With an average lifespan of 84 years Hongkongers have the world's highest life expectancy, according to the local Department of Health – higher even than Japan's.
For the city’s insurance companies, though, that presents a major quandary because they don’t have long-term investment opportunities to match their growing liabilities. This is partly as a result of the retirement products taken out by Hong Kong’s ageing population.
But help could be at hand thanks to Chinese President Xi Jinping’s pet project, the Belt and Road Initiative, since this mammoth multi-national undertaking will require the building of infrastructure, lots of infrastructure, which in turn will require lots of patient, long-term capital.
Serendipitous timing? FinanceAsia sat down with John Leung Chi-yan, the Insurance Authority’s chief executive, to discuss the business and investment opportunities, as well as the risks, posed by Belt and Road for Hong Kong-based insurers.
The Insurance Authority, or IA, was set up in June as an independent regulator to protect policyholders and improve the competitiveness of Hong Kong’s insurance industry.
For Leung, insurance could help bring to life Xi’s ambition to revitalise China’s ancient road and sea trade routes for the 21st century, boosting cross-border trade across more than 60 countries.
“There are so many large infrastructure projects that require a lot of risk-management expertise. So insurance is a necessity for the Belt and Road initiative to succeed,” said Leung, who was formerly the city’s Commissioner of Insurance, a civil service post.
However, Hong Kong’s role is not enshrined in the Belt and Road master plan. Although it is looking to carve out a position as a financial services hub for Chinese investment overseas, mainland Chinese companies could yet bypass the city altogether.
The government of the country where the infrastructure project is located will also want to see as much of the sub-contracting work awarded to local people and companies as possible. This could include any related insurance coverage.
“Usually in Belt and Road projects there is a requirement by the host country to arrange insurance via a local broker or local insurance company,” Leung said.
So for Hong Kong to remain relevant it has to play to its strengths.
“Hong Kong is used to serving as an intermediary between mainland China and the outside world. Now we have to expand and deepen that role to link up with local insurance companies along the Belt and Road. We can build this network and connectivity. That is what Hong Kong is good at.”
Hong Kong has a diverse mix of insurers, from pan-Asian AIA Group to smaller players such as insurance broker Nova Insurance.
Leung said they are starting to use their networks to knit together partnerships across the region.
ADVANTAGE HONG KONG
To be sure, multinational companies may not need to use Hong Kong if they have offices in other Belt and Road countries, but the city has some advantages.
Hong Kong is in pole position to provide reinsurance services for mainland Chinese insurers underwriting Belt and Road infrastructure projects after a deal was struck in May between the two jurisdictions’ regulators to move towards mutual recognition of each other’s solvency regimes.
China adopted a risk-based capital regime, China Risk Oriented Solvency System (C-ROSS), with effect from January 1, 2016. In Hong Kong, the consultation on a risk-based capital regime is ongoing.
China’s C-ROSS accords unfavourable capital treatment to reinsurance with reinsurers which are not authorised by its insurance regulator, the China Insurance Regulatory Commission (CIRC). Hong Kong authorised reinsurers were not treated any differently until the agreement, but now benefit from recognition of Hong Kong’s solvency regime as equivalent under C-ROSS.
The next step is for the CIRC and the IA to work out a more detailed equivalence regime which should be completed within four years
“We have temporary equivalence. We have not achieved full equivalence, that will take a few more years, but at least as an early harvest we gain favourable treatment vis-à-vis other offshore jurisdictions,” Leung said.
There are 18 professional reinsurers in Hong Kong from local players such as Peak Re, part of Fosun International, to multinationals including Swiss Re and Munich Re.
“We are in an advantageous position for mainland companies ceding business in Hong Kong,” Leung said, referring to the portion of risk that a primary insurer passes to a reinsurer.
Reinsurance ceded allows a primary insurer to reduce its risk exposure to an insurance policy by passing that risk onto another company.
