition to sustainable, low-carbon energy sources is no longer a choice but an urgent necessity.

As my colleague Vicky Robert-Mills wrote in a previous Fast Fast Forward article, the scale and complexity of the energy transition are immense, as are the risks. That is why, as Vicky put it, “Insurance has a fundamental role to play in (the energy transition).” This includes providing credit and political risk insurance, which are increasingly critical prerequisites for investors in renewable energy.

A transformative shift
According to the International Renewable Energy Agency (IRENA), about $130 trillion will be invested worldwide by 2050 to support the transition from traditional fossil fuels to cleaner, more sustainable sources, including wind, solar, hydropower, and geothermal energy. The impacts will be transformative. While some will lead and others will follow, every corner of society—governments, businesses, non-profit organisations, academia, and individual citizens—will be affected.

However, transitioning to low-carbon sources is about more than just substituting one type of energy for another. It will require fundamentally restructuring the entire energy ecosystem, including upgrading infrastructure, integrating renewable energy into existing grids, and developing new ways to store energy from intermittent sources like solar and wind.

Legacy energy companies, which have powered (pun intended) a growing global economy, will be on the front lines of this transformation. Although most are committed to developing more sustainable energy mixes, their deep roots in fossil fuels will make it difficult to pivot quickly. Also, producing energy from renewable sources requires different capabilities and expertise.

In Asia, economic and social factors add further layers of complexity. In particular, several Asian countries derive considerable revenue from fossil fuels and have invested in this sector for decades, including in projects that came online recently and are planned to be operational for at least the next 30 years.

Other challenges include inadequate grid infrastructure, bureaucratic red tape and regulatory barriers. For example, AXA XL supported a renewable energy project where construction delays for a new transmission line connecting the facility to the national grid meant the project owner couldn’t sell the power until the evacuation lines were completed.

Ambitious plans
While the challenges are formidable, transitioning to renewable energy will drive economic growth across the region and create millions of new manufacturing, construction, and maintenance jobs. IRENA also estimates that over 11 million new jobs could be produced in Asia’s renewable energy sector by 2050.

It starts with abundant renewable resources. India and China have vast solar potential and ambitious plans to significantly increase the share of non-fossil fuels in their energy mixes. India, for example, aims to install 450 gigawatts (GW) from renewable sources by 2030.

China’s plans are even more ambitious. It accounted for 59% of the new renewable energy capacity added in 2023, including 216GW of new solar photovoltaic capacity—more than many other developed countries currently have installed. China’s targets call for installing 1,200GW from renewable sources by 2030, but given its current pace of expansion, it could potentially exceed this target by up to 300MW.

Japan is investing in offshore wind farms, solar power, and hydrogen technology and estimates that renewables will account for 22-24% of its electricity mix by 2030. Likewise, South Korea has committed to phasing out outdated coal-fired power plants and increasing its reliance on renewable energy as part of its Green New Deal initiative. Its investments also focus on offshore wind, hydrogen fuel cells, and solar power.

Vietnam is emerging as a renewable energy leader in Southeast Asia, with substantial wind and solar power investments. The country is on track to produce 30% of its electricity from renewables by 2030. Vietnam also offers renewable energy development incentives and has begun attracting foreign investment in clean energy projects.

Credit and political risk insurance: Critical enablers
AXA XL’s Asia-based teams have been supporting renewable energy projects since 2014 and are deeply familiar with diverse initiatives that cost hundreds of millions, if not billions, incorporate relatively new technologies, and are located in places with high natural catastrophe exposures, some of which are also subject to political instability. Moreover, these projects are typically owned by special-purpose vehicles with few other assets. In other words, investors need to be comfortable participating in ventures where the risk exposures are high, the risk horizons are long, and the borrower has limited collateral.

Given these factors, credit insurance is becoming a vital enabler for renewable energy investors. It offers two essential benefits.

The first is protection against the risk of non-payment by borrowers. A facility that isn’t generating electricity isn’t producing revenue for its owners and investors, and there are numerous ways in which construction can be delayed or a facility taken offline after it becomes operational. For instance, supply chain disruptions and weather delays can impede construction. Once operational, accidents, mechanical failures, severe storms or, in the case of offshore wind farms, damages to subsea cables can take a facility offline for months.

