HK insurance regulator stands firm on capital ratios

Hong Kong’s insurance regulator has stressed it is not about to lower capital requirements for firms in the industry despite the threat they will not be able to match their long-term liabilities.

Insurance commissioner Annie Choi acknowledges that a prolonged low interest-rate environment would impact the asset valuations of insurers, whose portfolios are typically bond-heavy as they seek stable returns.

“When interest rates are low, the capital requirement is higher as it is based on the future projection of liability,” she noted at last week’s Pan-Asian Regulatory Summit in Hong Kong.

The city’s Office of the Commissioner of Insurance is in talks with the Actuarial Society of Hong Kong to identify solutions to this problem. Separately, it is also in the process of developing a framework for a risk-based approach that insurers can adhere to, with an open consultation period due next year.

But Choi confirms that lowering capital requirements – insurance firms are presently required to maintain a solvency margin ratio of 150% – is not an option.

While action on capital requirements is not a concern in the short or medium term, Choi agrees that regulators worldwide would become more concerned should rates stay low for a prolonged period.

Moreover, there is the risk that such an environment would spur insurance companies to engage in some sort of financial engineering in an effort to boost returns.

But Choi notes that not many insurers in Hong Kong offer guaranteed return products, and says she has not seen any trend to suggest they were seeking to raise risk exposure by chasing returns.

The European Commission is poised to implement Solvency II in January in a drive to raise regulatory standards, having carried out a review of insurance firms’ capital adequacy regime.

However, Choi clarifies that Hong Kong will not look to impose a system from overseas, and will seek to develop a model that is workable in the local market. It is flexibility that is needed, not uniformity, she says.

“We have 158 insurers, both global players and small local players. We believe that transplanting an overseas system to Hong Kong might not be suitable to our own market. We need to develop something workable in Hong Kong,” she concludes.