This year, as Hong Kong's insurance industry recovers from the Asian financial crisis, it looks set to consolidate its position. The longer-term future, though certainly not free from all concerns, is encouraging.
Provisional statistics in the Hong Kong Federation of Insurers (HKFI) Annual Report for 1999-2000, provided by the Office of the Commissioner of Insurance, show that gross and net premiums for general business written in 1999 amounted to HK$16,600 million and HK$11,325 million respectively, declines of 7.4% and 7.3% compared to 1998. Cargo business recorded the highest rate of decline, with gross premiums tumbling nearly a quarter. Property damage, which at 28% of total gross premiums is the largest class, slipped 13.3% to HK$4,651 million. Motor vehicle business declined by a similar margin, to HK$2,686 million.
There is a flip side, though, as the HKFI notes. “Long term business sustained substantial growth in 1999.” Total office premiums in respect of new business last year were HK$11,382 million, an increase of just over a third. “The increase was mainly attributable to the growth in Individual Life business, the dominant line of Long Term business,” the HKFI report notes. Office premiums in respect of new business for Individual Life policies increased by 36% over 1998, to HK$9,736 million, including both linked and non-linked business. Individual Life (Linked) business grew at the almost breakneck rate of 46.6%, to HK$3,302 million, while non-linked grew at the more sedate (but still impressive) 33.4%, to HK$6,434 million.
Benjamin Tang, Commissioner for Insurance, admits that on the general side the figures overall are “not very good.” This, he argues, is the result of a shrinking market, the product of Hong Kong's shift from a manufacturing to a service economy, and an insurance environment dominated by companies that “want to have market share by any means.” Exacerbating the situation are difficulties in the two largest classes: motor and employees' compensation. The former, Commissioner Tang argues, is “cut-throat – consolidation will have to happen.” The latter, which is softening because employees increasingly not only know their rights but exercise them, is a market where there is “very little we can do.”
One more statistic fleshes out the picture. As of May 16th the HKFI had 117 General Insurance Members and 42 Life Insurance Members. The former category ranges from Allianz to Zurich; Life members from Aetna Life Insurance to Zurich. Clearly this is not a backwater organisation, having both numbers and big names. Not bad, either, for a territory of just six million people. But there is another international dimension that is wise to remember when considering Hong Kong. Not only are major league international insurers of various hues setting up operations in Hong Kong, but Chinese insurers are coming to the Special Administrative Region to raise capital by listing.
As China prepares to enter the WTO Hong Kong will have an increased regional importance, especially in relevant financial services. “We see Hong Kong providing back-up for going into China,” says Commissioner Tang, who adds that: “the major problem there is talent; we hope we can provide people to fill that gap. They know how Western people do business and they know how Chinese people do business. Their role is as an intermediary.” The examples he gives include companies such as the Boston-based Mass-Mutual, which recently bought a local company as a springboard into China. Commissioner Tang adds that in terms of captive insurers, a sub-sector that the government is keen to expand, “a few [are] actively talking to us, hoping to see if it can be effected.”
Paralleling this is economic convergence on the Hong Kong stock exchange. While Chinese companies have been listed on the Hang Seng Index for a number of years now, insurers are just joining the fray. First in was China Insurance International Holdings Limited (CIIH), a member of the China Insurance Group, one of the oldest domestic insurance groups on the Chinese mainland. Its listing was the first play for international investors on China's embryonic insurance industry. CIIH is not likely to be a lone play, either, as several other big mainland companies, including Ping An, have said they will seek listings in Hong Kong, giving the territory a doubly important long-term role as an insurance centre.
Domestically, though, statistics from the HKFI suggest that the worst, like the sharply divergent outlooks for the two sectors, is not yet fully over. “It is anticipated that in the year 2000 the general insurance industry will, at its best, bottom out at the current premium level. As regards life insurance, continued double-digit growth in new business is expected,” according to its annual report. However, the longer-term outlook is better.
