Why are protection products driving value?

December 30 2019 by Nick Ferguson

Falling bond yields, volatile equity markets, trade tensions and geopolitical uncertainty have put even more pressure on Asian life insurers during 2019, but most have experienced steady growth.

With large legacy books of guaranteed savings products, companies in the region are accelerating efforts to re-focus strategies towards products that emphasise protection rather than savings as interest rates have continued to decline in most Asian markets.

Chinese life insurers’ published results for the first six months show a 12.7% improvement in EV.

This strategic shift continued to produce significant results in China and India during the first half of 2019, according to Milliman’s latest report on embedded value (EV) across Asia.

Chinese life insurers’ published results for the first six months show a 12.7% improvement in EV. 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 growth.

VNB
The value of new business (VNB) is more varied, with China Pacific, China Taiping and New China Life all suffering declines, but the average is still a healthy 10% thanks to strong gains from AIA, PICC Life and Prudential.

In India, all companies included in the report published VNB gains of 20% or more and there was an average EV improvement of 7.6% as a result of companies’ continued focus on writing profitable protection business — and helped by solid economic growth, favourable demographics and improving insurance penetration. Indeed, India saw the strongest equity market gains across Asia in the first half, touching a record high in April, though it experienced a major fall in July 2019.

Japanese risk-free yields are declining severely.

The half-year data is patchy in some countries, but Milliman’s last full-year report showed that markets with large books of guaranteed business and unfavourable interest rate environments were performing worst. EV in Korea fell by 15%, Taiwan was down 5% and Japan down 2%.

Japanese 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.

Some insurers in Hong Kong improved their VNB thanks to more efficient distribution during the first half, but Milliman notes that the reductions in new business sales due to the continuing protests were mainly felt in the latter half of the year.

Capital regulations continue to evolve throughout Asia, but the varied approach to reporting EV makes comparisons difficult across the region, and even within countries in some cases. Among Asian insurers, 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 a better understanding of the inherent values and strengths of companies in the region.

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