Curbs needed on insurers taking too much risk
The deepening financial crisis has raised doubts about whether regulators should continue to allow commercial banks and insurance firms to get into risky investment businesses.
The United States government was forced last week to increase its rescue of troubled American International Group.
AIG's insurance operations have sold millions of policies in the US and its collapse could lead to policyholders marching in the streets to protest their losses.
In Hong Kong, AIG unit American International Assurance is the city's largest life insurer with more than 2 million policies and 20 per cent of the market. The firm has unveiled a restructuring plan that would hive off AIA from AIG, while AIA is planning to seek a listing.
Another target of government bailouts, Citigroup, is a financial giant doing commercial, private and investment banking as well as asset management business.
These players are just too big to collapse and the government has no choice but to rescue them.
While Hong Kong has not seen problems of a similar scale, our regulators should take the US as a good reference. A key question is whether we should continue to let financial institutions offer one-stop financial services.
Many commercial banks have aggressively expanded into wealth management and investment in recent years while some are venturing into proprietary trading.
Such a business model has helped banks and insurers earn fat profits, but also created a potential problem.
If their investment units suffer huge losses, the government has no choice but to offer a rescue package as it has to protect depositors and policyholders.
In such circumstances, it makes sense for the government to impose more curbs on these players to get them to focus on their core business instead of taking on too much risk.
We had tended to think big was beautiful. Now, regulators may need to rethink that approach. Instead of encouraging these financial houses to diversify, they should make them more focused to ensure their commercial banking and insurance businesses are separate from any risky business they may enter.
Advice from the expert
Our podcast and video guest this week is Naomi Denning, the head of investment consulting for Asia-Pacific at Watson Wyatt.
Ms Denning joined Watson Wyatt in 1994 to manage its investment consulting department in Hong Kong. Two years later, she was promoted to her current role.
Today, she will talk about the investment market and analyse the global fund markets.
Ms Denning said last year was a bad year for all pension markets, with Hong Kong, Britain, Australia, Canada and Ireland experiencing the greatest declines.
A Watson Wyatt report shows Hong Kong pension funds had lost an average of 31.5 per cent, the worst ever. It found 53 per cent of pension trustees had cut the risk profile of their portfolios and the same percentage of fund managers say the crisis would last one to two years.
