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Non-Life: Bracing for transition

Source: Asia Insurance Review | Jul 2014

Hong Kong’s general insurance market has experienced strong growth in recent years with gross premiums showing a CAGR of about 10% from 2007 to 2013. Gross premiums grew 7.1% last year to HK$42.1 billion (US$5.4 billion), and the industry recorded underwriting profit of HK$3 billion.
 
 The market is heavily fragmented and intermediated with 95 non-life players and 20 composite players, 636 brokers and 2,400 agency personnel. It has traditionally been a very competitive market, but more so in the last year with a number of players eyeing aggressive top line growth and entering into new market segments to increase premiums. 
 
Asia Insurance Review speaks to five prominent players in Hong Kong’s non-life segment to get a sense 
of some of the priorities, challenges and opportunities. Below are seven key take-aways from the market. 
 
We also reveal more about the individual sentiments and outlook for various companies.  
By Ridwan Abbas
 
Seven trends in the Hong Kong non-life market
Readying for rule changes
The upcoming change in regulatory structure will see an independent body, the Independent Insurance Authority (IIA), introduced in 2015 to ensure greater oversight on insurers and intermediaries alike. The move will bring supervision of various insurance service providers – from insurers, reinsurers, brokers and agents – under one roof while equipping the IIA with greater inspection and investigation powers. 
 
General insurers are awaiting the finer details of this rule change, but what is clear is that the setting up of an independent regulator will have a transformative effect on the industry. For a start, there would certainly be greater compliance requirements resulting in a higher cost of doing business. 
 
Consolidation expected
Consolidation is expected to occur as a result of the new rules, especially given the drive towards higher capital standards as the territory aims to move towards a risk-based solvency regime soon. 
 
“The introduction of the new IIA is probably going to be less of a challenge for most large international companies. But for example, the majority of small to medium sized intermediaries in Hong Kong have limited resources and it could be a challenge for many of them, that might likely lead to consolidation in the market. Generally, the increased level of regulatory oversight will lead many companies to look at enterprise risk in a different way,” said Mr Doug White, ACE’s Hong Kong Country President.
 
However, consolidation would be a long process as many of the smaller companies have been quite resilient in the face of numerous challenges in the past. Also given the large number of licensed insurers, any movement on the M&A front would not likely result in significant changes to the competitive landscape in the near term. 
 
Rates trending down
Rates for most lines of businesses are softening in Hong Kong by about 5-10%, with the more affected lines seeing a reduction of as much as 15-20%. Others such as property continue to remain flat. 
 
The abundance of capacity coupled with the aggressive pursuit of market share by several players in recent times has contributed to a softening in rates. 
 
“I think there are still a number of companies who are pursuing volume over value, and that will translate into a soft cycle in the Hong Kong market,” said AIG’s Chief Executive for Hong Kong, Marc Breuil.
 
EC business still seeing losses
The employee compensation (EC) business for instance has been recording continued losses for a number of years and is expected to return to a soft cycle after a brief hardening in 2013. 
 
“The employee compensation market has seen underwriting losses of HK$325 million and I think given the outlook of the market, things will become worse before it gets better,” added Mr Breuil. 
 
The unique nature of Hong Kong’s market has seen little boundaries as far as rates are concerned. However, given the ultra competition and tightening of margins, the Hong Kong “market cannot afford to go soft,” he warned. 
 
RBC expected to improve pricing environment for insurers
But looking ahead, regulatory measures set to be introduced from 2015 onwards are expected to induce more discipline in the market. 
 
“Once RBC is in place, insurers will have to work out their pricing models to get adequate returns. I believe in the future, players would have to be more careful in pricing,” said Zurich General Insurance CEO in Hong Kong, Eric Hui.
However in the near term, QBE’s Chief Underwriting Officer, Shaun Standfield, stated several options in managing the competitive environment. 
 
“Firstly, segmentation is required to identify niche areas of profitability. Secondly, one needs superior claims and risk management services to retain and acquire new risks.” 
 
He added there are also opportunities to grow the medical portfolio – amid an ageing population and ongoing healthcare reforms – by identifying profitable segments. 
 
7% growth expected
Several of the insurers we spoke to, predict the rate of growth this year to hover around 7%, similar to that of 2013 when the market grew 6.7%. 
 
Mr Hui said that a slowing rate of growth in two of the main lines of business – employee compensation and accident & health – means the industry is unlikely to register double-digit growth in premiums as was the case pre-2012. 
 
