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Do regulatory detours disrupt or build your insurance future?

New capital regimes and financial reporting standards are redefining an insurer's societal roles in Hong Kong.

More than a decade after the 2008 global financial crisis (GFC), risk-based capital (RBC) regimes and International Financial Reporting Standards 9 (IFRS 9) or IFRS 17 are being introduced around the world to promote risk-driven and consistent measures in solvency reporting and profit reporting.

We are already seeing the results of the new measures in the form of: balance sheet management through in-force business and new business management, asset liability management, and restructuring or reinsurance. Insurers must manage these at the same time as navigating uncertain territory, such as the Belt and Road Initiative (BRI), the growth opportunities in the Greater Bay Area and the disruptive rise of insurtechs.

Framing the questions

Dealing with Hong Kong RBC (HKRBC) and IFRS 9 or IFRS 17 requires greater cooperation between the actuarial, finance, investment, risk management and information technology (IT) functions. As these teams work more closely together, they are facing new challenges from the “known knowns” to the “unknown unknowns”.

Insurers must tackle the detailed strategic, technical and practical considerations.

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What are the known-known considerations for HKRBC?

The overarching principle in developing the HKRBC regime is to protect policyholders while maintaining the competitiveness of Hong Kong’s insurance industry.1 The second quantitative impact study (QIS 2) found that the quality of asset and liability management varies vastly among insurers, although some common themes emerged for different types of companies.

To gauge these details, we conducted an independent QIS 2 result benchmarking2 on life insurers at the end of 2018, as highlighted below.

Solvency ratio under Hong Kong Insurance Ordinance (HKIO) and HKRBC bases

HKRBC solvency ratio improvement under sensitivity tests

EY - Do regulatory detours disrupt or build your insurance future?

Our benchmarking indicated that, generally, non-Solvency II insurers have a bigger duration mismatch than those for whom Solvency II applies; in particular, Chinese insurers have more short-term products with higher guarantees. Traditionally, most non-Solvency II insurers have not been managing their balance sheet under a capital regime similar to HKRBC and Chinese insurers have access to Chinese assets with higher yields in supporting the guarantees.

Given these known asset liability management issues, the table on the right offers strategic, technical and practical considerations based on the currently known requirements of the HKRBC regime.

When assessing the competitiveness of the Hong Kong insurance industry, we must consider the risk-adjusted return for shareholders while protecting policyholders by holding sufficient capital requirements to withstand 1-in-200 events. It might be straightforward to compare the requirements by individual components across different RBC regimes, but insurers should also consider the whole design more holistically — in particular, the minimum capital requirement level at which regulatory intervention would be triggered.

Strategic, technical and practical considerations4

EY - Do regulatory detours disrupt or build your insurance future?

As insurers move to the HKRBC regime, we expect them to evaluate their product design, product mix, investment strategies (in terms of asset type, rating and duration) and reinsurance strategies. These will evolve over time with the RBC regime, and are also influenced by other capital regimes undergoing a similar process of review and consultation.

What are the known-unknown considerations for the interactions of HKRBC and IFRS 9 or IFRS 17?

Insurers know the key requirements for the RBC regimes and the IFRS standards. What they do not know are the effects of managing the business using these new measures. Risk, actuarial and finance teams will all play a pivotal role in understanding their impact. To support this process, the table on the right sets out the similarities and differences between the two measures and their likely intersecting effects.

The interactions noted in the table on the right suggest that the new measures will create both financial impacts and practical challenges for insurers, including producing a bottleneck in the implementation timeline. These issues will be exacerbated by limited actuarial, finance, risk, investment and IT resources, and the complexity of data, systems and processes.

Risk, actuarial and finance functions need to understand the similarities and differences of solvency and profit reporting. They can assess the interaction through projecting the balance sheet using stresses and scenarios to test sensitivities.

HKRBC and IFRS 9/17
– key interactions
(preliminarily observed)6

EY - Do regulatory detours disrupt or build your insurance future?

What are the unknown-known considerations for in-force business or new business management, asset liability management and restructuring or reinsurance?

Risk-driven and market-consistent measures introduce increased volatility in balance sheet management. The consequences of these new measures will be unknown until they are implemented, likely, in 2022.9 However, insurers must start managing their balance sheet before implementation by first looking into their known key levers to their balance sheets.

The following framework of structured assessment will help insurers to understand the value drivers of their income statements and balance sheets.

Sample value drivers — in-force business or new business management, asset and liability management and restructuring or reinsurance

EY - Do regulatory detours disrupt or build your insurance future?

The unknown consequences of balance sheet volatility can be managed by projecting the balance sheet and testing its sensitivities to understand the volatility caused by the known levers.

