Insurers retreat from risk amidst tighter capital rules

South Korean and Taiwanese firms are extending asset duration to protect solvency positions.

Asia-Pacific insurers are facing higher costs, more complex investment decisions and stricter capital requirements as geopolitical tensions, inflation and cyber risks affect the sector.

The ratings agency said energy-driven inflation was limiting the scope for interest rate cuts and keeping financial markets unsettled, according to S&P Global Ratings. 

Insurers are responding by managing the duration of their investments and reducing their exposure to changes in interest rates. 

Equity market swings could also cause greater volatility in insurers’ capital positions, particularly in South Korea and Taiwan.

Regulatory changes are adding to the pressure. Japan introduced an economic value-based solvency regime at the end of March 2026, whilst Taiwan adopted the Insurance Capital Standard in January. 

China also extended IFRS 17 accounting requirements to the wider insurance industry from the start of 2026.

S&P said insurers may make greater use of debt and hybrid securities to maintain capital strength. 

Reinsurance remains an important way to reduce risk, with access to reinsurance capacity still available across the region.

Investment strategies are also changing as insurers seek better returns.

Insurers in Southeast Asia are increasing allocations to equities and alternative assets because of low yields and strong competition. 

Chinese insurers are expected to gradually raise their equity exposure over the next two years, whilst Japanese insurers are moving away from loss-making bonds and domestic shares towards higher-yielding bonds and alternative investments.

In South Korea and Taiwan, tighter capital rules are pushing insurers to reduce investment risk and hold longer-term assets. 

The charts in the report show that fixed income remains the largest asset class for insurers outside China, although the share of other investments has increased since 2020.

Natural disaster losses are rising because of inflation, urban development and climate change, but most large insurers are expected to remain financially resilient. 

S&P estimated that about 80% of the 30 Asia-Pacific insurers and reinsurers with the highest exposure could withstand a one-in-250-year catastrophe.

Their average surplus capital after such an event would fall to about 15%, from nearly 20% before the stress. About half could withstand a one-in-500-year event, supported by an average reinsurance rate of 52%.

However, S&P lowered its assessment of the financial risk profiles of six of the 30 insurers by one or two levels because of increased risks, including greater exposure to natural catastrophes. Most of the changes applied to reinsurers.

Cybersecurity is another concern as insurers increase their use of artificial intelligence and digital systems. S&P said stronger governance, tighter controls and further investment in cyber protection would be needed. 

Cyber breach events reported by Asia-Pacific insurers remained low compared with other sectors in the region as of 1 June 2026.

Japanese insurers are also making greater use of asset-intensive reinsurance, which transfers both insurance and investment risks to a reinsurer. 

Rising interest rates since 2022 have helped reduce the cost of these arrangements and improve capital efficiency.

More Asia-Pacific insurers are establishing reinsurance subsidiaries in Bermuda, although regulators are expected to increase their oversight because of counterparty and concentration risks. 

Japan accounted for the largest Asia-Pacific share of Bermuda-based reinsurance contracts at the end of 2024.