“These two sectors were the major fuel for growth in recent years and when you see them not growing at the same pace as before, I’d say the growth in the general market will also not be a strong as it was before,” he said. 
 
But on the whole, prospects remain good owing to several factors including the strong pipeline for construction, increased trade flows within Asia, as well as favourable demographics, said Mr Standfield. 
 
“There is a fundamental shift in trade flows today, where in the past Asian trade flows to and from the US and Europe used to be dominant, we’re seeing that intra-regional trade flows between Asian economies are greater than to the Western world today,” he said. 
 
Mr Standfield added this would lead to growth in marine and trade credit insurance, with Hong Kong being a major beneficiary owing to its status as one of Asia’s major trading hubs. 
 
Talent war
There is currently intense competition for talent in the Hong Kong market and companies are spending big money to acquire and retain good people. 
 
It is estimated that for every 100 jobs available in the sector, there are only 90 qualified candidates. There are more jobs created than there are people to fill them, and the talent crunch is especially acute for roles such as underwriting and channel management. 
 
Some of the global insurers have had to transfer more staff from overseas into Hong Kong to make up for the shortage. Other more active measures include greater engagement with undergraduates to attract them into the industry, as well as consciously nurturing more leaders internally. 
 
“Insurance is no longer regarded as the poorer cousin of financial services and we are increasingly attracting the top 20% of graduates as they see the value and benefit of working for a global financial company, with opportunities for transfers and job rotation and are willing to invest their career with us, and likewise we are committed to investing in them,” said Mr Mark Mitchell, CEO Greater China for Allianz Global Corporate & Specialty (AGCS). 
 
He added, “We have to consciously build our bench-strengths – particularly in actuarial and underwriting divisions – which will create a pipeline for the future generation of talent and leaders, particularly in the face of acute talent shortage.” 
 
Under-pricing of long-tail risks
Risk adequate pricing, or the lack of it, is an issue owing to the intense competition which leads to anaemic rates. 
 
This is especially so with long-tail risks, with products such as employee compensation which has experienced chronic deficit for a number of years, said AIG’s Marc Brueil. 
 
 “I think this is a great cause of concern, especially when there’s no mandate in Hong Kong for resident actuaries in companies. So adequate reserving for long tail business is a concern here, especially around construction EC,” 
he said. 
 
Mr Standfield expressed similar worry for under-priced long tails risks: “The long-tail claims which came from those underpriced business written in the past may deteriorate and erode profitability. This however could be addressed by proactive and effective claims management, and also by setting up low-cost scheme and insurance facility to reduce the expenses.”
 
Impact of Chinese slowdown
Having been a beneficiary of China’s growth, the potential slowdown in the mainland could affect businesses in Hong Kong. 
 
“As it is, we saw only a 2.5% growth in the first quarter in Hong Kong, that has an impact on business such as EC, lines of business that supports export or re-export in Hong Kong like trade credit, cargo and product liability. So I do expect the slowdown in China to have an impact on the non-life market,” said Mr Breuil. 
 
But Mr Mitchell felt that any adverse effect has not been seen in the market yet and was unfazed. 
 
“Although Hong Kong companies rely heavily on manufacturing in China as well as tourism for example, but we’ve not seen evidence of a slowdown yet. Our clients have not reported a direct impact on their business and as a result we haven’t seen a direct impact on our sales,” he said.
 
Upping their game – Products & tech
Non-life insurers, especially multinational ones, have upped their game in terms of technology as well as new product offerings and enhancements. 
 
There have been numerous e-portals and mobile apps launched by insurers in Hong Kong to serve various needs of customers. Insurers see this as an avenue to gain a competitive edge over others; and to be in line with the expectations of consumers who increasingly utilise these technologies for their business and personal needs. 
 
At the same time, insurers have also enhanced their products to cover new and emerging risks. These include things such as cyber liability and reputation risk, and while the take-up has not been as strong compared to places like the United States, insurers have been working to improve awareness in these areas in a bid to create demand.
 
Company snapshots
 ACE – Measured approach wins 
Having stepped into the job for four months now, Mr Douglas White, Country President for ACE in Hong Kong, Taiwan and Macau, is understandably keen to sustain ACE General Insurance operations’ presence amongst large corporations, where it has been especially successful in writing property and casualty business. 
 
However, it is also looking to increase its involvement in other areas including insurance for mid-sized local companies as well as employee compensation (EC) business. 
 
Writing for profit
“We’re working to build up our EC offerings, but we’re not after market share. We’re going to be selective on the business that we write,” said Mr White who stressed that underwriting profitability remains a key objective. 
 