Second, partnering with a credit insurance provider who assumes a portion of the risk allows institutional investors, financial institutions or other “holders of capital” to expand their internal limits and risk tolerances. That, in turn, lets them offer beneficiaries funding that otherwise wouldn’t have been available or a financial package greater than the lender could have delivered on its own.

In some cases, owners or investors might also take out political risk insurance to mitigate country risk, including currency inconvertibility, exchange transfer, breach of contract by the host government, and losses from civil strife, expropriation or related disruptions. Since renewable energy projects are typically long-term undertakings extending well beyond election cycles, political risk insurance is particularly relevant in emerging markets as an effective hedge against future political and economic uncertainty.

Supporting the energy transition with blended finance solutions
In recent years, credit insurance has also become an integral component in blended finance structures where different institutions and entities join to finance a development project. The stakeholders can include government agencies, multilateral development finance institutions (DFIs) like the Asian Development Bank (ADB) or the Asian Infrastructure Investment Bank (AIIB), non-governmental organisations, commercial banks, institutional investors, and, lately, philanthropic organisations.

The potential benefits of such blended finance solutions are considerable. For starters, a collection of investors has more capacity than any single investor. Moreover, these varied entities have different capabilities, and blended finance structures can leverage each other’s strengths to achieve common goals. For instance, public sector agencies can provide policy support, regulatory frameworks, and public infrastructure, while private sector investors bring capital, expertise, and efficiency to project implementation. Blended finance structures can also lower the cost of capital by combining concessional financing from government agencies or DFIs with commercial funding from private investors. This helps make inherently risky projects more financially viable by bridging the gap between the relatively high cost of capital for renewable energy projects and the lower returns expected by private investors.

Since 2014, AXA XL’s Asia-based Political Risk, Credit & Bond (PRCB) team has supported almost two hundred “green business” projects, primarily for renewable energy. (Others included marine conservation, low-carbon vehicles and water resources.) Although the journey has been challenging at times, our green business portfolio has more than doubled since 2019. We have also assembled a strong, capable team of underwriters and risk analysts to support these projects and established excellent working relationships with government agencies and major commercial banks.

The energy transition represents a monumental undertaking that will reshape the global energy landscape and economy. To overcome the scale and complexity of the challenges, unprecedented collaboration and innovation across all parts of society will be required. At the same time, the transition offers immense opportunities to create more sustainable and resilient energy systems for future generations. AXA XL looks forward to supporting clients in navigating the challenges and unlocking the opportunities.

Mark Houghton Head of Political Risk, Credit and Bond, APAC, AXA XL Email: mark.houghton@axaxl.com

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WTW’s Ben MacCarthy, head of real estate, hospitality & leisure, Asia, and Jennifer Tiang, cyber leader, Asia, discuss the real estate industry’s sectoral risk landscape and the emerging role of proptech.

What are some of the key risk concerns that could hamper the recovery of the real estate businesses in Asia Pacific?

From the WTW Global Real Estate Risk Outlook 2024 report, we found several risks that can impact real estate businesses in Asia. Out of that, two risks are of most concern – one at a micro level and another at a macro level.

Energy transition risk is of concern due to the unknown impact it can have on the value and performance of assets, especially for commercial and industrial real estate businesses. Energy was among the global trends with the greatest impact on risks as 80% of the asset and risk managers were concerned with the availability and cost of energy.

Investment strategies are partly influenced by sustainability where managers may need to retrofit existing buildings to become greener or adhere to new government regulations to improve energy efficiency (such as by installing solar panels).

They also need to be up to date on the technical advancements and emerging renewable energy sources and the shifting preferences of tenants who want to rent green buildings. With this recognition of a need to transition, asset managers will be able to ensure the long-term viability and resilience of their portfolios.

Geopolitics also poses great risks to real estate organisations. Sudden changes in policy, trade tensions and political instability will all impact the demand and operating costs, as well as undermine optimism about future returns for the real estate business and investors.

