Year 2008 - Insurance Industry after current finanical tsunami

10 2008 YEARBOOK 二 〇 〇 八 年 年 刊 Feature The Insurance Industry after the Financial Tsunami Nobody is going to dispute that 2008 will go down in the history books as one of the most eventful and tumultuous year of all times. The global financial crisis built up its potency in the summer of 2007 against a backdrop of robust economic growth, low inflation and almost negligible unemployment. As structural weaknesses began to emerge in the United States where the real estate market was boosted by a flush of excess liquidity that allowed credit to be extended to people with dubious repayment ability and innovative financial products that compressed risk premiums to unrealistic levels, many were still basking in the hopeful belief that developing economies would be decoupled from the calamity. Perhaps not surprisingly, this theory soon succumbed to tumbling flow of trade and production activities as prosperity acquired exclusively through buoyant exports and inward investment inevitably fell prey to recession enveloping the wealthy nations. The failure of Lehman Brothers, a stalwart of investment banking, sparked off growing concern about the exposure of financial institutions to high leverage and complex bilateral swap arrangements. Widespread reliance on securitization backfired due to sharpened focus on counterparty credit risk, while rising default rates prompted banks to hoard liquid assets and tighten up lending policies. Investors reacted by shunning all forms of risk, causing asset prices to depreciate dramatically, bringing the global financial system to its knees, to the brink of collapse. This episode, candidly dubbed the “financial tsunami”, revealed serious flaws in the financial supervisory architecture and posed unprecedented challenges for politicians and regulators alike. As some bright minds are working tirelessly to devise countermeasures, a secondary implosion is heading our way since financial paralysis will quickly transform into corporate downsizing and staff retrenchment. Against this gloomy backdrop, the Government must do all it can to sustain economic activities and preserve market stability. From an external perspective, Hong Kong is actively contributing to deliberations of working groups formed to take forward an action plan promulgated by the G20 Leaders Summit. At the domestic front, targeted measures have been introduced to support small and medium sized enterprises, stimulate consumer spending and create job opportunities. On market stability, my office has launched a vigorous exercise to ensure that all insurers are capable of satisfying the stipulated solvency requirements and meeting their on-going liabilities. The industry also responded positively by pursuing the establishment of a policyholders’ protection fund, enhancing