Hong Kong RBC proposals could lead to inconsistency – Axa Asia CRO

Axa Asia chief risk officer flags concerns about proposed risk-based capital regime in Hong Kong

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Hong Kong: CRO claims new solvency rules mean some firms' capital calculations would be unrealistic

Hong Kong's proposed new solvency rules could lead to hidden inconsistencies in how firms calculate capital, according to Axa Asia's chief risk officer (CRO).

Mark Stamper, regional CRO and chief life actuary for the firm in Hong Kong, says companies would be given too much scope to decide their own valuation methodologies under the risk-based capital regime proposed last year.

"There could be some room for companies to interpret valuation methodologies in different ways and use company-specific approaches," says Stamper. The concern is that firms could make the mistake of "hidden or inherent conservatism, or optimism, in their valuation", he adds.

In September 2014, the Office of the Commissioner of Insurance (OCI) in Hong Kong released a consultation paper on a new capital framework for the insurance industry. The regime would aim to "strengthen the protection of policyholders by relating capital adequacy to the risk exposure of the insurer," according to the OCI's paper. Currently, insurers in Hong Kong hold capital on a formula basis.

Firms submitted responses to the OCI's paper at the end of 2014 and are now focused on the upcoming quantitative impact study planned for later this year.

To reduce the effect of volatility and pro-cyclical trends on insurers' balance sheets, the OCI suggests alternatives to using a current market risk-free rate to discount liabilities. This differs from the approach under Europe's Solvency II rules, seen by many in the industry as an international benchmark for risk-based capital regimes.

"Due to the potential volatility that could arise under this approach, especially during anomalous market conditions, a 'market-referenced' discount rate that makes reference to both the current and historical yields may be more appropriate," states the paper.

Stamper says: "It is implied that valuation might not be based on up-to-date economic data, especially where [the OCI] talks about yield curves. The consultation paper asks whether [insurers] are going to use a historic average, which moves away from being economic. This may not be the favourable way to go because the basis by which you are assessing capital might not be realistic, which is then in conflict with the way in which you actually want to manage the business."

The motivation for taking a less market-consistent approach might be the inadequacies of Hong Kong's smaller insurers, which "currently only perform amortised cost liability valuations and may not have sufficient technical knowledge to perform a market consistent valuation", according to the OCI.

But Stamper says: "I don't think there should be too many concessions just because a company is small. Certain strengths come with regulation that are desirable. If that means some consolidation of small businesses, that might well be a good thing."

Meanwhile, European insurers and regulators might hope to achieve equivalence between Hong Kong and Europe to align capital models, but this is dependent on Hong Kong enforcing a regime that is consistent with Solvency II standards.

The fundamentally different approach proposed by the OCI to the valuation of liabilities makes equivalence hard to imagine, says Stamper. "There would need to be significant lobbying from European insurers with Hong Kong-based operations, as well as the desire from the industry and regulators for Hong Kong to be considered equivalent. I haven't seen this desire expressed by anyone, so I can't see equivalence being very likely," he says.

Axa Hong Kong serves more than one million customers in Hong Kong and Macau. It is the largest general insurer and sixth largest life company in Hong Kong.

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