On the same day, HSBC also announced that it has received preliminary approval to form a 50-50 joint venture insurance company in China with Beijing-based National Trust.
That follows the group taking a 10% stake in the Vietnam Insurance Corporation two weeks ago. In India, HSBC announced that it has set up a joint insurance company with two Indian banks, Canara Bank and Oriental Bank of Commerce.
The focus on insurance makes sense, say observers, given that HSBC has what many pure insurance companies do not have û one of the biggest foreign banking networks in Asia as well as knowledgeable staff on the ground.
ôFrom a diversification point of view û both in terms of income and in terms of geography û itÆs a great move. But they could have leveraged their branch network and done it earlier,ö says one analyst about the move in Taiwan, pointing out that HSBC has got a large number of branches (eight) compared to most other foreign banks (although Citi has grown its network to 66 banks following its recent acquisition of Bank of Overseas Chinese).
HSBC is currently among the top 20 insurers globally, and its insurance business recorded pre-tax profits of $1.6 billion in the first half of 2007, contributing 11% to HSBC Group earnings. The Asian region is the largest contributor, accounting for 33% of the groupÆs insurance profitability, according to the press release. The group says it aims to double the contribution from insurance to overall earnings and become a top 10 global player.
Every HSBC insurance investment has had a different structure. This reflects the numerous regulatory restrictions in most countries for foreign entrants, say observers û often to protect local (often state-run) incumbents.
One observer says the move in Taiwan will not bring any immediate benefits to the bottom line, rather is a long-term play.
ôThe start-up costs of doing insurance are high. You have to pay the agent, who sells the commission, for up to four years. And the more policies you underwrite, the more you have to pay to reserves,ö says one observer.
ItÆs only after four to five years, when the likelihood of the buyer cancelling his policy is greatly reduced (since he will be older and subsequent premiums will be more expensive), and premiums come in without deductions for the agent that the life insurance business begins to provide a boost to the bottom line.
HSBC will be using the bancassurance model in Taiwan (selling through its own branches), which is cheaper than having to pay high commission to rival banks to sell their products.
The life insurance industry in Taiwan is competitive, although the press release says that the average-sum-assure in Taiwan is just NT$1.28 million ($39,000) compared to NT$2.16 million in Japan and NT$5.08 million in the US.
However, one analyst says that life insurance markets closely follow per-capita incomes. ôYouÆd expect the Japanese and US markets to be much higher because they have much higher incomes per capita.ö
Nevertheless, with most economies in Asia seeing annual GDP growth in excess of 6%, the insurance industry looks as if it will become an important contributor to HSBCÆs profitability.