Behind the optimism is an increasing tendency of the government to involve insurers in the economy. “A trend has been developing whereby the Government seeks to impose compulsory insurance, e.g. the Mandatory Provident Fund Schemes, river-trading vessels, buildings, and civil aviation, etc. The prospect of new business opportunities for both general and life insurance business is promising and substantial,” states the annual report. The biggest of these is undoubtedly the Mandatory Provident Fund, which also acts as a metaphor for the hows and whys of insurance in Hong Kong, especially on the life side. Essentially, it reflects the changes and developments within Hong Kong that have made insurance increasingly important.
Years ago there was no need for any type of old age insurance, as nearly all of it was done within the family. Hong Kong had fewer old people, and the young were building a vibrant manufacturing economy. The dynamic has changed, and in an age of affluence the issue of increasing numbers of old people living meagrely needs to be addressed. Commissioner Tang has no doubt as to the potential it has for the industry overall. “People still haven't focussed on this. MPF will actually act as a catalyst,” he says. However, it will not be totally smooth and easy. Due to start on December 1 this year, some, such as experienced actuary Stuart Leckie at Woodrow Milliman China Ltd, foresee teething problems. There could be a great many administrative snarl-ups as the system tries to cope with a sudden influx, and low-income recalcitrants try to avoid it altogether.
What they are catching on to is the broader problem for the insurance industry and its associated professionals in Hong Kong (such as the Commissioner for Insurance): educating the public about the benefits of insurance. “People know basically nothing,” says Peter Record of investment researchers Asia Market Intelligence. That explains the problem, as well as the potential opportunity. The MPF, lest it is forgotten, is expected to accrue during its first year contributions in the region of HK$10 billion.
A recent survey of HKFI members showed that the top three roles of the Federation should, broadly, be about education. Without quantifying it, the HKFI lists them as:
Commissioner Tang is pulling the OCI into the same fray. His contribution is a newsletter (a first for the OCI), distributed via the government offices and the ubiquitous internet. “The most we can do, in terms of the bumf I've put out, is educate the consumer,” he says.
There is more in the pipeline, reflecting a mixture of government initiatives, such as one about building insurance that will require owner-corporations to insure communal parts of buildings against third party bodily injuries, and a maturing and increasingly sophisticated and affluent society looking at how it can best finance services such as healthcare. “Coupled with the government study on the introduction of deposit insurance and health care reform, new business opportunities for the industry are abundant in the near future,” states the annual report.
Both the private sector and government will have to accommodate the rise of the internet and the challenges arriving with e-commerce. Commissioner Tang is “still looking at” e-commerce, despite acknowledging that changes are “coming so fast.” Set against the rapid evolution of cyber commerce, though, are a set of Asian realities. Singapore, the Asia region's other highly-evolved financial centre, is seen by Commissioner Tang, because of its developed state and British background, as a partner of sorts. But China, Hong Kong's de facto partner, is much further down the learning curve. “I've asked the China Insurance Regulatory Commission, and they're not working on it… They feel e-commerce in China will have some time to take off,” Commissioner Tang says. The polarity, he says, is complicated by a lot of regional variation.
One consequence has been the delay new regulations, unsurprising when there is no immediate legislative corpus to hand. Commissioner Tang himself is waiting to see what the October Cape Town conference of the International Association of Insurance Supervisors decides on the matter. “Hopefully, by the end of this year or early next year, I will put out something on the internet,” he says. “Rules will only be adopted if only internationally accepted … [Hong Kong] may have some rules and regulations, but most of them have to conform to international standards, otherwise we can't claim to be an international finance centre.”
Not that standards are being allowed to slacken, especially given Commissioner Tang's plans for developing the local agency force. Minimum standards are to be upped, rather than just set and applied. This means sympathy, but no licence, for those who do not pass recently-instituted agency exams. “I tell you, in no uncertain terms, that I will not extend that grace period. If they don't qualify, sorry mate, that's it, you're not coming into the industry,” says Commissioner Tang, who is also going to introduce a programme of ‘continual professional development.' Agents, he says, “will have to do certain things to keep their licence or their qualification. It's no good just sitting an exam and then you can practice for life.”
Michael Mackey is a freelance journalist based in Hong Kong.