Asian accounting and regulation is taking a new step. Indeed, many countries in the region are in the process of putting in place new risk-based capital regulation similar to the European Solvency II, and also, new accounting standards: IFRS 9 and IFRS 17.
Managing mismatches between IFRS 9 and IFRS 17
While IFRS 9 sets a body of accounting standards for financial instruments for all listed companies, IFRS 17 is the new accounting standard for insurance contracts. IFRS 9 has been in place since 2018 but European insurers can defer application until 2022 when IFRS 17 will enter into force. The challenge for asset managers is to adapt their investment process and tools to the new requirements from IFRS 9 and help insurers manage accounting mismatches between the two norms.
Amundi met recently its Asian clients to give advice on that issue. The links between Crédit Agricole Group’s insurers and Amundi support a natural position of trusted insurance asset manager. “We’re used to manage assets under regulation constraints and have a long experience with insurers,” explains Jean-Renaud Viala, Head of Insurance Solutions Engineering. “We adapt our clients’ asset allocations and find investment solutions to maximise risk-adjusted performance of their multi-asset insurance portfolios.”
Classification of assets and liabilities is a critical point and stresses the need for close communication between the insurer and its asset manager. The asset managers’ expertise in issuer selection and monitoring, knowledge of investable instruments, and ability to manage duration mismatches can help limit the volatility of the financial result account and the balance sheet due in particular to market changes.
Solvency II framework: a challenging regulation
“Solvency II is a European regulation that serves as a benchmark,” Mr. Viala says. “We expect Asian countries to adopt a similar type of regulation. Our Asian insurance clients and counterparts are keen to learn from Amundi’s confirmed experience: we’re happy to be a knowledge-sharer on this topic.”
Amundi has worked closely with peers and insurers to build appropriate answers ever since the first discussions regarding implementation of Solvency II. Dedicated teams have leveraged on all the Group’s expertise and resources, including in-house tools, to design asset allocations that would optimise risk-adjusted return under solvency capital requirement (SCR) constraints. Risk mitigation and compliant reporting were also carefully set up.
In the context of the current market where the search for return remains complex, managing the tail risk of the equity market is key. Amundi has adopted for some clients a protected equity strategy to lower the volatility and maximum drawdown of equity investment, therefore improving volatility of the SCR.
“Our European experience is relevant and useful for Asian insurers with an evolving regulation where capital charge for equities will be significantly higher,” Mr. Viala says.
Risk management is a major concern for European regulators. As Asian insurers turn to the same kind of regulations as Europe, they are also looking at managing the environmental risks of their assets. Announced last October, Amundi’s portfolio managers will systematically integrate environmental, social and governance (ESG) ratings in their processes by 2021. This ESG plan, like the establishment of similar accounting and prudential norms, is to have a long-term vision that anticipates all economic and financial risks.
Key figures – Source: Amundi
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The information contained in this document is deemed accurate as at April 30, 2019. Data, opinions and estimates may be changed without notice. Document issued by Amundi Asset Management, a French “société par actions simplifiée”- SAS with capital of 1 086 262 605 euros - Portfolio Management Company approved by the AMF under number GP 04000036 — Registered office: 90 boulevard Pasteur — 75015 Paris — France — 437 574 452 RCS Paris - www.amundi.com