Furthermore, there are risks such as military conflicts and terrorist attacks that can create uncertainty and impact the overall security of assets. It is therefore important for real estate firms to stay vigilant across both monetary and physical risks when operating in different continents, particularly those that are experiencing heightened geopolitical tensions.

How exposed is the real estate sector to emerging risks such as cyber security and business interruption?

Our report revealed that cyber security is a mounting worry, with 72% of the respondents considering it to be one of their greatest insurable risks. This reflects the awareness that the real estate sector is indeed exposed to cyber risk and non-physical business interruption events (such as ransomware attacks).

While it may be convenient to minimise cyber risks facing the real estate sector,  as they tend not to carry high volumes of personally identifiable information and, therefore, are not a target of cyber threats, is perhaps a rather short-sighted and outdated conceptual understanding of cyber risk facing businesses today.

Due to the absence of regulations in the cyber security space, there is a general lag in maturity amidst real estate companies, which makes them ripe targets for threat actors.

This, combined with the heavy reliance on technology and the continued digitalisation of management processes and building asset systems, a strong “business case” for threat actors targeting deep pockets where business interruption will be problematic.

Commercial real estate owners and investors continue to invest in highly sophisticated technology solutions. We now have “smart” buildings, which offer many benefits and often reduce overall operating costs. However, the flip side to these benefits is that it does open up systems to new vulnerabilities – a new world of risk.

Undoubtedly, the fear of insecure systems cannot inhibit innovation – particularly in today’s hyper-competitive environment. However, the benefits must be weighed against the risks. Risks must be put through due mitigation and risk transfer treatments. The questions to be asked include: Are we investing enough to be secure? Are we insured in case our defences fail?

How can proptech and smart buildings help companies build risk resilience and help mitigation strategies?

Proptech and smart buildings, as with all things underpinned by technology, are a double-edged sword. They can help build risk resilience and mitigate the impact of cyber threats in many ways. For example, the safety and security of occupants can be more intelligently overseen by smart buildings that incorporate advanced security measures such as biometric access control, fire detection systems and surveillance systems.

AI-based algorithms can detect anomalies and potential threats, improving overall safety. However, as mentioned above, the flip side is that these smart systems open up new vulnerabilities and risks to business operations.

Key to risk managers in the real estate sector is that risk-benefit trade-offs are properly explored – with the cost and impact of vulnerabilities being exploited are understood well by all key stakeholders. Involving the security teams and business continuity teams (which includes a security colleague) is key to this process.

What can business do to adapt to evolving trends in ESG and climate regulations?

We highlighted earlier that energy transition risk has shown to be the biggest risk facing real estate risk and asset managers now. Yet, this trend is one of many with how ESG and climate regulations are evolving. What we have discussed and found with real estate businesses is that they plan to:

• Implement sustainable building and development practices in current and future assets. This includes energy-efficient building design, green construction materials and renewable sources of energy. All of which reduce carbon footprint and operating costs.
• Conduct ESG performance assessments and reporting to ensure and demonstrate transparency and accountability to investors and stakeholders.
• Integrate climate risk analysis into investment decisions that can mitigate financial and insurance impacts of extreme weather events, as well as regulatory changes.

These are some measures that real estate businesses can look to adopt to ensure that they are one step ahead of any evolving and emerging trends in ESG and climate regulations.

Ben MacCarthy Head of Casualty, Asia at WTW & Head of Real Estate, Hospitality & Leisure, Asia Email: ben.maccarthy@wtwco.com

Jennifer Tiang Regional Head of Cyber Practice, Asia Email: jennifer.tiang@wtwco.com

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Building resilience into your business is no longer a choice. We used to think companies could choose to proactively defend themselves from known risks as they tackle the market, but this is not the case anymore. It has become essential to maintaining business continuity and value.

Who would have thought that Covid-19 would have such an impact on people and businesses globally? The unexpected happened and has reset our risk barometer, delivering many lessons. If disruption can happen at this scale, what should we be prepared for next?

