Fresh out of college, Peter Tam Chung-ho, now the chief executive of the Hong Kong Federation of Insurers, bought a sterling-denominated life insurance policy in the 1980s. And, unwittingly, a ticket to the pound's roller coaster.
When Tam bought the policy, the pound was at a low HK$8.37. Its peak came in 2007, at HK$16.59, and has since tapered to the current HK$12.40. Any swing in the pound's value - and there have been plenty in the past 25 years - means two things for Tam: estimated valuation loss or gain on the policy at maturity, and change in premium amount because he has to convert Hong Kong dollars to pounds to pay the premium.
At the current exchange rate, Tam stands to make a valuation gain of 52 per cent - as of now - on the policy as the pound has got 52 per cent stronger than when he bought it. But then he is also paying 52 per cent more in premium. And how much he will finally make will depend on the exchange rate when the policy terminates.
Tam's story has a lesson for those planning to buy yuan-denominated insurance policies that many banks in Hong Kong have started selling: hitching your wagon to a star currency may sound like a bright idea but it is better to concentrate on the core product because the attendant currency uncertainties might not be worth the trouble.
'Investors who purchase policies denominated in other currencies, including those who go for yuan policies, should remember the currency risks involved,' Tam advises. 'This is why such policies are better as a long-term investment.'
In recent months, the buzz over the yuan's possible appreciation has spread to the insurance sector. Big names like BOC Life, HSBC, MassMutual Asia and Citibank have introduced yuan products.
BOC Life, the first to launch yuan insurance late last year, is the biggest seller. It now sells 60 per cent of all yuan insurance in the market.
