S’pore and regional insurers to look more to private credit market for yield, say observers

SINGAPORE - Local and regional insurers will likely turn more to the less liquid private credit market and other private asset funds in the coming few years as they seek to improve yields, observers said.

They noted that the declining interest rate environment and current greater market volatility make it harder for insurers to earn better investment returns.

This affects how well the insurers can balance their assets and liabilities.

In the region, insurers in Hong Kong, Japan and Taiwan are expected to feel the heat more as regulatory changes that require them to better match assets and liabilities are rolled out in a couple of years.

Singapore, being a front runner in implementing an updated version of the risk-based capital framework in 2020, could show the way for others in the region, said Aviva Investors’ senior investment director Alastair Sewell in an interview.

After the revised framework was rolled out here, he noted that there was a modest increase in government bond holdings among five large life insurers – AIA, Great Eastern, Income Insurance, Manulife and Prudential.

Together, these five make up the bulk of the market.

There was also a modest increase in the five firms’ cash and deposit exposures.

However, there was a significant rise in exposure to the riskier and less transparent private credit market.

Private credit refers to loans issued by a private entity and extended to privately held firms.

A Bain Capital report in September 2024 estimated that Asia’s non-bank credit market, which includes private credit, is valued at roughly US$12 trillion (S$15.7 trillion) to US$13 trillion – just over 20 per cent of the Asian credit marketplace, which is US$63 trillion.

Mr Vladimir Zdorovenin, PineBridge Investments’ head of international insurance solutions, said in a report in late August that more insurers are turning to private credit for its predictable income, and to diversify their investments.

But he noted that Asia-Pacific insurers often view this asset class as complex, so they avoid it. This means there is room for this segment to grow in the region.

A Moody’s report released in May 2024 said insurers in the West park more of their funds in private assets such as mortgage loans and real estate than their counterparts in Asia-Pacific.

As at end 2022, private asset allocation in the US was 38 per cent, compared with 18 per cent in Europe, and 9 per cent in Japan, said the report.

Moving forward, Mr Sewell said he is convinced there will be a shake-out in the private credit market at some point.

“There is a huge amount of capital chasing private credit at the moment, there are new entrants into the private credit space, and while recession is not in the base case for Aviva Investors at the moment, we do see recession as a downside risk,” he said.

Globally, insurers’ higher exposure to the private credit market, which is illiquid or not easily converted into cash, has caught the eye of regulators who are concerned about financial stability risks.

The Monetary Authority of Singapore is also keeping close tabs on the situation.