One of Asia-Pacific's true success stories, Hong Kong's mature insurance market is testament to the city's competitiveness. And it is set to play a pivotal role as China opens her doors to the global reinsurance community, discovers Shirish Nadkarni.

Two facts about Hong Kong's insurance market stand out. The tiny Special Administrative Region (SAR, as it became known after the British handover to China in 1997) has the largest number of authorised insurance companies in Asia and, after Japan, has the second most developed insurance market in the Asia-Pacific region in term of per capita insurance premium. These facts would no doubt be a source of considerable pride for the residents of the SAR, as competitiveness is simply a way of life in Hong Kong and being pre-eminent in any sphere affords the Hong Kong Chinese enormous satisfaction.

The Asian Tiger, which has become an undisputed financial capital of Asia, has also become a leading insurance centre after attracting many of the world's top companies in the field. Today, there are 178 authorised insurers in Hong Kong, of which 113 are pure general insurers, 46 are pure long-term insurers and the remaining 19 are composite insurers. No less than half of the total insurers were incorporated overseas, to a large extent in the US and UK.

Size matters

Big players have a dominant presence. The top ten insurers account for more than one third of the general insurance market, and the top ten long-term insurers account for more than 80% of the long-term insurance market.

From a 2003 level of HK$102bn ($13.2bn), representing 8.3% of the country's gross domestic product, the total gross insurance premiums grew by 19.5% to HK$121.9bn in 2004 (figures for 2005 are still being finalised), equivalent to 8.6% of the GDP. It is significant that gross written premiums increased by 14.6% in 2003 over 2002. General insurance business showed a drop of 5.2% in 2004, but long-term insurance business maintained the double-digit growth it has shown over the last decade, and grew by 27.4%.

According to provisional statistics for 2005, premium income of general insurance business grew by 6.6% to HK$26.2bn, while long-term in-force business rose by 10%. Long-term insurance business grew by a much more conservative 4.7% in 2005 than in 2004. "1999 and 2003, when the SARS (Severe and Acute Respiratory Syndrome) epidemic broke out, were bad for the insurance industry in Hong Kong," says Darryl Pidcock, head of property and casualty for international reinsurer Swiss Re, which has a large office in Hong Kong. "But following those two bad years, the insurance market has been gradually regaining lost ground. If anything, the pace of recovery was accelerated by September 11 due to the shrinkage of reinsurance capacity. As a result, the strong demand for good financial capacity has caused a sharp increase in the premium rates."

Over the last decade, the basic structure of the Hong Kong industry has gradually been transformed from a manufacturing-based environment into a serviced-based environment. Because of this change, most insurance business in Hong Kong has switched from industrial to commercial. While insurance penetration (premium income as a percentage of GDP) is 9.6%, insurance density, calculated as per capita expenditure on insurance, is an impressive HK$17,600. In terms of employment, more than 60,000 people earn their monthly pay packet from insurance companies.

The future growth potential is massive, which encouraged the France-based AXA group to establish its Asia-Pacific headquarters in Hong Kong in October 2001, in a bid to tap into what it called "tomorrow's insurance market", according to the company's regional chief executive Mark Pearson. "We see tremendous business opportunities in the region, and have full confidence in Hong Kong as a gateway to both China and the Asian markets and as an international hub for financial services," he added.

Today, major players operating in Hong Kong include Bank of China Group Insurance, American Home Assurance, Munich Re, Ming An Insurance Company (Hong Kong), Swiss Re, HSBC Insurance (Asia), Asia Insurance, QBE Hong Kong & Shanghai Insurance, Wing Lung Insurance and AXA. "We provide a full range of general insurance services ranging from marine, mid-commercial insurance, health & medical, to personal insurance packages serving both SME and individual insurance needs," says Dr Victor Kuk, who heads up AXA's Hong Kong operations.

Whereas the life insurance business in Hong Kong registered double-digit growth over the last decade, the general insurance business maintained a modest 1% growth in the new millennium thanks to difficult economic conditions in 2003. Underwriting profits have seen some recent improvement as a result of improved risk management.

Hong Kong's insurance sector was given a stable outlook by Standard & Poor's, although the firm warned that consolidation is likely in the territory's fragmented industry. S&P observed that the local insurance market had been resilient during the years of the economic downturn, and survived intense competition, volatile markets and the outbreak of SARS in 2003. "Perhaps the most obvious defect afflicting both sides of the broader industry in Hong Kong is the disparity between the larger and the smaller operators," noted managing director Ian Thompson. "Both the life and the non-life sectors in the territory are overcrowded; and smaller companies that cannot find their own niche may find themselves pushed out of the market."

Regulation and transparency

There has also been exports of insurance services from Hong Kong, to the extent of $433m (provisional) in 2005, of which the share of direct insurance, both life and non-life, was $123m and reinsurance was $156m. Others, including agency, broking, consultancy, loss adjusting and actuarial valuation, came to $154m. But the problems faced by the local market during 1999 and 2003, when there were a few high-profile failures, has made the Insurance Authority of Hong Kong extremely strict in the matter of eligibility for conducting insurance business in the region.

