HSBC Life is well-placed to weather the introduction of new risk-based capital (RBC) rules in the coming two years, but the insurer may have to further diversify its portfolio into more alternative assets to weather the adverse effects of the ongoing US-China trade war, said Hong Kong chief investment officer William Chan.

The proposed RBC regime, which has been dubbed HKRBC, is modelled initially on Europe's Solvency II regime. Most industry participants think the new Hong Kong rules will largely align with its framework.

Speaking to AsianInvestor via an emailed interview, Chan was sanguine that his HSBC Life, which he has previously said has around $40 billion in assets under management, will not be heavily affected by the new rules.

William Chan
 

"The introduction of the HKRBC [rules] is not expected to materially change our allocation to listed equities. In the latest QIS (quantitative impact studies), the risk charge applicable to global equities appears to be broadly aligned with Solvency II," Chan said.

He added that HSBC Life has applied a proprietary risk-based economic capital framework derived from Europe's Solvency II principles for many years. Chan said that this leaves it strongly positioned relative to HKRBC’s requirements.

His confidence contrasts with some other insurance firms in Hong Kong, which are having to consider major changes to their investment portfolios, especially equity positions, to maintain solid solvency ratios.

The new rules adopt a risk based three-pillar approach that covers quantitative and qualitative aspects on enterprise risk management, own-risk and solvency assessment and disclosure. For regional and local insurers, the proposed HKRBC standard would cause far higher capital charges on equity investments and long-term bonds with relatively low ratings.

The proposed capital cost of equity holdings under the new regime would range from 40% for developed-market stocks to 50% for private equity, which are in line with European charges under Solvency II. But this comes as a big change to a city whose current regulatory regime doesn't place any risk charges on insurers' investments, according to Moody's. 

Hong Kong’s Insurance Authority is testing the impact of the new rules via proposals on insurers through quantitative impact studies, and is set to introduce the new regime in 2022.

When asked whether HSBC Life would have to adjust its exposure to lower-rated long-dated bonds too, as the risk-charge against them rises, Chan was more noncommittal. He only said that RBC rules favour certain alternative credit assets above long-dated bonds and they consider potential uses of derivatives are considered case by case.

He also declined to specify whether HSBC Life plans to ramp up allocations to US-denominated assets – despite this foreign currency asset facing lower risk-charges than other offshore options under the looming RBC regime, only saying that HSBC Life's portfolio is "already very diversified across geographic regions".

TRADE WAR CONCERNS

While HSBC Life looks well-grounded in terms of incoming rules, Chan was more cautious about his view of the ongoing US-China trade war on its $40 billion investment portfolio. 

"In reality, no one has perfect foresight on how short term geo-political events and the corresponding market sentiment will evolve,” he said. “For insurers and other investors alike, it is important to ensure that the investment portfolio is sufficiently diversified and avoid taking on unduly concentrated risks or bets for or against the odds of one particular risk event.”

Practically speaking, Chan noted that this meant investing more in private asset classes.

"A large part of investment deployment over the medium term is intended towards further diversifying our investment exposure in the alternative investment space – including and not limited to infrastructure debt, real estate loans and private debt across different sub-strategies, private equity, property, etc," Chan noted.

HSBC Life declined to provide AsianInvestor with the asset breakdown of its portfolio.

Geopolitical events tend to be unpredictable and can fuel significant short term market volatility. Where HSBC Life has strong conviction about the risk-reward offered by tactical investment opportunities, it is mindful to keep such positions within the tactical asset allocation ranges and risk budget, he added.

HSBC Life takes a fairly active approach to managing its investment portfolio. The insurer has internal teams that manage its cash equity and bond portfolios, while its invests a large part of its alternative investments via external funds or managers. 

Chan noted that the insurer has invested a larger proportion of its assets in external funds or managers, but did not specify how much this was.