Author
Bowtie Team
Updated on
2025-06-12
Disclaimer: This article is translated with the assistance of AI.
Are insurance company rankings reliable? Many consumers pick big names for peace of mind, but actuaries like Mr. J reveal the inside scoop on smarter choices!
Be Cautious When Comparing Standardized Premiums
Given that some long-term premium products (like savings insurance) allow for a single lump-sum payment, standardized premiums (known as Annual Premium Equivalent or APE) can help minimize the impact of these one-time premium policies:
Standardized Premium = Lump-sum Premium / 10 + Annualized Premiums for Other Terms
In the industry, standardized premiums are often used to gauge insurance company performance, and the Insurance Authority regularly publishes these figures, making them easy to access and compare.
For example, suppose an insurance company sold two policies this year: one with a lump-sum premium of $10,000, and another with five-year monthly payments that equate to $5,000 annually. The standardized premium would be $6,000 ($10,000 / 10 + $5,000).
So, is a higher standardized premium always better? Keep in mind that savings or investment-type products typically have higher premiums, where a good chunk of that money is essentially the principal the company invests on behalf of clients. Therefore, it might not be entirely fair to compare insurance companies that sell savings or investment products with those that offer pure insurance protection.
Is a Jumbo Cases Always Good for Insurers?
Some insurance companies have agent teams that specialize in landing “jumbo cases” to boost the company’s numbers. These big policies are mostly savings life insurance, often using premium financing to amp up returns (while also hiking the coverage). It’s great for the company’s profits, no doubt, but it gives the actuaries a real headache. Why? Because if one of these giants lapses, it’s like losing dozens of smaller policies at once, forcing the company to scramble for liquidity.
For insurers, the ideal scenario is policies that are independent and identically distributed—think no single event triggering a mass of claims (like COVID-19) and coverage amounts that are roughly similar across the board. But jumbo cases throw a wrench in that “identically distributed” part, ramping up the risk for the company.
Comparing Market Capitalization Is Not Good Reference
Another metric that’s frequently mentioned is market capitalization , calculated as the number of outstanding shares multiplied by the share price. While investors often use this to measure company size, it has its drawbacks when applied to Hong Kong insurance companies. Many multinational firms have their core operations elsewhere, so their market cap might not closely reflect their Hong Kong business. Plus, some financially strong insurers choose not to go public for funding, leaving no market cap to reference.
Credit Rating Does Not Correspond To Financial Health
Major rating agencies like Moody’s, S&P, and Fitch assign credit ratings to insurance companies based on their standards and provide a rating outlook—categorizing the company’s future as negative, positive, or stable—for investors to consider.
To get a credit rating, insurance companies have to pay the agencies, and it’s not cheap. Unless they need financing, many skip this expense altogether. So, just because a company lacks a credit rating doesn’t mean its finances are weak. Additionally, some ratings focus on the parent company and might not accurately capture the credit risk of their Hong Kong operations.
Is the Current Solvency Margin Requirement Sufficient?
Another key indicator of an insurance company’s stability is solvency . Any insurance company operating in Hong Kong must maintain assets exceeding liabilities by an amount that meets or exceeds the regulatory solvency margin requirements. According to the Insurance Companies (Solvency Margin) Rules , the required solvency margin for insurers engaged in long-term business is roughly 4% of the mathematical reserves and 0.3% of the capital at risk . .
- Mathematical Reserves : When an insurance company sells a policy, it creates a liability on its balance sheet, and that liability amount is the mathematical reserves.
- Capital at Risk : This is the maximum amount an insurance company could lose without provisions. In simple terms, it’s the sum insured minus the mathematical reserves.
However, the current system is criticized for not accurately reflecting the insurance and market risks insurers face, and it doesn’t incorporate the widely used financial concept of Value at Risk. After all, the existing framework is based on the European Union’s Solvency I, which relied on simpler mathematical formulas because computing power back then couldn’t handle detailed calculations using policyholder or fund holding data.
Another issue is that the solvency ratio tends to fluctuate wildly—many large companies might boast ratios of 300% or even 500% during calm periods, making it seem like they have plenty of capital, but this can plummet in extreme scenarios.
To keep the insurance system steady, the Insurance Authority requires companies to update their solvency ratios weekly during extreme events. For instance, during the 2018 U.S.-China trade war that triggered a sell-off in Chinese assets, or the 2020 COVID-19 pandemic that shook global stocks and bonds, insurers were mandated to recalculate and ensure compliance.
What Impact Will the Risk-Based Capital Regime Have on Insurance Companies?
What is the Risk-Based Capital Regime?
Hong Kong is adopting the risk-based capital regime , expected to roll out in the second half of 2024—think of it as a “game-changer” for the insurance world. It mandates that insurers hold capital proportional to the risks they face, preparing for statistically rare events like a once-in-200-years financial crisis. This new setup aligns closely with the highest standards of the European Union’s Solvency II, introduced in 2016, putting Hong Kong on par with global best practices.
Companies Selling Savings Products Will Feel the Heat First
The new capital regime focuses on curbing market risks, for example, requiring insurers to add $0.4 to $0.5 in capital for every $1 held in stocks to buffer against market downturns.
This hits companies that sell savings products hardest—they’ll have to weigh the impact on their solvency ratios and might even ditch developing products with heavy stock allocations, like long-term savings life insurance. At industry investment forums, executives from big insurers known for high-dividend savings products have shared plans to cut back on stocks and optimize asset mixes to ease capital demands.
On the flip side, companies focused on pure protection products will likely dodge the major effects.
How the Risk-Based Capital Regime Better Protects Consumers
Mathematically speaking, market risks can’t be diversified away using the law of large numbers (as we’ll dive into later), so even big firms don’t have an edge in downturns. By imposing higher capital requirements on insurers selling high-risk products, this regime makes perfect sense and ultimately safeguards consumers.
Law of Large Numbers: This principle describes that in repeated experiments, the larger the sample size, the closer the average value gets to the expected value. For example, with coin tossing, the more you toss, the nearer the probability of heads and tails approaches 50%. When applied to life insurance, the more policies a company holds, the closer the average death rate of policyholders aligns with the overall average, making it easier for insurers to profit. However, market risks can’t be mitigated by this law, as human life isn’t something you can hedge like stock market investments.
Consumers Should Base Decisions On Product Comparison
The preparation process for the new system took several years, with the Insurance Authority requiring major companies to conduct multiple simulated stress tests to evaluate the impact on solvency ratios. To gather the necessary data, teams in actuarial and accounting departments worked around the clock, and many companies formed dedicated teams to manage it all.
In reality, the Hong Kong Insurance Authority has been taking a stronger regulatory role in recent years, especially under the new system, where all surviving companies have demonstrated solid capabilities. Before buying insurance, it’s wise to shift your focus to the products themselves—compare your options thoroughly to get the best deal and figure out which one truly meets your needs; that’s the smartest move.
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