Knowledge needs are changing, too. Business leaders know a lot about processes, financial structures, supply chains and distribution networks. But they don’t typically possess deep knowledge of rising sea levels, water supply availability or other risks that may have an impact on manufacturing value chains and shareholder expectations.

Specifically, the growing appreciation of the impact of climate risk is a catalyst for change, with regulators around the world increasingly making climate risk disclosures mandatory. Stock exchanges are also demanding corporations to ‘explain or comply’ regarding their business’ materiality and other risks. These are leadership responsibilities that did not exist ten years ago and now require new skills and data.

At the same time, exposure growth in high-hazard geographies, inflation and climate variability mean the insurance industry needs to be prepared to deal with a US$200 billion annual loss aggregation – doubling levels over the past six years. This all contributes to the growing recognition of resilience as a foundation of business growth.

A business’ growing challenge in tackling multifaceted risks
Natural hazard exposures across Asia Pacific geographies vary significantly. In Singapore for instance, threats are relatively benign except perhaps for flood and rising sea level risks, though the government is proactively mitigating these through various green investments and initiatives. But further north, typhoons, earthquakes, and floods are an ever-present threat in China, Taiwan, Malaysia, Philippines and Vietnam.

As upstream manufacturing continues to move from China into South-East Asia, in particular to Vietnam and Thailand, new regulatory, environmental and talent risks are emerging. Climate-related risks like rising temperatures and the increasing prevalence of flooding events are creating new exposures and threatening business resilience across old and new supply chains.

For example, by building a factory in a different geography you diversify supply chain risk, but there is also a need to recognise there may be new or emerging risks associated with that new location. How do you choose between Hanoi or Ho Chi Minh? What are the current flood exposures and how will rising sea levels affect this in the near-term and mid-term? What types of safety and risk prevention solutions should be considered in these facilities? Do sprinklers, fire alarms, roofing and wall panels meet the specifications and standards required to maintain business continuity and customer expectations of a global business, regardless of the local requirements? While your own facility may be robust and risk-managed, can the same be said for the suppliers and partners you rely on?

Resilience tools to value-add and support business continuity in today’s world
Fortunately, there are tools at hand to help business leaders take action and deliver accountability to shareholders and other stakeholders.

FM Global’s Climate Change Impact Report is a tool that helps property owners aggregate a range of engineering and business data to understand their climate-related exposures and inform solutions that will engineer out risks and protect business value at the core.

This is supported by the Resilience Credit, which is issued to eligible FM Global clients to bolster their investments in climate resilience solutions against extreme weather hazards such as wind, flood and wildfire. According to FM Global data, its first-ever resilience credit of US$300 million in 2022 accelerated the implementation of natural hazards-related recommendations. This is a key benefit of the company’s mutual structure, where clients are effectively shareholders.

With the 2023 resilience credit of US$350 million as well as the US$800 million membership credit, FM Global announced a total of US$1.15 billion in credits last year, which has the potential to help organisations reduce total loss expectancies related to wind, flood and wildfire by more than US$120 billion. The credits not only encourage business leaders to invest in climate and other resilience-building solutions, but they also support value creation, which benefits their stakeholders.

FM Global’s Resilience Index – a free-to-access online resource – provides a much wider lens on prevailing macroeconomic factors affecting operations in any particular geography. The FM Global Resilience Index is particularly valuable for business leaders in making informed decisions on site selection, supply chain design and loss prevention.

For example, Asia’s mature geographies such as Singapore, Japan and South Korea have always been attractive to business leaders due to their strong economic and supply chain resilience, largely owing to the governments’ emphases on building a robust infrastructure and having strong legal and regulatory bodies.

In today’s world, where business operates in a constantly evolving macroeconomic landscape coupled with geopolitical tensions resulting in supply chain disruptions, it is imperative that businesses take a proactive step in assessing their risk profile.

The ability to assess economic, risk quality and supply chain resilience to build a business or organisation that not only has the ability to withstand climate-related risks, but weather through other headwinds and challenges, and remain sustainable, is now of vital importance.

Where building business resilience was once an option for consideration in the context of fast-moving, high-growth geographies, recent experience and the continued evolution of markets and supply chains have removed that choice and reframed risk management as a business enabler.

