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Implementing a matching adjustment in Singapore and Hong Kong

Implementing a matching adjustment in Singapore and Hong Kong

18-05-2022 | Insight
Insurers face a complex framework when it comes to ensuring they have enough assets to meet their future liabilities. One way of making sure that assets are correctly aligned with liabilities is through the ‘matching adjustment’ that was introduced under the EU’s Solvency II directive.
  • Clara Yan
    Clara
    Yan
    Head of Insurance Analytics

Speed read

  • How a matching adjustment can be applied in Hong Kong and Singapore
  • Its advantages include a higher solvency capital ratio and lower volatility
  • Challenges remain in portfolio construction and the eligibility of assets
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The rules on matching adjustment recognise that long-dated liabilities are better matched by a longer-term investment approach than a short-term mark-to-market approach. This can improve the asset liability management (ALM) mechanism, and lower both volatility and the solvency capital charge.

However, implementation of the matching adjustment rules can be highly complex, and there are challenges in evaluating the mix of assets that are used to underpin the solvency, particularly if riskier assets such as equities and real estate are included. Meanwhile, integrating sustainability into the mix has never been more important for risk mitigation.

Real expertise is needed

So, how to go about it? Real expertise is required if an insurer is to have confidence that they will be able to meet future liabilities while also addressing the need to make returns on their assets in a world that becomes riskier every day.

Robeco works daily with insurance companies to create customized solutions to meet their distinct regulatory and investment challenges. In this Q&A article, our insurance experts answer six questions on how matching adjustment works, and what it means for investors in Hong Kong, Singapore, and more widely across Asia.

Our insurance team members are uniquely placed to share their knowledge, since much of the matching adjustment concept arose from EU regulations in Robeco’s home patch of Europe. In the Q&A, we try to make it as relatable as possible by giving examples of how it works in practice.

The main challenges and benefits

Our experts explain what the main challenges are to implementing it in a straightforward manner. And with our long experience in managing European matching adjustment portfolios, we discuss how Robeco can help Asian insurers to benefit from matching adjustment.

Finally, we show how the increasing responsibility emanating from climate change requiring carbon reduction can be incorporated into the process.

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