Wenzhe Sheng
Senior Product Manager of Regulatory Tech
Wenzhe joined the Clearwater Analytics team in 2022 and is based in our London office. He has more than a decade of experience in investment operations, accounting, and regulations through his experience at J.P. Morgan and GSI-backed life insurance firms. During this time, he was a working member and directly engaged with UK regulators on key regulatory initiatives, such as UK PRA’s Solvency II reform and the Bank of England’s Transforming Data Collection programme.
As a Senior Product Manager, Wenzhe oversees Clearwater’s UK and EU insurance regulatory product and is an expert in helping our clients navigate through the complex and evolving regulations in Europe.
As global financial markets are intrinsically interconnected, the Risk-Based Capital (RBC) regime has emerged as a global regulatory requirement. (See our recent blog: Risk-based Capital Regulatory Changes Create Fresh Challenges in 2024 for Hong Kong and Singapore Insurers). Most recently, in 2024, the Hong Kong Insurance Authority implemented HK RBC. Since its implementation, RBC has presented challenges and opportunities for insurers that are subject to the regulation, and the asset managers that serve them. The RBC regulatory regime is a set of rules designed by financial service regulators that require insurance and financial institutions to hold a minimum amount of capital based on the level of risk associated with their assets. Developed with European and international standards, the RBC regime has level set risk management and asset performance equivalence across jurisdictions and facilitated the flow of investment allocation between APAC, Europe and the US. In this article, we explore how RBC compliance is reshaping cross-regional investments and highlight the need for strategic adjustments for firms in Europe and APAC. We will also analyse how Clearwater‘s expertise can facilitate compliance and improve operational efficiency for firms with regulatory requirements, using Hong Kong as an example.
The RBC regime intends to drive investment direction and global competitiveness
APAC regions, such as Australia, Hong Kong, and Singapore have already adopted RBC measures like Solvency II; while countries including Japan and Thailand are set to implement their own RBC/ICS measures by 2025/2026. This demonstrates international alignment toward simplifying cross-regional regulatory standards. While there are local nuances influenced by each country’s economic policies, history, and financial market behaviour, the overarching alignment fosters a more cohesive regulatory environment. Insurers and Internationally Active Insurance Groups (IAIGs) must also additionally adopt the ICS, which is related to the RBC regime.
The RBC regime adopts a three-pillar framework and incorporates considerations such as an insurer’s portfolio sensitivity, which is subject to many parameters resulting from the variation of their risk appetite and insurance product mix. Taking Hong Kong as a recent adopter, RBC affects Hong Kong insurers, reinsurers, captives, Lloyd’s syndicates, third country branches and subsidiaries, as well as the financial eco-system surrounding them, such as their asset managers.
Since its implementation on 1 July 2024, we have observed a significant surge in outbound investment interest from local insurers, driven by the political and economic dynamics across regions and the need for portfolio diversification. The HK RBC shares similarities with other RBC regimes; however, it diverges in several key areas. Notably, it does not differentiate between public and private debts in the context of credit spreads and maturity bands. This approach facilitates investments in non-traditional assets such as private credit, infrastructure, and green assets, which can yield high-quality, long-duration, and predictable cash flows, ultimately delivering better risk-adjusted returns relative to capital requirements.
Regulatory frameworks are instrumental in shaping the macroeconomic landscape of investments. By harmonising regulatory regimes across different regions, asset owners and managers can create synergies that enhance their capacity to evaluate risk-adjusted returns more effectively. This alignment not only simplifies investment processes but also cultivates a more stable environment for making well-informed decisions.
Investment implications of RBC for insurers: Designate your assets with a purpose
As investors and asset managers explore new opportunities beyond their traditional investments, they inevitably face a critical challenge: “How can I remain agile and adapt to evolving regulatory requirements to stay competitive in my portfolio allocation?” Addressing this question requires a thorough understanding of these regulations and their integration into daily operations, decision-making, compliance, and monitoring processes.
Asset liability management
- This process involves an evaluation of asset quality, duration, and yields while ensuring alignment with liabilities. Such alignment is crucial for hedging against market volatility and maintaining stable, predictable cash flows.
Capital and solvency position
- Various factors influence capital and solvency positions, with market risk being a major contributor to volatility. In the aftermath of COVID-19, sharp increases in interest rates and persistently-high inflation have exacerbated volatility and created mismatches within insurers’ portfolios, leading to a rapid decline in their capital and solvency positions.
Liquidity management
- There has been an increasing focus on liquidity management from regulatory bodies such as the FSB and IMF. This emphasis is also reflected in Hong Kong, where the IMF’s Financial Sector Assessment Program technical report highlights the need for local authorities to strengthen their liquidity management framework. Insurers must improve transparency and forecasting methods to prepare for stricter liquidity reporting requirements. This includes addressing aspects such as collateral management, derivative hedging, short-term liquidity needs, and the quality of asset liquidity and cash flows.
Partnering for success
European insurers and asset managers operating across jurisdictions in APAC face the challenge of navigating a complex RBC regulatory landscape. This landscape must significantly influence both compliance and investment strategies. By leveraging advanced compliance solutions, such as those presented by Clearwater, firms can streamline their reporting processes, optimise their portfolios, and sustain a competitive edge in cross-regional environments. Contact Clearwater today to explore solutions that streamline your RBC compliance and position your firm for success.