FWD’s CIO hopes HK’s RBC rules find the right balance

In an exclusive interview with AsianInvestor, the CIO of FWD Group explains why new risk charges need to be reasonable if Hong Kong insurers are to fulfil their duties.
FWD’s CIO hopes HK’s RBC rules find the right balance

Hong Kong’s proposed new risk-based capital regime is stirring debate among local insurers as the new rules take concrete shape and the impact on asset allocation becomes clearer.

While some, such as HSBC Life, remain sanguine, others have aired concerns that the new rules could make some local insurers insolvent after a second Quantitative Impact Study showed the average solvency ratio falling to 112% from 293%.

In the third and final QIS rolled out in August by the city's Insurance Authority, some of these stipulations have been relaxed. 

Whether or not they are still too punitive in the eyes of some insurers is unclear. But Paul Carrett, the chief investment officer of FWD Group, is in no doubts that the industry will “absolutely get to the right place” with further discussions, he told AsianInvestor in an interview.

Paul Carrett
Paul Carrett

And it is essential that the regime is done right, he said, because insurance companies are crucial sources of long-term funding for local companies.

“Particularly in the Asian context, finding long-term investors in local currency is frequently difficult,” Carrett said.

“If you want to borrow long-term money or you need patient equity money, insurance companies are really important transformers of retail policy holders' premiums into institutional money that can be invested across the spectrum from government bonds to equity, private equity, [or] real estate,” Carrett told AsianInvestor.

“If we get RBC right, we can continue to fulfil that function for society,” he said.


Related to that is the industry's role as buyers of longer dated credit, a staple instrument for insurers to manage their asset-liability duration.

“We are natural fixed-income investors because we often offer guarantees or effectively locked-in premiums for long-term life insurance contracts implying fixed cash flows on the liability side,” Carrett said. 

“Consider Hong Kong, it's a US dollar market; here the biggest buyers of long-dated corporate credit are insurance companies and pension funds,” he said.

Investing in longer-dated corporate bonds and supporting real companies form a key part of an insurer’s role, he told AsianInvestor. And local insurers risk being priced out of the market if these assets become too expensive due to higher capital charges.

To help avoid that, the capital charge parameters for credit spreads on longer-dated bonds have been relaxed. For example, for triple-B rated 20-year zero coupon bonds they have come down to around 28% under QIS 3 from 33% under QIS 2, said Thibaut Ferret, senior solutions director for Asia Pacific at Aberdeen Standard Investments.

That's in addition to a downward revision in risk charges on property holdings, to 25% from 44%, Ferret added.

Introducing a risk-based capital regime is important because setting the bar too low can encourage bad behaviour in the market, leaving insurers with too much risk to shoulder, which can eventually feed through to product pricing and put policyholders at risk, Carrett said. 

But striking the right balance is no easy feat.

If the rules are overly stringent, they could “put sand in the wheels [of] the efficient investing players in the long-term savings market," he told AsianInvestor.

“I have sympathy for regulators considering higher capital charges for longer-dated corporate bonds, [but] making these charges too low would mean that insurance companies [would] under-price for this risk,” Carrett said. “The capital charge should be appropriate, and also the credit spread we get paid should be appropriate to the amount of capital we have to hold against that risk.” 

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