With Hong Kong’s risk-based capital (RBC) regime slated to take effect in about two years’ time, insurance companies caught off guard in the second impact study could potentially take advantage of the refined rules in the latest round to stay out of capital inadequacy.  

Having finalised the technicalities on matching adjustment, the Insurance Authority invited companies to participate in the study which focuses on such a mechanism in August. The data submission period ends soon, on November 29.

The mechanism could make a difference to the general health of local insurers as close to half of them became insolvent under the second study. But as the studies progress, clarity on relief measures such as matching adjustment has been provided.

The matching adjustment mechanism could potentially help Hong Kong insurers increase their financial resources through the application of a liability discount rate, which would both reduce the liability value and lower the credit spread capital charge.

Under the refined rules, Thibaut Ferret, senior solutions director for Asia Pacific, Aberdeen Standard Investments, told AsianInvestor that such a mechanism reduces liability levels by increasing the liability discount rate, which is dependent specifically on the features of an insurer’s asset and liabilities.

“The level of additional spread on the liability discount rate is based on a formula, and depends on different factors specific to the insurance company,” he added, “[including] level of assets, credit rating of the assets, duration of the assets and liabilities, ability of asset to match liabilities, eligibility of assets, liability cash flow profile and equity exposure.”

With credit-spread risk bearing the biggest weighting (26%) of the stress parameters used to calculate risk charges under the regime, the matching adjustment mechanism also allows insurers to mitigate such a charge on the asset side if they apply a credit spread stress on the liability discount rate, Ferret said.

Overall, the mechanism could improve an insurer’s solvency ratio by up to 10%, depending on the company, an insurance specialist at a US fund house said.


But Hong Kong insurers should not just rely on the matching adjustment mechanism to lift their solvency ratios due to the limitations of such a method. Only life insurers are allowed to take advantage of the mechanism.

“One element hasn’t been sufficiently assessed in my view, the supply of the matching adjustment eligible assets is limited," said the insurance specialist, adding: "The characteristics of the assets that are eligible to that are pretty tight.” 

The assets range from senior unsecured vanilla bonds, municipal bonds with no prepayment options, to loans with make-whole call provisions. Given the limited supply of eligible assets, the competition for these assets could result in decreasing yields, which would make it even more challenging in the current low-rate environment, the specialist noted. 

The long-term solution that insurers should take to cope with the new rules is to review their asset allocation more holistically. But that will take time, he added.

“It took more than 10 years for European insurers to transition their portfolios to Solvency II. I expect a shorter cycle in Hong Kong due to the lower duration of the assets, but it will definitely take more than five years for portfolios to adapt to RBC 2."

For example, allocation to equities in Europe has decreased from about 15% to below 5% in the last 10 years. Given that the proposed RBC rules impose higher risk charges on riskier assets, such as equities and private equity, Hong Kong insurers that hold these assets are likely to scale down their exposure slowly, the specialist predicted.