FTLife CIO sees ETFs as useful tool in new regulatory era

New World Development’s FTLife endorses the use of ETFs for swift exposure adjustment and risk management, particularly in the face of Hong Kong’s forthcoming risk-based capital regime.
FTLife CIO sees ETFs as useful tool in new regulatory era

FTLife Insurance sees exchange-traded funds (ETFs) as effective liquidity providers and hedging tools for better asset and liability management (ALM) under Hong Kong’s new risk-based capital (RBC) regime.

With the liquidity of ETFs, life insurers can switch exposure “very quickly” as needed, for de-risking purposes, said Richard Chan, chief investment and ALM officer at FTLife, the insurance business of Hong Kong conglomerate New World Development.

Richard Chan, FTLife

“If the portfolio consists of a bit of ETFs, they become very handy. They can do solvency-driven de-risking in a very quick period of time,” Chan shared during a panel discussion at AsianInvestor’s Insurance Investment Briefing Hong Kong last week. 

Insurance companies may have some solvency-driven — instead of macro or market-driven — de-risking actions from time to time, and this is where ETFs can come in handy, Chan noted.

Meanwhile, insurance regulators will challenge insurers on whether it is practical to reduce the Time Value of Financial Options and Guarantee (TVOG), to de-risk and improve ALM in response to the market movement.

“Again, with ETFs as part of the portfolio, the portfolio has the liquidity to improve this kind of dynamic strategic asset allocation (SAA),” Chan added. 

ETFs can also work as an effective hedging tool with a low tracking error, in which both the underlying assets and the hedging tool are pointing to the same or similar index, Chan said.

Noting that Hong Kong's RBC rules are not finalised on whether there will be any limitation on the basis risk of insurers’ hedging strategies, Chan said an ETF overlay with some options can qualify as “safe harbour” hedge with low basis risk.

Basis risk refers to the risk that arises due to imperfect correlation in the values of assets and liabilities as interest rates change.

Under an RBC regime, effective ALM aims to minimise this basis risk by carefully matching the durations and sensitivities of assets and liabilities.

The Hong Kong RBC regime is expected to come into effect for insurance companies in 2024, which necessitates capital reserves proportional to mark-to-market risks.


Connie Chan, BlackRock

Echoing Chan’s views, Connie Chan, head of Greater China iShares distribution at BlackRock, believes there will be an increased demand for transparency and reporting in insurers’ portfolios as the RBC regime and new accounting rules, the International Financial Reporting Standards (IFRS) 9 and 17, come into effect.

The new IFRS rules require greater transparency around insurers’ financial assets and liabilities.

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BlackRock has worked with more insurance companies in implementing a look-through approach in their portfolios, particularly on bond funds and bond ETFs, since the European version of the RBC regime, the Solvency 2, came into effect in 2016.

“We see [that] the trend will come to Asia,” Connie Chan said at the same panel discussion.

With the market volatility in the past few years, she noted that the importance of liquidity has come into favour for vehicles like ETFs, especially bond ETFs, which is a market that BlackRock expects to grow to $6 trillion by 2030.

Connie Chan shared some use cases of bond ETFs that BlackRock has been working on with global insurance clients.

Unlike insurers’ traditional hold-to-maturity approach, bond ETFs enable them to implement relatively short-term and agile fixed income strategies as the market moves in part from tactical asset allocation.

Strategically, when insurers need to park assets in cash or cash equivalents to get liquidity, ETFs can add to that liquidity while also effectively fulfilling long-term SAA by providing bond market exposure, she said.

Lastly, when an insurer needs to move from one active manager to another, ETFs can provide interim beta before assets are fully invested, since the transition will involve time and transaction costs, she added.

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