APAC insurers face tighter capital buffers

Some markets are not required to hold explicit capital against the illiquidity risk of private debt investments.

Asia Pacific (APAC) regulators’ updates to risk-based capital frameworks for insurers have prompted discussions on private credit investments, mergers and acquisitions (M&A) activity, and changes in investment strategies, according to Fitch Ratings. 

Monsur Hussain, head of Financial Institutions Research at Fitch, noted that insurers in Hong Kong, Japan, Korea, and Taiwan are not required to hold explicit capital against the illiquidity risk of private debt investments. 

As a result, these investments can yield an illiquidity premium compared to actively traded bonds. 

Terrence Wong, senior director of Insurance Ratings at Fitch, highlighted that smaller insurers with weaker market positions might face rising capital costs, potentially outpacing returns from operations. 

This could accelerate M&A activity, particularly with the adoption of IFRS17 in APAC, which has improved the transparency and comparability of insurers' financial metrics.

Fitch reported that new capital regimes have likely reduced capital buffers for APAC insurers, prompting increased issuance of capital bonds to strengthen adequacy. 

The pace of issuance will depend on market conditions and interest-rate trends.