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17 August 2017 Insurance

Hong Kong devises plan to fend off Singapore’s insurance hub ambitions

The future of the insurance industry in Asia looks bright. A robust expansion of the economies in the region, helped by higher government infrastructure spending is expected to boost insurance demand and spur reinsurance activity in the region.

Fitch expects China’s large-scale Asian infrastructure projects to be a source of reinsurance demand. The country’s “One Belt, One Road” initiative is expected to involve more than $900 billion in infrastructure spending across more than 60 countries, with insurance premiums from already-announced projects potentially reaching $7.0 billion, of which $5.5 billion will go to Chinese reinsurers, according to a July 31 Fitch report.

Indonesia plans to increase its budgeted infrastructure spending by 22 percent year on year in 2017, to more than $26 billion.

Similarly, Thailand has increased infrastructure spending to up to $25 billion for the year. These large-scale projects will have to becovered against substantial risks and catastrophes throughout their construction and operating cycles. Direct insurers are unlikely to have the capacity to underwrite such exposures alone and reinsurers will have opportunities to step in and address this gap, Fitch noted.

Insurance growth is set to be led by emerging markets in Asia, particularly China. Real GDP grew by 6.4 percent year-on-year in emerging Asia in 2016, according to the Swiss Re sigma report 3/2017.

Non-life insurance premiums in emerging Asia grew 18 percent in 2016 after a 15 percent gain in 2015 and 14 percent in 2014, the report states.

This was partly due to sustained healthy growth in China (20 percent) which accounts for more than 80 percent of the region’s non-life premiums.

The life business shows similar growth rates. Life insurance premiums in emerging Asia increased by 23 percent in 2016 (2015: 16 percent) against a backdrop of stabilising economic growth. China, which accounts for around 70 percent of the region’s life market, was the main driving force with a healthy 29 percent gain in premiums (2015: 20 percent), supported by higher growth in traditional life and health lines.

In addition to the boost from economic growth, a comparatively low insurance penetration in Asia is likely to offer additional opportunities for insurers to expand their businesses.

Total premiums as a percentage of GDP in China, for example was 4.15 percent in 2016 compared to 7.31 percent in the US or 6.08 percent in Germany.

Insurance companies are aware of the growth potential the industry faces in Asia.

Swiss Re announced in April 2017 that it is setting up its general reinsurance business regional headquarters in Singapore after opening an office in Kuala Lumpur, Malaysia, in March. Similarly, Munich Re kick-started a restructure of its Asian operation in September 2016 to strengthen its presence in key hubs, including Tokyo, Beijing and Singapore, with an eye on potential expansion to India. In addition, Lloyd’s of London’s Indian reinsurance branch commenced operations in April 2017 to tap into accelerating onshore market growth opportunities.

At the same time local competition is growing.

In China, PICC Re, Taiping Reinsurance and Qianhai Reinsurance received approval in 2016 from the China Insurance Regulatory Commission (CIRC) to set up reinsurance operations. Competition in China’s reinsurance market is set to intensify, according to Fitch.
Hong Kong, a historically grown major insurance hub in Asia, fears that it might fall behind Singapore in capturing potential insurance growth.

Hong Kong’s Financial Services Development Council (FSDC) said that the jurisdiction is being impacted by competition from its Asian competitors in many areas, especially in reinsurance, marine insurance and captives.

HONG KONG IS LOSING OUT TO SINGAPORE

In a report titled “Turning Crisis into Opportunities: Hong Kong as an Insurance Hub with Development Focuses on Reinsurance, Marine and Captive," the council said that the position of Hong Kong as Asia’s reinsurance centre was lost to Singapore after 1997. Over the past 20 years, the number of captives and volume of reinsurance and marine business in Singapore have grown significantly, contributing to its development as a regional insurance hub.

The chairman of the FSDC, Laura Cha, said: "The recent departure and downsizing of the Hong Kong offices of various international insurance and reinsurance companies highlights the need for Hong Kong to further develop our insurance and reinsurance industry.

“Further departures are likely in the near future if action is not taken,” Cha added.

Hong Kong is reacting. It is trying to make the jurisdiction more attractive to the insurance industry. The city is, for example, establishing an independent insurance authority which is tasked to modernise the regulatory framework of the industry and make it in par with other sophisticated markets, the Hong Kong Federation of Insurers (HKFI) told Intelligent Insurer in an emailed response to a comment request.

The new insurance authority will have a mandate to promote the industry and play the role of a market enabler. “It should help putting Hong Kong more firmly on the map of the insurance world,” according to the association.

In addition, the government in Hong Kong is developing a policyholder’s protection scheme aiming to maintain market stability and better protect policyholders’ interest by providing a safety net in the event of insolvency of an insurer.

