Risk Management and the Insurance Industry Outlook

Since our global economy took a hit by the financial tsunami in 2008, banks and financial institutions had been more serious towards risk management, hoping to get back on track in the unprecedented market fluctuations. With a gained level of financial crisis awareness while stepping into a relatively more stable situation in 2010, risk management teams are established and professionals of Financial Risk Management are in even higher demand.

Responding to Crises with Preventive Measures

The professional seminars organized by HKU SPACE College of Business and Finance have always been providing us with informative insights on various topics. The “Risk Management and Insurance Industry” seminar held on 13 October addressed on the hot issue was also a big hit with Dr. Raymond Yeung of Swiss Reinsurance invited to share his viewpoints. At the beginning of the seminar, Dr. Dominic Li, Consultant and Associate Head, College of Business Finance, HKU SPACE, delivered an introductory speech, “A series of policies were adopted by the U.S. Government to tackle challenges brought about by the crisis. The extent of the negative impact was thereby contained by these remedial actions.”

Dr. Li was an Economist before he became an investment banker. From the several financial crises took place in different areas of the world, he brought to our attention a very insightful question: "Why would there be a financial tsunami if those financial risk management theories and systems were already in place?" Were the theories not practical enough? Or was there something wrong with the methodology? These may not be some simple yes/no questions and no answers were provided during the seminar, but they worked well by arousing our interests towards the subject matter.

Parents are Managing Risks Every Day!

Dr. Raymond Yeung then used parenting as a parable of risk management to explain the concept in a lively and interesting way. He said, "Parents are in fact the best risk managers, they acquired so much experience by trial and error. For example, if they are too lenient, the child may have an open mind towards new things but sometimes accidents may happen. But if they set it too tight, the child may become hesitating to changes and have no courage to explore new opportunities."

Dr. Yeung also explained that the role of reinsurance companies is to provide insurance coverage and share responsibilities in case of catastrophies for insurance companies that provide life and medical coverage for individuals. Swiss Re is one of the biggest reinsurance firms with the longest history in the industry. "Risk management is actually everything about the availability of capital in case of financial risks. In the event of catastrophic incidents, like earthquakes, tornadoes, etc., common insurance companies may just be unable to deal with the huge claims filed in at the same time. This is where reinsurance companies come to help." Dr. Yeung explained.

Below are the three areas discussed in the seminar:
1) Impact on capital during financial crisis;
2) Recovery and future outlook of the insurance industry;
3) Changes in compliance regulations.

The Capital Market and Financial Crisis

Dr. Yeung brought us on a tour reviewing major crises took place, and then he focused on the recent financial tsunami originated from the problematic subprime market in the U.S. He described the subprime problem as a direct result of a loss of balance in the capital flow, and that the situation was known to the economists long before 2007. Dr. Yeung said, "The impact of the crisis on the insurance industry was far less than that upon the banking industry. According to a survey done by the Geneva Association in 2006, calculating the stockholders' capital value, the insurance industry suffered a lost of 26%, compared to the 68% of the banking industry. That is why the need for capital injection was also lower for the insurance industry."

The insurance industry has adopted a few new policies after the hit, as a move to enhance their crisis handling abilities. That includes adjustments on their investment portfolios, an increase in assets liquidity and selling off non-core business lines, etc. The compliance regulations for the insurance companies are getting tighter globally, requiring them to increase stand-by capital to deal with any possible crisis in the future. Naturally, the needs for more reinsurance solutions are higher than ever.

Asian Market Outlook

Despite the huge challenges ahead in the U.S. and the European markets, the outlook of insurance industry in China, however, is optimistic because of the rapid growth of the China market. Adding to that, the regulatory system in China is also more sophisticated than that in the U.S. Anyway, the European countries have already proposed a new regulatory standard based on the risk factors - Solvency II. This will help to build a safer and brighter future for the industry, according to Dr. Yeung.

Dr. Yeung pointed out that there are people who worried about an outbreak of similar subprime mortgage crisis in Asia, and according to an analysis of credit spread over the years, he also thinks that the present scenario of investment market is very much alike with that in 1998/99. He reminded investors to stay alert as the possibility of another financial crisis still exists. Taking into consideration warnings made recently by Joseph Yam Chi Kong, the ex-Chief Executive of HKMA, it is easy to understand why financial risk management becomes such a hot topic here in Hong Kong. It may really be a smart move for us to equip ourselves with knowledge in risk management.

Apart from the MSc in Finance degree course, HKU SPACE has just launched a new programme - Postgraduate Diploma in Financial Risk Management. There will also be a series of professional seminars regarding risk management to be held in October and November. Please check our event list in our Facebook Page (http://www.facebook.com/hkuspacebusiness) for more information.

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