The Asian life insurance problem - Who holds the debt matters

Some risk lessons which are not given enough attention:

• The biggest risks are usually in the places where investors are not looking. 
• Just because a risk has been identified does not mean it will then go away.
• The holders of the assets and liabilities in any market matter.
• Weak firms can never be marginal buyers 
• We are better prepared for a repeat of the last crisis not the next crisis

I was turned onto the risk of Asian life insurers by reading the blog posting of Brad Setzer, see Council on Foreign Relations "Follow the Money" blog. His views were only further reinforced after reading the IMF Global Financial Stability Report for October 2019. While this information is not new, it represents all of the big risk lessons we have highlighted above.  

US debt is being increasingly financed by cross-border flows especially from Taiwan, South Korea, and Japan. Their excess savings is being moved around the world and is disproportionate for their size. This creates risks both in the corporate and currency market through their hedging. As marginal buyers, a change in their asset allocations will impact corporate debt markets. 

Few would think to focus on Asian life insurers as the key buyers of dollar denominated debt. Even if we now know these key players in the debt market, the risks do not change. Their buying decisions will still impact spread levels. A weakening of their balance sheets or just a change in relative risk to reward will have cross-market effects. European bank buyers of CLOs and mortgages were drivers for the last Financial Crisis. Asian life insurers are playing a key role in current debt markets.