Insurance companies' financial strength — can three major indicators clearly reflect it?

In recent years some local insurers have run into trouble — for example, Tai Wo Life was restricted from writing new business. Although the insurance regulator ultimately acted as a backstop to steady the situation, the incident still prompted much reflection — are life insurance companies really safe? When insurance advisers sell policies they often praise their own company’s financial strength, citing large scale, strong capital base, and high credit ratings, but are these reference indicators truly bulletproof?

1. “Too Big to Fail” — does being large mean no risk?

After the 2008 financial crisis, regulators worldwide generally tightened supervision of financial institutions to reduce customer risk, and multinational life insurers were no exception. Another argument is that the larger an insurance company is, the greater its ability to diversify asset risk.

Currently multinational life insurers such as AIA (HKEX: 1299), AXA (EPA: CS), Manulife (HKEX: 945), and Prudential (HKEX: 2378) are listed around the world; the general public can look up these companies’ market capitalizations from public sources to understand their scale. One can even learn financial information from company financial statements, including annualized new premiums and embedded value, which reflects the value of in-force policies and net asset value (see Table 1).

In addition, policyholders can also learn from the Insurance Authority's website about certain operating data of multinational life insurers' local subsidiaries; they can also easily check from public information which shareholders own some local insurance companies and whether their ownership changes hands frequently.

Some say: "If an insurance company is too big to fail, then its insurance products are safe to buy..." But history tells us that large life insurers also carry the risk of collapse — for example, Australia's HIH Insurance was liquidated in 2001, AIG came close to bankruptcy in 2008, and mainland China’s Anbang Insurance was also liquidated in recent years.

2. Is higher solvency safer? It turns out insurers describe it differently

Another key indicator of a life insurer's soundness is solvency. According to the Insurance Authority, an insurer must keep the amount by which its assets exceed its liabilities at not less than the solvency margin level prescribed by the regulations. The purpose of this requirement is to provide reasonable protection to policyholders when an insurer faces unforeseen circumstances and there is a possibility that its assets may be insufficient to meet its liability risks.

Hong Kong's current solvency margin adopts a standard "fixed ratio" model, with only two risk factors for long-term insurance — actuarial reserves and risk capital — and these are used in terms of monetary amounts to roughly represent risk.

Currently insurers are not required to disclose solvency to the public; only some insurers choose to disclose from time to time. For example, Tai Wo Life once disclosed a solvency ratio of 450% as of the end of June 2018; FTLife Insurance reported a solvency of 364% as of the end of 2022, but these figures are based on the current capital framework.

Another point to note is that because insurers can be divided into multinational insurers and local insurers, the standards for the capital ratios they disclose are not uniform and are difficult to compare; a higher number does not necessarily mean greater safety (see Table 2). Consumers must pay attention to how it is calculated.

Earlier this month, the Legislative Council passed the the Insurance (Amendment) Bill 2023, which establishes a legal framework for implementing a risk-based capital framework for Hong Kong’s insurance industry. The risk-based capital framework assesses factors such as market risk, life and general insurance underwriting risks, and operational/business risks through a modular approach, making it more commensurate with each insurer’s risk profile while providing a consistent calculation standard for the industry.

10Life believes that once the risk-based capital framework is implemented, the Insurance Authority should require insurers to disclose the relevant data in their annual reports and to upload those annual reports to the Insurance Authority’s website in a timely manner, so that consumers can view insurers’ capital positions and changes in solvency under the same standard.

3. Does a high credit rating mean it’s good? Some companies have “gone bust”

Credit ratings are another indicator consumers can refer to. Life insurers will engage rating agencies to conduct ratings when assessing their own financial strength or when they need to issue debt to raise funds, and the ratings can reflect whether an insurer has a strong balance sheet or faces potential default risk.

Currently, the three major rating agencies—Moody's, S&P, and Fitch—each use their own criteria to rate different types of companies. They generally have about 20 notches and use letters from “A” to “D” to indicate debt-paying ability. The best is “AAA” or “Aaa”, while the worst is “C” or “D”. For example, in the table below, “Aa2” indicates stronger debt-paying ability than “Aa3”, and “Aa3” is safer than “A1” and “A2”. In addition, rating agencies also assign rating outlooks, which can be negative, positive, or stable.

However, if an insurance company is relatively small, or is only the local arm of a multinational insurer, there often may not be relevant rating information available for consumers to consult. And even if an individual insurer receives a credit rating, it is not necessarily available for the public to view; sometimes there are many different rating categories — besides financial strength, there may also be debt ratings such as long-term debt, short-term debt, subordinated debt, etc. — which can easily cause confusion.

Another point worth noting is that rating agencies have been criticized by the market for many years. In particular, before the financial crisis some rating agencies gave relatively high credit ratings to US subprime assets and the investment bank Lehman Brothers; those assets ultimately collapsed, and the rating agencies were criticized for failing to identify the companies' serious financial problems and were even fined by regulators.

Licensed insurers are strictly regulated — no need to worry unduly

Finally, although insurance advisers often tout their company's strong financial position and list the indicators mentioned above, it should be remembered that these indicators can often be interpreted in different ways and are for reference only.

The Hong Kong Insurance Authority has been rigorously supervising licensed insurers, so to some extent policyholders need not be overly concerned about an insurer's financial strength. Before deciding to purchase an insurance product, you should instead understand your own needs, determine whether the product can meet them, and compare similar products on the market. If you have questions, consider asking several licensed insurance intermediaries for their opinions.

Note: Last updated: 7 August 2023.

This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.