With the benefit of hindsight, the authority has decreed that insurance business in or from Hong Kong may not be conducted by anyone who is not an authorised insurer, Lloyd's member, or member of an association of underwriters approved by the authority; and has laid down stiff paid-up capital and solvency rules. The minimum requirements for authorisation include paid-up capital, solvency margin, fitness and propriety of directors and controllers, and adequacy of reinsurance arrangements. These requirements relate to the need for a viable business plan and a physical presence in Hong Kong. For non-statutory general insurance business for long-term business, the minimum paid-up capital required is HK$10m. For statutory general business and general and long-term business, it goes up to HK$20m. Captive insurers needed to be capitalised at a minimum of HK$2m.

With regards to solvency margins, general insurers are required to maintain a margin determined on "premium income basis" or "claims outstanding basis", whichever is higher, and subject to a minimum of HK$10m for non-statutory business insurers and HK$20m for statutory business insurers. Regulatory measures developed in Hong Kong are supported by a system of self-regulation by the insurance industry, with such measures formulated by the industry in consultation with the region's government.

A survey conducted by the Insurance Authority in 2000 on 158 general business insurers revealed that the performance of employees' compensation (EC) significantly deteriorated over the period 1996 to 1999. To address this situation, the authority has endeavoured to improve the transparency and the adequacy of reserves of EC business. Its most recent legislation stipulates that every EC insurer needs to undergo actuarial review for business written where the gross premium income/gross reserves for claims outstanding is at or exceeding HK$20m.

Employees' compensation is one of the statutorily required insurance products in the SAR. Pursuant to the Hong Kong Employees' Compensation Ordinance, every company needs to buy insurance with a limit of indemnity of HK$100m and HK$200m to protect their employees. Policyholders are required to pay an EC levy of 5.3% on the policy premium.

The manner in which the insurance market is growing in Hong Kong is very much in consonance with regional trends. Multi-channel distribution of insurance products is growing in popularity. While insurance products are primarily distributed by agents, there is rapid growth of bancassurance penetration.

Short-term prospects for the insurance industry are enhanced by the sharp recovery of regional economic activities and the launching of the Mandatory Provident Fund (MPF) scheme, which began collecting contributions in December 2000. The MPF scheme is estimated to inject an extra of $4-5bn a year of retirement funds for the next 30 to 40 years until the system matures. Insurance companies will play a vital role in not just administering the MPF, but also operating master trusts and directing funds to various external fund managers.

Taxing issues

What is still up in the air is the resolution of an imbroglio that developed in April 2004 between Hong Kong's insurance industry and the Inland Revenue over a provision contained in the new International Accounting Standards Board rules which could exempt some investment-linked insurance products from tax. Currently, the Hong Kong government imposes a standard profits tax of 17.5% on 5% of the aggregate annual premium income of such insurance products. However, under Rule IFRS4, policyholder contributions to investment-linked products are not classified as premium income. Insurance firms therefore argue that, under Hong Kong law, policyholder contributions (which exceeded HK$16bn in 2005) should be exempted from tax.

PricewaterhouseCoopers tax partner, Tim Lui Leung has predicted that both sides will stand firm. "The government stands to lose a huge source of tax income, while the insurance companies could add an equivalent amount to their bottom lines," he says. "It will not be easy to resolve this dispute."

One segment that Hong Kong is relatively new to is captive insurers. Nevertheless, the Office of the Commissioner of Insurance has been actively promoting Hong Kong as an excellent environment for captives from mainland China, citing a well-developed infrastructure, advanced telecommunications, the rule of law, independent judicial power and an efficient workforce. With the enactment of the Insurance Companies (Amendment) Ordinance (1997) concessions are well in place in the territory's regulatory framework to provide incentives for multinational conglomerates to establish their captive insurers in the SAR.

- Shirish Nadkarni is a freelance journalist.

Hong Kong Setting its sights on China

There have been numerous efforts by Hong Kong insurance companies to get into the mainland Chinese market which has massive potential for growth. The conditions imposed on them are substantially less formidable the barriers to entry for foreign companies. The whole of Asia, and China in particular, continues to be viewed by global insurers and reinsurers as the region most likely to provide growth in the longer term.

Those insurers who form groups through re-grouping and strategic mergers to enter the mainland market are subjected to several conditions, including possession of total assets of over $5bn - the same condition imposed on foreign companies. Other conditions state that one of the Hong Kong insurance firms in the group should have been in operation for over 30 years and should have had an established representative office on the mainland for over two years.

Hong Kong residents with Chinese citizenship who have obtained the mainland's professional qualifications in actuarial science are allowed to practice on the mainland without prior approval; and those who have obtained the mainland's insurance qualifications and are employed by a mainland insurance institution are allowed to engage in the relevant insurance business.

Taking advantage of this increasingly liberal regional insurance market, a number of foreign insurers and reinsurers have expanded their operations in the SAR to cater to the needs of the regional insurance market. China's accession to the World Trade Organization has also accelerated the process, and Hong Kong's insurance sector and professionals can benefit from the Closer Economic Partnership Arrangement agreement signed with the mainland.

Global insurer Zurich Financial Services became the first foreign insurer to be granted a business license to establish a general insurance branch in Beijing by the State Administration for Industry and Commerce, after receiving approval from the China Insurance Regulatory Commission. Johnny Chen, CEO of Zurich's Greater China, Hong Kong and Taiwan business, said: "Beijing is one of the fastest growing cities in China, with a GDP growth rate of 11.1% in 2005. It is home to many leading private companies and to most of the large state-owned enterprises, as well as to many local and foreign multinational companies. This creates a growing demand for general insurance, with customers looking for sophisticated insurance services."