The jurisdiction is also investing in its fraud detection capabilities, building a centralised claims database to detect and prevent fraud by applying “state-of-the-art” algorithm and machine learning technology. The aim is to “plug the loopholes and improve our underwriting performance while maintaining a reasonable level of premium”.

Among the weaknesses of the jurisdiction is arguably the insurtech development, which should be addressed through the creation of the insurance authority and the facilitation of the HKFI, according to the association.

The general insurance market is seen another weak point of Hong Kong. In 2016, gross and net premiums of general insurance business recorded a decrease of 0.7 percent to $45.6 billion and 2 percent to $31.5 billion respectively compared to 2015, according to the HKFI annual report 2016/2017. On direct business, gross premiums increased slightly by 0.4 percent to $35 billion whilst net premiums decreased by 3.4 percent to $24.8 billion in 2016 compared with 2015. The growth in gross premiums was mainly attributable to both accident & health business and property/damage business.

Singapore also saw general insurance gross premiums of direct insurers shrink slightly to $3.97 billion in 2016 from $4.00 billion in 2016, according to the Monetary Authority of Singapore. Gross premiums of general insurance, both direct and reinsurers in the Offshore Insurance Fund also fell to $8.87 billion from $9.00 billion over the period.

HONG KONG'S PUSH FOR CHINA AND ILS

In order to attract more business in general insurance, the Hong Kong insurance regulator has signed an ‘Equivalence Assessment Framework Agreement on Solvency Regulatory Regime’ with mainland China’s insurance regulator.

This will enable Hong Kong to provide a much wider spectrum of quality reinsurance services for the Mainland and help facilitate market development on both sides, according to the HKFI.

The move has the potential to turn Hong Kong into becoming a hub for mainland China’s reinsurance needs, Hong Kong-based Peak Re noted in its July Peak Times issue.

The agreement could mark the first step towards developing an integrated insurance and reinsurance market between the two places, with Hong Kong ultimately being recognised as an onshore jurisdiction for regulatory purposes. This may, however, still be a few years away from being realised, with some potential pitfalls along the way, Peak Re admitted.

“While certain details are relatively vague at this moment in time, the high-level concept behind the agreement is very positive for Hong Kong,” says Andrew Mak, deputy head of underwriting at Peak Re.

On marine insurance, Hong Kong is working with International Union of Marine Insurance (IUMI) as its Asian hub to help raise the profile of Hong Kong as a regional marine insurance centre and attract a cluster of seasoned professionals to the market.

Hong Kong aims to attract a broad range of insurance lines. With more attractive government policies in place and a huge Mainland China market beside, more insurers are expected to be interested in offering specialty lines for emerging risks such as cyber liability.

Furthermore, Hong Kong wants to grow in insurance-linked securities (ILS). The FSDC suggested that ILS are going to be an important driver of the future growth of Hong Kong’s reinsurance industry, driven by a rapid development of mainland China’s primary insurance industry.

Currently over 75 percent of ILS transactions are being completed in Bermuda, despite Hong Kong’s integrated financial system and supply of talents from across the financial industry. In order to pave the way, the industry, together with the regulatory bodies, have upgraded the regulation on ILS, focusing on ensuring a fair treatment of customers and transparency of products, fees and returns.

SINGAPORE'S FOCUS

But Singapore is not standing still, either. The Monetary Authority of Singapore (MAS) is particularly interested in developing insurtech capabilities and innovation. MAS will, for example, allow insurers to offer the full suite of life insurance products online without advice to cater to the needs of a growing segment of technology savvy, self-directed consumers, said Lee Keng Yi, director and department head (Insurance Department) of MAS at the 17th Asia CEO Insurance Summit on 21 February 2017.

To foster safety and ensure that consumer interests are protected, MAS will be issuing a set of guidelines on the safeguards to be put in place for the online distribution of such products.

In addition, MAS is building data infrastructure for natural catastrophe and cyber risk insurance in collaboration with the industry and academia. To enhance catastrophe insurance penetration in Asia, the Natural Catastrophe Data Analytics Exchange has been established in April 2016 to expand the availability of high-quality data on catastrophes in the region by pooling industry loss data and collecting economic data through remote sensing technologies, Lee said. On the other hand, to help accelerate the growth of cyber risk insurance, the Cyber Risk Management Project aims to better quantify cyber risks through developing industry-wide risk definitions, databases and models.

While Singapore has the advantage of having a strong government which plays a proactive role in leading new initiatives, Hong Kong’s industry is more dynamic and self-driven, the HKFI said, adding: "Now that the IA is in place, we are expecting more facilitation from the regulator as market enabler. Such driving force, together with the self-motivated nature of the Hong Kong insurers, will help bring our industry to new heights.

While there are a number of emerging markets in the region, Hong Kong will remain a preferable choice for many geographically and in terms of market potential when they have to pick a regional headquarter, according to the HKFI.

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