Tan Hian Hong Operations Senior Vice President, Operations Manager, Asia, FM Global Email: hianhong.tan@fmglobal.com

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Fitch’s neutral outlook for major insurance markets in APAC – China, Japan, and Korea – reflects the expectations that the performance of these sectors will stay stable in 2024, despite the macro challenges.

China Insurance Outlook 2024: Earnings Hinge on Investment Returns while Regulatory Initiatives to Underpin Capitalisation and Growth

Fitch’s Life Sector Outlook: Neutral
Fitch Ratings’ neutral outlook for the Chinese life insurance sector in 2024 is underpinned by moderate industry premium growth, improving underlying business margins on financial regulator National Administration of Financial Regulation’s (NAFR) push for lower commission expense, and capital relief under recent updates to the China Risk-Oriented Solvency System (C-ROSS) phase 2 that took effect on 1 January 2022. The sector outlook also takes into consideration the risks of a spillover in China’s property slump that could lead to a tightening in financial conditions in 2024.

Savings products will continue as the premium growth driver in 2024, reflecting customer demand and market sentiment. Health insurance growth will remain relatively flat on a reduction in the number of agents and unfavourable claims, although the Chinese government has announced policies to promote commercial long-term health insurance and wider insurance coverage.

Fitch expects the life insurance industry to have steady and better-quality growth in 2024. The release of regulatory notices to life insurers and revamped solvency regulation support the healthy development of life insurance, although challenges remain.

Fitch’s Non-Life Sector Outlook: Neutral
Fitch Ratings’ sector outlook reflects our expectation that China’s non-life insurers will maintain a sound solvency buffer and financial flexibility to support the stable pace of premium expansion in 2024. Solvency adequacy is reinforced as a result of the revision of several rules in the calculation of the minimum capital requirement of insurers solvency in September 2023. Capital infusion, however, is inevitable if insurers’ business expansion continues to outpace their surplus growth.

We do not anticipate the pace of premium growth to accelerate in 2024, while insurers will continue to optimise their product mix by expanding non-motor insurance – due to ongoing demand for regulatory-initiated products. Government’s measures on promoting automobile consumption will support insurers’ motor premium generation.

The motor insurance margin is unlikely to decline significantly despite further relaxation of commercial motor premium pricing limits in 2023. We expect greater pricing flexibility will provide motor insurers with an incentive to reinforce their underwriting sophistication. Underwriting deficits of insurers with smaller scale will persist, while scale advantage will enable large firms to sustain their margin. Claims from catastrophe perils will remain a threat to operating stability.

Chinese Life Insurers: Industry Premium Growth

Chinese Non-Life Insurer: Industry Premium Growth

Japan Insurance Outlook 2024: Fundamentals to Remain Overall Healthy
Fitch believes underwriting profits will continue to recover in 2024, as insured losses arising from Covid-19 have subsided. We view the biggest risk for Japanese insurers remains the volatility in financial markets, while moderately rising Japanese yen bond yields and the yen’s depreciation work in their favour.

Fitch’s Life Sector Outlook: Neutral
Fitch Ratings believes Japanese life insurers’ earnings will be stable in 2024, even after considering the negative impact from volatile global financial markets, and they will maintain capitalisation at healthy levels in the near future.

Investment spread has become a larger portion of total earnings than before, at approximately 50%, due mainly to secular growth of positive investment spread and continued declines in average guaranteed yield. Earnings from profitable protection-type insurance underwriting (such as health insurance and death protection), which are quite stable and much more profitable than in most jurisdictions outside Japan, still represent the major part of the total earnings.

Fitch expects Japanese insurers to continue to expand overseas, driven by a saturated domestic market – especially for life insurance – caused by an ageing population and shrinking workforce. The country’s four major life insurance groups and three major non-life groups are likely to continue to acquire insurers in the countries such as the US, the UK and Australia.

