Review your investment and ALM strategies, Hong Kong regulator says
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Hong Kong’s insurance regulator has urged insurers to revisit their investment and asset and liability management strategies in the midst of current uncertainties in the market due to inflationary pressure and rising interest rates.
Tony Chan, associate director for policy and development at the Insurance Authority, said after a decade of low interest rate environment, which was challenging for life insurers as fixed income investments are an important earning stream, “bond yields are finally increasing under the recent interest rate normalisation”.
He said the regulator expects insurers to revisit their investment and ALM strategies, for instance their asset allocation, hedging strategies and reinsurance.
“Over previous years of low interest rate environment, we are aware that insurers are seeking yield improvement and investing in private equities. With interest rate hikes, insurers may need to review the risk-adjusted return of the investment profile,” he said during a speech at the Actuarial Society of Hong Kong’s 20th Appointed Actuaries Symposium on 30 November.
Chan added the upcoming risk-based capital regime in the city, known as HK RBC, should better reflect foreseeable and relevant risks and is also more responsive to ALM measures.
“Hence, for insurers with better ALM, it is generally expected the solvency position would be less volatile under such market movements.”
Increasing interest rates could have a positive or negative impact on RBC solvency positions, he added, depending on insurers’ asset and liability duration matching.
Chan also warned of the implication for insurers’ liquidity in a high inflation and high interest rate environment.
He said liquidity risk is not prescribed under the RBC’s risk modules but the regulator expects insurers to consider this risk in their own risk and solvency assessment processes.
“While we are glad to see that many insurers have considered liquidity risks, a few of them are seen to have specifically designed stress scenarios, for example a massive surrender event with implications for illiquidity in investment portfolios under market stresses,” Chan said.
“It is crucial for insurers to assess liquidity risk and develop liquidity planning, and we hope to see more insurers embed liquidity risk management into ORSA processes towards the implementation of the RBC,” he added.
When does the RBC take effect?
Hong Kong expects to implement the RBC in 2024.
The IA is working with the Hong Kong government on the drafting of amendments to prescribe detailed requirements of the rules.
Chan said: “We aim at introducing the amendment bill into the Legislative Council in the 2022-23 session. After the passage of the amendment bill, we will conduct a consultation on the draft rules together with necessary guidelines for implementing the RBC, with a view to commence implementation of the RBC in 2024.”
In December 2021, the regulator said it would allow early adoption ahead of the legislative amendments for insurers carrying on long-term business if they are at an advanced stage of implementation, to better promote ALM.
The HK RBC regime aims to strengthen policyholders' protection by requiring that the regulatory capital of insurers reflects their risk exposures.
Similar to capital rules in other jurisdictions such as Europe’s Solvency II and China Risk Oriented Solvency System (C-ROSS), the HK RBC has a three-pillar approach, covering quantitative capital requirements, qualitative aspects on enterprise risk management, and reporting and disclosure.
Are you reviewing your investment and ALM strategy to reflect the current market environment?
