Reinsurer sees higher risks ahead for firms
Insurers should brace themselves for the possibility that their risk profile could rise, reflecting the potential fallout from the United States debt ceiling standoff and from the euro-zone crisis.
Clarence Wong, Asia director of client markets with Swiss Reinsurance, yesterday said insurance companies should assess the potential investment risks of holding US and European sovereign debt.
However, he said this would be tricky because insurance companies did not have enough risk-free choices. He warned of the potential for 'concentration risk' as insurers focus on a handful of countries.
The major rating agencies have threatened to downgrade the US government's prized AAA credit rating in the event that it defaults on its debt after August 2, the deadline for raising the US debt ceiling. Fitch recently downgraded Spain's credit rating to AA from AAA.
Wong said that insurance companies, which, under regulatory requirements, must invest in sovereign bonds from their home countries, could face falling asset values if and when markets decline. He said some insurance companies might need to hedge against inflation and market risks. Insurers could also face rising payouts for medical claims.
Principal Financial Group's Asia president, Rex Auyeung Pak-kuen, said the concentration risk would be more relevant in a few months if Europe continues to weaken and face more defaults among peripheral euro-zone economies.
However, he said there were enough products available for insurers, as core European markets such as Germany, France and Switzerland remained strong despite economic weaknesses in Italy, Greece, Ireland and Spain.
Bernard Chan, president of insurance firm Asia Financial Holdings, recommends sovereign and corporate bonds issued by Singapore and Australia. He also recommends Japanese corporate bonds, Hong Kong quasi-government bonds and corporate bonds, and yuan bonds issued by mainland banks.
Sally Wong Chi-ming, chief executive of the Hong Kong Investment Funds Association, said insurers and pension funds should reconsider US and European sovereign bonds, which are traditionally viewed as being risk-free. She ruled out a structural change in investment flows, however, because emerging markets could not match the depth and the size of developed economies' sovereign debt markets.
According to data from Fitch in June, few economies from the economically robust Asia-Pacific region are rated A or above. Singapore is the only Asian country with the top AAA rating, while Hong Kong, Japan and Australia have AA ratings. China, South Korea, Taiwan and Malaysia are rated A.
The number of authorised insurers in Hong Kong at the end of March. Total gross premiums of the industry reached HK$184.6 billion in 2009