Fitch’s Non-Life Sector Outlook: Neutral
Fitch believes Japanese non-life insurers’ pricing of premium rates will continue to be favourable. Premium rates for property insurance are likely to continue to rise to cope with insured losses from catastrophes, which will boost insurers’ results over the medium term. Fitch expects Japanese non-life insurers to maintain strong capital adequacy, backed by accumulated core capital, including retained earnings and capital reserves.

Japan remains at substantial risk of natural catastrophe events, which leads us to expect non-life insurers to continue to raise premium rates for domestic non-life products, as they face higher reinsurance premium rates. Given the high reinsurance premium rates recently, Japanese non-life insurers have raised their risk retention compared with a few years ago. Thus, their insured losses might be substantial if significant natural catastrophes hit Japan in 2024.

Korea Insurance Outlook 2024: Contractual Service Margin a Key Value Driver
Fitch expects a stable overall performance for Korean insurers, driven by higher investment returns, a narrowing in negative spreads, and contractual service margin (CSM) recognition, despite persisting uncertainty over the operating environment. We see insurers under IFRS17 and K-ICS as likely to reshape the operational strategy during the transition phase, and the results should improve gradually from 2024.

Fitch’s Life & Non-life Sector Outlook: Neutral
Fitch Ratings expects the performance of Korean life and non-life insurers in 2024 to be stable amid a high-interest-rate environment – due mainly to higher investment returns, a lower burden on negative spreads, and amortised CSM recognition. Insurers are still facing uncertainty over the operating environment, with prolonged inflation and high interest rates.

However, we believe insurers will optimise their insurance and investment portfolios, focusing on new business with high CSM – such as protection and health-type products – as well as investing more in longer-term and stable yield generation assets, with lower risk charges to reduce the capital burden.

Both lifers and non-lifers reported strong net profits in 1H23, up by 64.7% and 54%, respectively. This was led mainly by accounting standard changes with sound CSM amortisation, despite direct comparability between IFRS4 and IFRS17  being still limited. Non-lifers are maintaining a decent underwriting performance, as major companies’ combined ratio for property & casualty and motor business is consistently below 100% under IFRS17. We also expect total assets and profitability to grow smoothly, led mainly by sound CSM growth.

Nonetheless, uncertainties still persist, with higher claims reflecting higher claims payouts and an increase in reinsurance costs. In addition, insurers’ ‘fair value through profit and loss assets’ (FVPL) has risen considerably after the reclassification of investment assets under IFRS9, which could lead to an increase in the volatility of insurers’ investment returns. Insurers will place greater effort in switching the assets from FVPL to ‘fair value through other comprehensive income’, in an attempt to reduce potential volatility in profitability.

Learn more about Fitch’s views, visit: www.fitchratings.com/insurance

or contact us:

Jeffrey Liew Senior Director, Head of Insurance Ratings, APAC Email: Jeffrey.Liew@fitchratings.com

Mee Ryung Song Senior Director, Business Relationship Management, APAC Email: MeeRyung.Song@fitchratings.com

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Slowing economies and the ongoing impacts of the inflationary environment create a complex risk environment in the Asia-Pacific, according to the World Economic Forum’s latest Executive Opinion Survey.

The Asia-Pacific (APAC) region has remained a key driver of the global economy in 2023. But forecasts for the region suggest that growth will dip from 4.6% this year to 4.2% in 2024 and 3.9% in the medium-term as China’s economic slowdown dampens the region’s performance. That sober outlook is reflected in the World Economic Forum’s Executive Opinion Survey (EOS), as economic pressures emerge as the top risk for APAC leaders.

From inflation and labour shortages to weather-related disasters, leaders across APAC share some common concerns, according to this year’s EOS. The survey, which gathers data from 11,000 respondents across 110 economies, paints a picture of the top concerns.

Financial concerns pose the biggest risk
It’s a difficult time for business leaders, who face multiple economic, energy and environmental challenges. Financial risks, energy supply pressures and labour shortages all feature in the top five risks for APAC leaders. While forecasts predict APAC inflation will be lower than in other regions, it could remain at a higher baseline for longer.

