Making the reinsuring business reassuring

HK urged to team up with mainland to compete with regional rivals

Hong Kong may risk losing yet another sparkling jewel in its crown unless it pulls its socks up as arch-rival Singapore closes in on all fronts.

The stakes have escalated after Munich Re Group - the world's largest reinsurer with assets to the tune of $275 billion - made an unflattering move to trim its exposure to Hong Kong more than half a century to the day it first set foot in the city.

The Munich-based group said it's revamping its business and expanding in Singapore, Beijing and Tokyo after dropping a bombshell in September last year. Besides partially showing the SAR the door, it said it would shut down its offices in Kuala Lumpur, Melbourne and Shanghai, while maintaining offices in Auckland and Sydney, as well as a liaison office in Taipei.

The move prompted the Financial Services Development Council (FSDC) - the Hong Kong government's think tank tasked with bolstering the city's financial industry - to warn that the SAR has to shore up as its Asian reinsurance hub status wanes in the face of the Singaporean threat.

"We're streamlining the structure, to be able to respond quickly and effectively to the challenges of these highly competitive markets," Ludger Arnoldussen, a member of the Munich Re management board for the Asia Pacific, said in September.

The reinsurance giant will raise the headcount at its Singapore office, now being staffed by more than 200, compared to its 50-strong team in Hong Kong. The unit in the Lion City will, in future, serve clients from Southeast Asia and support the group's reinsurance activities in India, Japan and South Korea.

According to the Office of the Commissioner of Insurance (OCI), although the gross premiums of Hong Kong's reinsurance business grew 9.5 percent from HK$2.47 billion in 2012 to HK$2.7 billion in 2015, the industry's total underwriting profit dropped nearly 71 percent - from HK$537.9 million to HK$157.8 million - in the same period.

Reinsurance represents the insurance policies purchased by an insurance company from one or more reinsurers as a risk management strategy to trim its exposure to loss by ceding part of the risk to third-party reinsurers.

"The Hong Kong government should consider negotiating an agreement with the China Insurance Regulatory Commission (CIRC) to secure preferential treatment for Hong Kong-based and registered reinsurers as opposed to being regarded as offshore," the FSDC said in a recent report, adding that the amendment, if enacted, can facilitate rerouting insurance business from other offshore centers to the SAR.

The CIRC implemented the China Risk Oriented Solvency System (C-ROSS) in January last year in an attempt to standardize the regulatory standards of the mainland's reinsurance industry to make it compatible with overseas standards in capital requirements, risk management and transparency disclosures.

Under the C-ROSS, higher capital charges will be imposed on mainland insurers if they purchase reinsurance products from Hong Kong-registered reinsurance companies that are regarded as offshore service providers.

"The government has been in close dialogue with the relevant mainland authorities and lobbying for relaxing the C-ROSS restriction. It's our understanding that the mainland authorities are considering the issues favorably," an OCI spokesperson told China Daily.

"As Hong Kong's reinsurance market is limited, it's necessary for Hong Kong to cooperate with the mainland in lifting the city's reinsurance sector," said Associate Professor Billy Mak Sui-choi of Hong Kong Baptist University's Department of Finance and Decision Sciences.

Push-and-pull factors are seen to have been responsible for the decline in the local reinsurance business, with the city's high compliance costs and the mainland's vast market potential luring global reinsurance companies to relocate to Beijing. Singapore's aggressive business promotion policies in recent years have further contributed to Hong Kong's shrinking reinsurance industry.

"The Hong Kong government must act by granting more tax concessions, providing more tailor-made package solutions, and building a targeted business promotion team to get more reinsurance companies to set up their headquarters here," said lawmaker Chan Kin-por, who represents the insurance sector in the Legislative Council.

If Hong Kong can relocate more reinsurance business activities here, its robust financial system and proximity to the mainland can be leveraged to develop the reinsurance business, experts say.

According to the FSDC report, the mainland's reinsurance market is expected to hit HK$1.54 trillion by 2020, fuelled by the growth in the primary general and life-insurance markets.

Besides reinsurance, Hong Kong is lagging behind Singapore in marine and captive insurance activities.

"Hong Kong has the fourth-largest shipping registry in the world, representing 10 percent of the total number of vessels. However, the total marine premium purchased in the city represents just 0.6 percent of the global total marine insurance premium at HK$231.7 billion, indicating there's room for further development," the FSDC said.

The council expects the city's marine market premiums to double or even triple, getting close to HK$4 billion, and elevate Hong Kong to become the Asia Pacific's fourth-largest marine insurance market if the SAR can successfully build up a marine cluster.

While marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination, captive insurance is an alternative to self-insurance, in which a parent group company creates its own licensed insurance company to provide coverage for its sprawling business segments and asset classes.

"The Hong Kong government can consider relaxing the regulatory requirements for captive insurers, for example, allowing parent companies to establish their captive operations in Hong Kong without the licensing requirement in order to boost the number of captives here," Terence Chong Tai-leung, executive director at the Chinese University of Hong Kong's Institute of Global Economics and Finance, told China Daily.

The FSDC sees Hong Kong capable of being a captive insurance domicile center by 2020, with up to 10 captives licensed each year and a total of 50 by 2025.

If more than 20 captives can be set up in the city, there could be the cluster effect that creates market demand for captive and management services, asset management and regulator experience.

oswald@chinadailyhk.com

(HK Edition 05/12/2017 page8)