Similarly, the investment decision is not an isolated one, but one that has to be made in view of the firm’s overall business goals, business strategies, capital needs, liabilities structure and risk appetite. Insurers would gain from establishing a robust Enterprise Risk Management (ERM) framework to manage these factors holistically. Good execution on this front will entail close coordination and communication between the investment function and other key functions, including actuarial, risk and finance, to ensure that dynamic trends on both investment assets and insurance liabilities, as well as the resulting impact on earnings and balance sheet volatility, continues to be monitored and managed dynamically. Asia driving global insurance growth 18. The ability to manage investment risks skillfully is even more essential in the Asian context, due to its rapidly growing share of insurance business and attendant risk exposures. 19. Over the next decade, Asia will continue to rise in importance in the global insurance arena. Munich Re for example, estimates that Asian premiums can register healthy growth of about 8% per annum, and account for almost 40%6 of global premiums by 2020. This is underpinned by positive structural factors such as a growing middle-class and rising affluence, aging demographics, and the continued industrialisation, trade and infrastructure development in emerging Asia. 20. In particular, I would like to focus now on how insurers can play a long-term role in Asian society and economies in two pertinent areas: one, financing Asia’s retirement funding gap; and two, financing Asia’s long-term investment needs. Financing Asia’s retirement funding gap 21.

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.