HK's new RBC regime deepens collaboration between investment, ALM teams
Investment chiefs at AIA Hong Kong, Chubb Life, and BOC Life stress the importance of greater integration between investment and asset-liability management (ALM) teams to ensure portfolios are well managed under Hong Kong’s new risk-based capital regime (RBC).
However, they also highlight the need to maintain some separation in order to avoid tensions when conflicts in views arise.
“It is very important — under all these types of [RBC] regimes — to have much greater integration and communication between investment, product, and actuarial teams,” said Ben Rudd, chief investment officer (CIO) at Chubb Life, at AsianInvestor’s 15th Insurance Investment Briefing in Hong Kong on September 5.
Hong Kong’s RBC rules, which took effect on July 1, require insurance companies to strengthen asset-liability management (ALM) as well as risk oversight of investment portfolios, in a balancing of regulatory requirements and financial returns.
Before the RBC rules, Hong Kong insurers’ investment teams could just build their portfolios based on product designs, Rudd noted.
Nowadays, there needs to be much greater interaction among investment, product, and actuarial teams at the start of the actual design or conceptualisation of products, he said.
“That really is a drive which is coming through RBC-type regimes. Because otherwise, as an insurer, you can very, very rapidly create some real risk on your balance sheet,” said Rudd.
“And I find it incredible that consumers in Asia are quite savvy. If you see a mispriced insurance product for whatever reason, they seem to know it and buy a lot of it, which I think is a fantastic reflection in terms of market intelligence in Asia by consumers, but it creates real problems sometimes for insurance companies as well,” he added.
Chubb Life is the international life insurance arm of American insurer Chubb. Chubb Life’s business focuses on Asia Pacific and Latin America, navigating through different risk-based capital regimes.
It doesn’t have in-house portfolio managers. It rewards mandates to external managers. Hence, the insurer designs mandates holistically to align investment strategies with products and ALM.
INTEGRATED TEAMS
AIA
AIA was one of the early adopters of Hong Kong RBC before the rules were officially implemented. At AIA Hong Kong, the ALM function falls under the CIO — which used to be separate teams — to ensure integration under RBC and IFRS 17 accounting rules, said Hong Kong CIO Sam Morgan.
The new regime also requires investment professionals to have stronger ALM capabilities, he noted.
“A good chunk of CIOs now are essentially ALM people, as opposed to investments people,” he said. “My guess is — particularly now that Hong Kong RBC and IFRS 17 are in place — that will be a trend that we'll continue to see.”
This echoes AsianInvestor’s article in July that recent new hires in Hong Kong’s insurance industry reflected such a trend.
For Xing Tao, chief risk officer at BOC Group Life Assurance Company, whether the ALM team sits under actuarial or investment, it must connect finance, investment, and actuarial to provide a complete perspective.
BOC Life
That said, Morgan stressed maintaining some level of team separation to avoid tensions.
“To a certain degree, portfolio managers need to focus on the return once they have their mandates and the setting of the asset allocation,” he said.
STRESS TESTING
During market volatilities and uncertainties, when insurers usually stress test their portfolios against different scenarios, stakeholder management beyond investment is also crucial, said Chubb Life’s Rudd.
“It is not just to understand the portfolios themselves and how they interact with the ALM. It's also stakeholder management,” he said.
Investment strategies must be truly understood by a broader range of people beyond investment, ALM or actuarial teams.
“When something goes wrong, everybody's looking at it. Everybody has a view. And sometimes a lot of people are surprised by what actually the results are actually going to be,” he said.
Tim Antonelli, head of multi-asset strategy for insurance at Wellington Management, said the trend towards greater cross-team integration also occurred in the US under similar rules.
“On top of that, rating agencies actually put a good amount of weight in the ability to integrate the investments in context of the liability,” Antonelli said.
“When you're getting a credit rating implication for that, you have to demonstrate to your regulator,” he said. “They want to know that you're considering the liability when you're considering the investment decisions for sure.”
Ultimately, BOC Life’s Xing said responsibilities fall under the chief financial officer (CFO), who will oversee the solvency and the company’s overall financial position.
“That's why we say those departments need to work together to help the whole company stabilise the financial position,” he said.