Life insurers have set their sights on APAC synthetic risk transfer transactions amid an implementation of the Insurance Capital Standard (ICS) that will render solvency charges more attractive and a pickup in the APAC pipeline as the region incorporates the Basel output floor.
According to Fitch ratings, increased SRT demand is expected in non-European markets, particularly in APAC, where insurance regimes are adopting the new Insurance Capital Standard (ICS) standard. The risk-sensitive and ratings-based solvency charges will make well-rated securitisation tranches more attractive to invest in from a risk-reward standpoint.
Adopted in 2024, the Insurance Capital Standard (ICS) is a globally comparable risk-based measure of capital adequacy for international active insurance groups. The purpose of the ICS is to create a common language for supervisory discussions of group solvency to enhance global convergence among group capital standards.
Monsur Hussain, head of markets research at Fitch ratings comments: ‘’ICS is a way to calculate solvency capital standards for the whole balance sheet and works better from a duration matching standpoint for liability driven investments.’’
He continues: ‘’Life insurers in this context would use ratings to gauge investment credit risk and synthetic risk transfer can be tailored to meet duration needs. Ratings are needed under the Asian ICS regimes otherwise the invested tranches won’t be capital efficient for life insurers.’’
Similarly, an insurer investor notes: ‘’life insurance firms tend to invest in SRTs from the asset side of the balance sheet which would put them in the minority since most insurers invest from the liability side with these being reinsurers, company market insurers and Lloyds market players.’’
He continues: ‘’since Corporate SRTs tend to have a tenor of 5-7 years they can be more suitable assets for life insurers to invest given that life insurers have longer liabilities than P&C insurers. So there is less of an asset liability mismatch. Moreover, ratings can help reduce those capital requirements even further.’’
Most insurers don’t invest from the asset side of the balance sheet for well understood reasons. One reason is the punitive capital charges for securitisation positions under the EU’s Solvency II and the EU is where insurers go for size and opportunities.
Another reason is that they are non-life or credit insurers so they are forced to address sudden events such as floods or earthquakes that will in turn be subject to abrupt claims that have to be paid out. Hence, they need instruments on the asset side of the balance sheet that are much more liquid than synthetic securitisations. Additionally, when SRTs sit on the liability side the main consideration is restricted to credit risk as opposed to market risk.
Another issuance driver comes from the sell side with the phasing in of the Basel output floor from APAC banks. The output floor sets a limit on the amount by which a bank’s internal models can reduce its overall capital requirement for credit risk compared with the requirement that would apply under the standardised approach.
The floor means thicker tranches that have to be sliced into smaller pieces. Insurers are well placed to invest in the mezzanine portions of the SRT deals for a duration that matches their liabilities.
APAC banks have led the implementation of Basel four. Australia, Indonesia and South Korea adopted full or parts of Basel four since January 2023 followed by China, Japan and Singapore in 2024, and Hong Kong and Malaysia in January 2025.
One notable exception is India, which has published consultations on the standardised approach for credit risk and market risk in 2025. Fitch expects this jurisdiction to complete the roll-out of the final Basel rules by the end of 1Q27.
The APAC pipeline has been picking up as a result with deals from SMBC last year (see: SRT Database| RTRA Intelligence Ltd) and a pending one from DBS that is in the early stages (see: Pipeline Alerts | RTRA Intelligence Ltd).
However, Fitch ratings analysts have noted that banking groups in most APAC markets have been able to absorb increases in capital requirements stipulated under the final Basel standards due to prevailing conservative regulatory approaches and less extensive use of internal models within the region.
Moreover, jurisdictions have national discretion when implementing a local version of the Basel rules. Key areas of national discretion include narrower or broader definitions of what counts as capital to absorb losses and variations in rules for how risk weighted assets are calculated such as different standardised risk weights.
Nevertheless, for APAC banks such as DBS growth via mergers is becoming key and this is where synthetic risk transfers will be crucial as has been observed in Europe and the USA (see: Mergers eyed – 06/02/2025 | RTRA Intelligence Ltd).
Another potential limitation for APAC issuance is the fact that life insurers are a minority of an already small insurer investor base.
EU SRT investor breakdown as of June 2023
Source: ECB, Fitch ratings
Consequently, the extent to which they can fill the gap in APAC remains to be seen and measured.
