As insurance firms worldwide grapple with how new risk-based capital (RBC) rules are affecting their investment portfolios, some Asian markets – such as Hong Kong and Korea – are lagging in their preparations for the new environment, say industry observers.
In the face of increased market volatility and falling profits, insurers globally are setting up frameworks to help them manage their corporate and investment risks on a longer-term basis. Such moves are driven in part by regulators imposing tougher capital requirements – such as Europe’s Solvency II – which make it more difficult for insurers to take on more risk to boost portfolio returns.
Malaysia, Singapore and Thailand are probably the most advanced in Asia when it comes to RBC rules, said Tino Moorrees, Hong Kong chief executive at BNP Paribas Investment Partners. Those markets are basing their frameworks on Solvency II, which came into force in January, and creating their own regimes known as RBC2.
Paul Sandhu, head of investment solutions at Conning Asia Pacific in Hong Kong agrees that in terms of solvency, “Over the past few years, Thailand and Malaysia have operated in a more advanced solvency regime than larger markets of Japan and China because they’ve adapted key principles from Solvency II”.
Meanwhile, Hong Kong has been singled out as being surprisingly slow off the mark for a major financial centre, and Korea is also seen as lagging on this front. Insurance firms in those jurisdictions are – presumably as a result – not preparing sufficiently for any future changes, said Moorrees. There is "a kind of wait-and-see attitude” in those markets, he added.
Insurers should start trying to look at how the future will be and look at what kind of implications this will have for their portfolio, he noted. “You have to try to optimise your return on capital, but a lot of companies are not thinking too clearly about this.”
It may be some time before Hong Kong has new RBC rules since a new independent insurance regulator is being formed, with transitional arrangements unlikely to be completed before the end of 2017.
Martin Lister, partner with law firm Simmons & Simmons in Hong Kong, told AsianInvestor, "Hong Kong is a fair way behind other developed insurance markets on solvency regulation. The Insurance Authority has already put out an initial consultation paper on RBC and issued his conclusions and is now endeavouring to develop the necessary rules and progress RBC, but I suspect that this programme has got caught up in the establishment of the new independent insurance regulator – it will be a while before the new RBC regime is introduced in Hong Kong."
Sandhu’s explanation for Hong Kong’s slow uptake of new solvency rules is that Hong Kong is not really a country; “It’s more like an airport. It’s a hub set up to help companies do business where regulations are only now becoming more of a priority to keep up with other evolving markets."
He says that since a lot of the biggest companies in Hong Kong are from Europe, they have already adopted European standards. "But for companies headquartered here and have many subsidiaries, it becomes difficult to adapt to all local regulations in the decision making process. Hong Kong, as a function of those things, has been a little slow.”
The reason some of the southeast Asian countries are at the forefront of change in solvency rules is partly due to foreign companies setting up there and showing the locals how it’s done. "The regulators have been given a boost in their learning through the incorporation of European standards that are already in place. So, they have a test case where they can see what works and what doesn’t. That’s why Thailand and Malaysia have recently had a more advanced solvency regime than even China up until when China went online with C-Ross in 2016," said Sandhu.
AsianInvestor’s September magazine will contain a special report looking in detail at issues of importance to Asian insurers' investment teams.