However, in terms of seeking investment returns, Asian insurers are operating within similar market trends as their global counterparts. To illustrate, long-term government bond yields in the US and Euro area have declined an average of 200 to 300 bps compared to the 10-year average prevailing before the Global Financial Crisis. In Asia, long-term government bond yields are, on average, 50 to 300bps lower than pre-crisis levels. Asian insurers also have to face increasing costs of capital4, compounding the pressure to generate higher returns. 10. Addressing the duration mismatch between assets and liabilities has been a persistent challenge for insurers in Asia, due to a shortage of long-dated instruments as well as restrictions on investments in some jurisdictions. A number of governments in Asia, including Korea, Taiwan, China and Singapore, have responded by issuing long-dated bonds; and easing restrictions on specific assets classes that insurers can hold. Notwithstanding this, the supply of high quality government and corporate bonds remains limited relative to the strong demand from a wide spectrum of investors for these “safe haven” assets, such that insurers can be crowded out. Regulatory reforms 11. Finally, let me touch on the oncoming regulatory reforms, such as Solvency II, which will also play a significant role in shaping insurers’ investment strategies. Almost 80% of the respondents to a recent Goldman Sachs survey listed regulatory capital treatment as the predominant non-market related concern. 12. Insurance regulatory reforms are converging towards a principles-based and fair value approach for the total balance sheet.

Lower returns in the new normal 8. First, lower returns in the new normal. There has been increasing acceptance that the era of low yields is not just a cyclical phenomenon, but is in fact the New Normal. In advanced economies, policymakers are faced with conflicting challenges as they seek to maximise economic growth on the one hand; while having to pursue fiscal consolidation and financial sector reform on the other. Meanwhile, emerging economies will grapple with tighter financial conditions and by implication, slowing growth when unconventional monetary policies are unwound. The outlook is highly uncertain as the normal cyclical recovery template cannot be applied to structural deleveraging episodes such as the one we are currently in. Although bond yields are expected to rise from their current low levels, it is likely that insurers will have to settle for much lower returns from fixed income investing in the years ahead than that achieved in the pre-crisis period. Over the next 20 years, the slowing demographic outlook for the world will also exert pressure on economic growth and lower the expected returns for most asset classes. Shortage of long duration assets 9. Next, a shortage of long duration assets. Asia has often been singled out as the bright spot in the global insurance industry, as rising incomes and lower than average  2  Allianz Global Investors estimates. 3  OECD Global Insurance Statistics. 2  BIS central bankers’ speeches  insurance penetration in many markets offer rosy opportunities for growth.