“Mainland insurance companies could make arrangements locally, or they could take on those risks along the Belt and Road, but they will likely need to cede some reinsurance arrangements outside the mainland, otherwise they might suffer an over-concentration of risk,” Leung said.
While this is a promising step for Hong Kong, in the past CIRC has been very protective of China’s domestic insurance and reinsurance industry, so some industry experts are sceptical about the extent of benefit to Hong Kong insurers.
“To what extent the CIRC will be willing to grant preferential treatment to Hong Kong authorised insurers, and what the immediate benefits for Mainland insurers will be under the Hong Kong regime, will only become clear once more details of the mutual recognition regime emerge,” said Jan Buschmann at law firm Hogan Lovells in a report to clients.
Hong Kong is also making it easier for Chinese insurers to set up captive insurers in the city – subsidiaries that provide risk-mitigation services for their parent groups and related companies.
For mainland enterprises this can help them better manage their new risk exposures as they expand along the Belt and Road.
In theory, infrastructure projects along the Belt and Road could also provide Hong Kong’s insurance industry with attractive investment opportunities.
“Hong Kong insurers are looking for long-term income streams to help match their asset liabilities. Infrastructure investment may not have a high interest rate but it is a long-term investment,” Leung said.
There are challenges though. Greenfield infrastructure projects pose too much risk for most insurance companies to stomach.
To help solve the problem, the Hong Kong Monetary Authority pledged $1 billion in September to an infrastructure financing initiative run by the International Finance Corporation, the private sector arm of the World Bank.
Such commitments by government-run institutions to the riskier parts of a project’s financing structure could help attract private institutions. “You need the public sector to take part in the Belt and Road investments because the risks could be enormous,” Leung said.
It’s not just the Silk Road’s revival on land that is pertinent to the fortunes of Hong Kong and its insurance industry; the maritime version is also pivotal.
And here too the city arguably has an edge as a centre for maritime services, having been chosen as the Asian hub of the International Union of Marine Insurance in October 2016.
The Asian marine insurance market accounts for almost 30% of global marine insurance premium income – a share that looks set to expand as trade in the region continues growing.
SILVER RUSH
Total gross premiums increased rose by 14% in the first half of 2017 compared with the same period a year earlier. While the increase can be partly explained by the increase in mainland Chinese visitors buying insurance policies in Hong Kong, domestic demand for retirement savings insurance and medical insurance is also swelling.
With the local life expectancy now the longest in the world, the “silver-haired population” will create vast demand for retirement-protection financial products and healthcare services, Leung said.
Persons aged 65 and above accounted for about 16% of the total population in 2016. By 2041, the IA has calculated that 30% of the population will be aged 65 or above.
While annuity products, especially life annuity products, are attractive to retirees, the longevity risk presents a great challenge to insurers. So not only do insurers struggle to match such long-dated liabilities with investment products – they also don’t want to insure people who live so long.
Only 10 or so insurers sell annuity products in Hong Kong and the annuity business only accounts for around 3% of total premiums of long term business.
So the public sector has had to step in. The Hong Kong Mortgage Corporation (HKMC) said in April that it intends to roll out a new life annuity product by mid-2018.
For the IA the HKMC’s product represents an option to help the elderly turn cash lump sums into lifelong streams of fixed monthly income.
However, it is aware of the risks. “Not every retiree aged 65 or above is suitable to get this product. If they are too old there may not be enough time to get the annuity. In my personal opinion, the priority should go to the 65 to 70 year old age band,” Leung said.
He also noted that selling these products through the banks creates another layer of conduct and operational risk.
“We need to make sure the selling process is up to our expectations,” Leung said.
In line with the growing challenges and opportunities in Hong Kong as it extends its regulatory oversight, the IA is growing its team.
“We are still hiring the team. It is an on going process. Right now we have about 180 people, so we will grow to 300 by the middle of 2019,” he said.
To offer more Belt and Road insights, FinanceAsia is hosting its first Belt and Road Connected: Invest Philippines conference in Manila on January 30. For more information, contact Andrew Wright on +852 31751926 or via email.