Amid slowing growth forecasts in China, APAC’s biggest economy, leaders cited the risk of economic downturn is the greatest perceived risk in four out of five APAC sub-regions. The growing focus on economic risks is a marked contrast to 2020, when no economic risks made the top five in East Asia and the Pacific, and two of the top five were technological risks.

In 2023, inflation comes third on the list for every region except Oceania, where it is in second place. Labour shortage comes in at fourth for South and South-Eastern leaders, and second in East Asia, but it’s absent from the top five in Oceania.

Meanwhile, energy supply shortage consistently ranks between second and fourth place across the five sub-regions surveyed. But these perceptions of risk should be contextualised by the fact that APAC is still home to some of the fastest growing economies in the world: the GDPs of China, Indonesia, Cambodia and the Philippines are all forecast to grow by over 5% in 2023 , while India’s growth could reach 6.3%.

APAC leaders eyeing climate and biodiversity risks
At the same time, risks related to climate change are also top of mind for many APAC leaders. That reflects the fact that APAC is the most disaster-prone region in the world, where the increasing impacts of climate change pose a rapidly growing threat. A total of 140 weather-related disasters struck the region in 2022, impacting 64 million people and causing damage estimated at US$57 billion.

Oceanian respondents rank extreme weather events at number four, the highest environmental risk of any sub-region, and environmental concerns are evident across the APAC. South-East Asian leaders scored extreme weather events sixth and were more concerned than the global average about biodiversity loss and pollution. Non-weather-related natural disasters were number 15 for East Asian leaders, above the global rank of 30. And Central Asian respondents ranked water shortages at number 10, far above the global rank of 24.

Pollution risks are also viewed differently across the different regions. APAC leaders ranked pollution risks (air, water, soil) at number nine in South-east Asia. In Oceania and Eastern Asia, pollution risks were less of a concern at 24.

The 2023 survey suggests that the pressure of dealing with the volume and intensity of short-term crises are weighing on leaders’ abilities to manage the looming threat from climate change. As such, failure to adapt to climate change did not receive the expected rankings in this survey.

How risks are evolving in the region
In general, economic concerns are trending away from unemployment and underemployment and toward labour shortages and inflation.

In last year’s EOS, debt crises in large economies featured in the top five for all regions in Asia. In 2023, leaders were slightly less concerned about the prospect of debt crises, although there were exceptions at a country level. In Australia, Indonesia, South Korea, Malaysia, New Zealand, the Philippines and Thailand, debt crises continued to appear in the top five risks.

In Central Asia, geo-economic confrontation, severe commodity supply crises, severe commodity price shocks or volatility and debt crises all dropped out of the top five risks between 2022 and 2023. New entrants to the top five risks this year include wealth and income inequality in South Asia and infectious diseases, which arrived in the top five in South-East Asia. Notably, cybercrime and cybersecurity dropped out of the top 10 risks this year, with the exception of Eastern Asia.

Geopolitics and debt divide regional leaders
Beyond economic and climate concerns, APAC leaders’ perception of risks are, perhaps unsurprisingly, quite varied. In stark contrast to their Central Asian peers, for example, Oceanian leaders ranked interstate conflict close to the bottom of their list at 31.

Meanwhile, Oceania’s high-ranking risks related to household debt are way down the risk list for South Asian businesses at 30. Leaders in South Asia instead ranked illicit economic activity high on their worry list at number eight (above the global rank of 19), but this risk is close to the bottom in all other APAC sub-regions.

Interconnectedness of risks across APAC and globally
While we identify and rate risks on a standalone basis, it is important to consider the interconnectedness of top risks. These will continue to exert varying degrees of impact across both the APAC region and globally. Accordingly, the interconnectedness of regional and global risks will always be an important consideration as we build our overall risk assessment.

Overall, economic, geopolitical and environmental risks are ranked relatively highly by APAC leaders compared to their global peers. Businesses and insurers should work closely with governments to manage these risks as a priority while also turning their attention to building resilience against long-term challenges. APAC countries must pursue sustainable growth, balancing gains in GDP and productivity with the effective management of environmental risks to secure their economic future.

Sid Medappa Regional Head of Risk, APAC, Zurich Insurance Email: sid.medappa@zurich.com.au

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