8 March 2017 Insurance

Hong Kong warns on shrinking re/insurance hub, seeks growth in ILS

Hong Kong is losing re/insurance business particularly to Singapore and hopes for growth in ILS (insurance-linked securities).

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.

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.

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.

Hong Kong is also losing business to mainland China, according to the report. Following the implementation of China Risk Oriented Solvency System (C-ROSS) 2 on Jan. 1, 2016, more reinsurance placement will be diverted to on-shore reinsurance companies in mainland China, the report says. Insurers and brokers are also diverting reinsurance businesses away from Hong Kong to Singapore, Shanghai and other reinsurance centres to concentrate their reinsurance purchases and enjoy economies of scale and tax benefits offered by these hubs.

The FSDC suggests 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 adequate supply of talents from across the financial industry, the report says.

In 2015 the non-life ILS market grew by $3.2 billion to hit a total value of $180 billion, as global investors were looking for better yield. Although, reinsurers operating in Asia have started to seek opportunity to make use of ILS and the capital market, the rapid growth of ILS in developed markets has yet to get its footprint in Asia, with the exception of Japan for risk transfer on natural peril exposures such as earthquake and typhoon.

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