April 19, 2017

Hong Kong insurance sector looks to its future in new report

On 3 March 2017, the Financial Services Development Council (the "Council") issued an important report, titled: "Turning Crisis into Opportunities: Hong Kong as an Insurance Hub with Development Focuses on Reinsurance, Marine and Captive" (the "Report"). The Report aims to promote business in the Hong Kong insurance market with closer cooperation with China, particularly under the One Belt, One Road initiative.

Reinsurance

The council's goal is to create a world-class reinsurance hub in Hong Kong. Reinsurance transactions usually have significant premiums. The Council believes that Insurance Linked Securities ("ILS") will be an important driver of the future growth of the Hong Kong reinsurance industry due to the rapid development of China's industry in terms of its absolute size, sophistication of insurance transactions, and reinsurance efficiency and effectiveness.

Among all the sectors in Hong Kong, medical and health insurance sectors showed a 16.86% increase in premium volume.

The Council stated that: "we see a clear tendency for reinsurance transactions shifting from a traditional practice – facultative and treaty underwriting to a more solution driven practice such as capital market solutions and private transactions".

The integration of the financial systems and geographic proximity between Hong Kong and China provide opportunities to further develop the reinsurance industry. In addition, Mainland Chinese insurance premiums and North Asian reinsurance business could be re-routed to Hong Kong. The Report estimated that new business prospect for Hong Kong could be increased by as much as HKD24 billion to HKD50.4 billion. 

Marine insurance

Hong Kong is facing fierce competition from Singapore and Shanghai in developing a regional marine hub. One of the Report's objectives is to develop Hong Kong into a leading international marine insurance market.

The Report lists out strengths of the Hong Kong marine insurance market as being:

  1. A leading international maritime centre with various maritime service providers, for example ship owners, ship managers and ship brokers.
  2. International marine insurance specialists have set up their bases in Hong Kong for many years.
  3. Hong Kong's Shipping Registry is the fourth largest in the world in terms of tonnage with 158 million dead weight tonnes and 2022 vessels registered.
  4. It has world class transportation infrastructure, including container terminals, cruise terminals, airport and logistics network.
  5. The establishment of the Hong Kong Maritime and Port Board in 2016 to promote maritime and maritime related services industries in Hong Kong.

Captive insurance

Another objective is to develop the size of the Hong Kong captive market and establish a world class and leading captive domicile, with the target of around 5 to 10 captives licensed each year, and reaching a total number of 50 captives by 2025.

Hong Kong has a geographical advantage in providing a captive market for international companies covering their Mainland China risks with an Asian-based captive. This position is strengthened by Hong Kong's status as a global offshore centre for RMB and as a gateway between China and the rest of the world. 

The Council states that "the increasing use and range of products available in RMB in Hong Kong provides a realistic incentive for many Mainland Chinese companies (or other companies with considerable risk exposure in RMB denominated assets) to establish a captive in Hong Kong".

Mainland Chinese companies have significant risk exposure, including to natural catastrophes and business interruption. One of the most effective ways to manage risk, protect business and provide a long term vision for stability and resilience would be to create a captive in the region. Through developing Hong Kong into a captive market, this will create a demand for tailored risk management and captive management systems.

To facilitate Hong Kong in developing into a captive market, the Report suggests creating an "in house" system where insurers can move into a niche environment after developing their skills in large insurance companies.  This will attract lawyers and other graduates of economics, finance, accounting and law degrees to take up this role. 

The Council is of the view that with a favourable monetary environment, Hong Kong can develop into a prominent insurance and reinsurance centre like Singapore by exploring the opportunity within the Greater China region, particularly in relation to Mainland Chinese companies, State Owned Enterprises and regulators.

Recommendations

The Report has hence recommended the following:

  1. Hong Kong should negotiate with the China Insurance Regulatory Commission to upgrade Hong Kong's status to "Special Administrative Region" from its current "offshore" status under the China Risk Oriented Solvency System (the "C-ROSS") so as to benefit from preferential treatment in developing China and Hong Kong's insurance and reinsurance business under the Belt and Road Initiatives.  This includes selling of a range of sophisticated corporate insurance products and risk transfer solutions to Chinese companies.  This can also strengthen Hong Kong's role as a super-connector in the Belt and Road Initiative.
  2. Hong Kong should liaise with the Central People's Government to play a bigger role in Chinese reinsurance business from offshore locations to Hong Kong.
  3. The Hong Kong Government may provide tax incentives to direct insurers, insurers in reinsurance business, marine hull and liability policies, and brokers. 
  4. The Council can promote marine insurance business with the Hong Kong Maritime and Port Board, and hold regular marketing events to promote Hong Kong as a reinsurance hub.  The Hong Kong Monetary Authority and the Trade Development Council can also organise marketing events to promote marine insurance offered by local insurers.
  5. The Hong Kong Government and the Hong Kong Federation of Insurers (the "HKFI") may provide insurance training courses to managerial grade insurance practitioners from China as well as young talent, for example on the benefits and uses of captives.
  6. The Independent Insurance Authority may work with the HKFI in promoting Hong Kong's marine insurance market and streamlining the regulation and application process; issue a Guidance Note regarding captives; holding marketing events to promote Hong Kong as a captive insurance and reinsurance centre.
  7. Hong Kong should further promote the advantages of registering ship-owners' ships in Hong Kong, for example tax exemption on insurance premiums and claims to be processed more quickly.
  8. Considering whether the Hong Kong insurance law needs any reform, particularly after the implementation of the UK insurance Act 2015.