Policyholders and shareholders are increasingly becoming more sophisticated. They not only assess an insurer’s solvency and profitability, but they also focus on the insurer’s ability to manage the volatility of its income statement and balance sheet from one year to another. To excel in the current era of changing regulatory and financial reporting requirements, insurers need to start transforming themselves. The goal is not just to report these metrics, but to use them to create values for stakeholders.

What are the unknown-unknown considerations?

Among the many unknown-unknown, insurers should be thinking about:


This massive infrastructure development is building a trading network over 150 countries across Asia, Europe and South Africa. The belt refers to overland infrastructure and the road refers to maritime infrastructure. Insurers have yet to determine the extent of the opportunities here, but they are starting to provide capital through infrastructure investment.

Other regulatory regimes, such as Solvency II, have already provided favorable capital charges for infrastructure investments as the asset duration matches well with the liability duration. Their guarantees by a sovereign government make such investments even more attractive, reducing the risk of counterparty default.

Unknown business opportunities for insurers may also arise from the newly established Greater Bay Area, which has deepened cooperation between Hong Kong, Guangzhou and Macau. The cooperation leverages the principle of “one country, two systems”, integrating a market with an estimated population of around 70 million people.10

Infrastructure investment opportunities11

EY - Do regulatory detours disrupt or build your insurance future?

Insurtech disruption

Companies such as Bowtie and CXA are already providing health products through online platforms. With increasingly sophisticated customers from Gen-X, Gen-Y and Gen-Z, insurtech value propositions are sound. But it remains to be seen if they can sell products online — rather than through traditional sales channels or increase their market share by passing sales commission savings to customers.

Protection gap

Rather than focusing on savings products, insurers need to focus more on closing Asia’s protection gap, which Swiss Re estimates to be USD 1.8 trillion.12

Scanning the horizon

Insurers need to prepare for large-scale initiatives and disruptions by going through their Own Risk and Solvency Assessments using horizon-scanning techniques. We are already seeing some insurers projecting their balance sheets under a range of stresses and scenarios to understand the impacts of previously unknown initiatives and disruptions.


The RBC regimes and IFRS standards will change the way insurers conduct their business through their product strategies and investment strategies for policyholders and shareholders. Specifically, they need to consider their strategic, technical and practical impact, and work out short-term, medium-term and long-term actions to respond to various considerations.

Contact us

EY - Jonathan Zhao

Jonathan Zhao

Managing Partner
Ernst & Young Advisory Limited
+852 2846 9023
EY - Tze Ping Chng

Tze Ping Chng

Actuarial Partner
Ernst & Young Advisory Limited
+852 2849 9200
EY - Florence SH Ng

Florence SH Ng

Ernst & Young Advisory Limited
+852 2849 9189
EY - Mi Namkung

Mi Namkung

Group/entity SME
Ernst & Young Advisory Limited
+852 2849 9184
EY - James Lin

James Lin

Ernst & Young Advisory Limited
+852 2849 9463
EY - Steve Cheung

Steve Cheung

Ernst & Young Advisory Limited
+852 2846 9049
EY - David Wong

David Wong

Ernst & Young Advisory Limited
+852 2849 9282
EY - Frery Winkel

Frery Winkel

Pillar 2/3 SME
Ernst & Young Advisory Limited
+852 2629 3899
EY - Han Chua

Han Chua

Optimization SME
Ernst & Young Advisory Limited
+852 2512 4112
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1. To achieve this overarching principle, three rounds of quantitative impact study (QIS) are being conducted by the Insurance Authority (IA). QIS 1 focused on designing the framework, QIS 2 focused on building the technical foundation and QIS 3 will focus on formulating policy decisions.

2. There were 24 insurers (18 of which are among the top 20 life insurers) who participated in our QIS 2 result benchmarking.

4. The strategic, technical and practical considerations are not exhaustive. Only a sample of items are listed here to give a flavor of our market observations.

5. The percentages in brackets represent the average proportion out of the total undiversified PCR based on EY QIS 2 result benchmarking on the 24 life insurers.

6. The key requirements and the key interactions listed are not exhaustive. Only a sample of items are listed here to give a flavor of our observations.

7. Risk margin is the additional reserve held for non-hedgeable risks.

8. CSM is the additional reserve held for profit to be released in the future.

9. With the exception of the first ORSA report (as part of HKRBC regime) to be submitted by HK insurers in 2021.

10. Source: “Overview,” Greater Bay Area,

11. Source: “Belt and Road Initiative,” The World Bank,

12. Source: “The health protection gap in Asia: a modelled exposure of USD 1.8 trillion,” Swiss Re Institute,