Sun Life HuBS CIO lays out implications of HK's new RBC regime

The insurer sees ways to tackle the capital charges being implemented later this year, the insurer’s CIO said at AsianInvestor’s Insurance Investment Briefing in Hong Kong.
Sun Life HuBS CIO lays out implications of HK's new RBC regime

Hong Kong insurance companies are preparing their portfolios to accommodate the changes a new risk based capital (RBC) regime will bring when it comes into effect in the second half of 2024.

Shiuan Ting van Vuuren
Sun Life International HuBS

“Depending on the types of equities, bonds and other assets, all of these allocations will have implications on your balance sheet," Shiuan Ting van Vuuren, chief investment officer at Sun Life International HuBS, said at a panel discussion at AsianInvestor’s Insurance Investment Briefing Hong Kong on March 19.

Highlighting some key areas where the new regime will have an impact on strategic asset allocation, she noted that equity investments will be significantly impacted as they will have high capital charges.

“Depending on whether it is developed or emerging market equities, you could get quite high capital charges at 40% or 50%,” van Vuuren said.

She pointed out that with the right kind of hedging framework and collaboration with the asset-liability management department, allocation to equities can still make good sense, albeit less attractive than fixed income.

She said that with the incoming regime, insurers will need to carefully assess equity investing against the capital charges they will incur.

Introduced by the Hong Kong Insurance Authority (IA), the Hong Kong RBC regime aims at strengthening Hong Kong policyholders' protection by ensuring the regulatory capital requirements of insurers reflect their actual risk exposures and incentivises improved risk management.

Recognising the regional insurance hub role that Hong Kong plays, it is also the first regulation to ever apply to insurance groups headquartered or having operations in Hong Kong.


Whereas equities might be the most obviously affected by the RBC regime, there will also be an impact on fixed income -- the preferred asset class of insurance companies.

The capital charges will vary depending on the duration and the credit rating of fixed incomes assets, van Vuuren pointed out.

If an insurer has too much credit risk on its portfolio, it could consider a barbell approach with a focus on government bonds with relatively longer duration.

“You do need duration, because if you don't, you're going to get a PCR (Prudential Capital Requirement) -- a capital requirement component -- in there. You can supplement the government bonds with shorter corporate bonds, for example,” van Vuuren said.

She also pointed out a model where creating a fixed income portfolio with a higher credit rating would make it possible to have longer duration on fixed income assets. This could ensure a better match with the duration of policy liabilities.

“For instance, the regime will penalise you if you go for 30-year bonds rated triple-B; you would instead want to get 10-year bonds with that rating,” van Vuuren said.

There is, nevertheless, still some ambiguity about some parts of the upcoming risk regime.


Van Vuuren also flagged some capital charges incoming for green bonds.

She said investors should look at this potential opportunity, as the regulator has proposed a favourable capital charge treatment -- 10% -- on green bonds.

“I will be eagerly awaiting to see what sort of qualifying criteria the Insurance Authority presents in terms of how green bonds can get this kind of favourable capital treatment,” van Vuuren said.

A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects.

These bonds are typically asset-linked and backed by the issuing entity’s balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations.​

Hong Kong has launched the Government Green Bond Programme which is an initiative of the government to promote the development of green finance, especially the green bond market, in Hong Kong.

Proceeds raised under the programme are used for financing government projects with environmental benefits.


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