RBC rules may shift Hong Kong insurers to bonds: Aviva Investors

Singapore’s asset growth in 2019 and 2022 could spark promise for Hong Kong.

Drawing from Singapore’s experience with its risk-based capital (RBC) framework 2, introduced in 2020, Aviva Investors suggests Hong Kong insurers may shift towards holding more core government bonds to efficiently match liabilities.

In Singapore, insurers saw a 15% rise in life insurance assets and over 30% in general insurance assets between 2019 and 2022, underscoring the potential for balance sheet growth under similar regulatory conditions.

The framework, which took effect in July 2024, requires insurers to carefully evaluate their balance sheets and optimize asset allocations to meet regulatory requirements. 

This shift is driving a need for Hong Kong insurers to improve their liquidity management, especially as they navigate exposure to private asset funds that, whilst offering benefits, also present liquidity challenges.

However, Hong Kong's RBC requirements differ from Singapore’s RBC2, notably in capital charges for certain asset classes. 

For instance, Hong Kong insurers face a 40% capital charge on developed equity risks, compared to Singapore’s 35%. 

These variations are expected to influence each market’s asset allocation differently. Despite these differences, industry experts anticipate that liquidity risk management will increasingly be a focus for Hong Kong insurers as regulatory scrutiny grows.

Liquidity strategies such as holding capital-efficient, liquid assets could provide insurers with a buffer against market volatility. 

This approach, which could include short-term government bonds or high-quality covered bonds, may offer higher yields whilst satisfying the new regulatory requirements. 

The Hong Kong Insurance Authority’s RBC framework does not differentiate fixed-income asset types, potentially allowing insurers to seek out these more capital-efficient alternatives.

Ultimately, Hong Kong’s RBC adoption signals a regulatory tightening aimed at fostering resilience in the insurance sector, pushing insurers to prioritise liquidity management whilst balancing yield and capital efficiency.