He added doing the EC business could also help open doors for ACE to access new accounts and market segments on which ACE has not previously focused. 
 
Getting an edge
In trying to get a competitive edge, ACE is looking to introduce more efficiencies in its business. One way is by improving the effectiveness of its relationship with producers by clarifying the profile of customers and risks that match their appetite, thus reducing the frictional costs of doing business. 
 
Like other insurers, ACE is also looking to leverage on technology to deliver its product more efficiently, as well as provide better service to clients. 
 
The other key area which allows the company to differentiate itself is in the area of people and talent. ACE prides itself on their unique culture which drives employee loyalty. ACE offers a clear road-map for personal development that will attract the best talent in the market, said Mr White.
 
He added that finding and retaining good people is a constant challenge for the industry. 
 
 AGCS – Finding niche areas
The tightening of supervision for new listings in China in recent times has made Hong Kong an even more attractive destination for mainland companies to launch an IPO. In fact, Hong Kong stands as the third largest IPO market raising US$7.9 billion as of June this year compared with $10.2 billion in London and $28 billion in New York. This trend has benefited Allianz Global Corporate & Specialty (AGCS) which offers insurance for IPOs, said its CEO for Hong Kong & Greater China, Mark Mitchell. 
 
“We’re seeing more Chinese companies come to Hong Kong to raise capital and the first quarter of this year we saw as many IPOs in Hong Kong as the whole of 2013,” said Mr Mitchell. 
 
Being a prominent player in financial lines, AGCS sees the healthy pipeline of IPOs in Hong Kong as one of its growth drivers going forward.
 
Operating in the space of large corporate and specialty companies , AGCS is also optimistic about its International Insurance Programme that provides centrally co-ordinated coverage that is harmonised and tailored to multinational clients with risks spread across the world. 
 
“Hong Kong companies as well as Asian business in general have been more actively diversifying and expanding their operations abroad and that’s a trend we’ve been seeing. We’ve observed an increase in buyer awareness and demand for Master Control Programmes when they’re acquiring assets abroad. Last year, we saw a 15% increase for this business,” he said. 
 
Strategising in a soft market
Mr Mitchell said the declining rates in the Hong Kong market is a concern, but AGCS is managing it by introducing new products in niche segments. Aside from IPO insurance, these also include cyber and reputation covers. 
 
“We’ve been focused on niche segments in Hong Kong, we’re continuously looking to introduce new products 
Thus far, ACGS has launched two new products this year and is preparing to introduce two more – targeting fine arts and SME business – before the end of the year. 
 
Expanding talent pool
As business expands, ACGS has been enhancing it’s bench strengths with the recruitment of more staff into its Hong Kong operations 
 
“We’ve been bringing in people with specific expertise from other parts of the Allianz Group to better access the North Asia market. That has also helped business in Hong Kong as it raises our profile in the market; what differentiates companies in our space is expertise and we focus a lot on demonstrating this through our engagement with clients and thought leadership initiatives,” said Mr Mitchell. 
 
 AIG – Note of caution amid optimism
The expansion in the non-life sector in Hong Kong has sometimes been at the expense of technical pricing, and the pursuit of growth in such a manner is not sustainable, according to AIG Hong Kong Chief Executive Marc Breuil. 
For example, covers for property often do not price in the element of CAT exposure. And should such CAT events occur, it would lead to a strong reaction in the market, he said. 
 
Statistics from the International Disaster Database show that in the period from 1980 to 2010, 58 natural catastrophes hit the city and an average of 1,649 Hongkongers were affected each year. 
 
On a separate note, Mr Breuil pointed out the high cost of intermediation in Hong Kong, which currently has around 600 licensed broker firms, 2,400 corporate agencies and 38,000 individual agents. He noted some progress being made in this respect arising from the ruling in a landmark case from 2012, which led to brokers adopting mechanisms for making standard disclosures to their clients, in relation to the commissions they received. 
 
 “The industry made progress last year with the introduction of commission disclosure provision but that only applies to brokers. With the number of brokers and agents, I personally think the cost of intermediation still remains a concern.” 
 
Getting an edge
In differentiating itself from others, AIG Hong Kong will continue to offer value-add service to clients in the corporate space. Other than handling claims in a fast and reliable manner, it seeks to provide practical solutions to companies and brokers alike. 
 
“We’re always looking to add value in terms of loss control services, medical rehabilitation and various other services which allows us to partner with our clients and help them better manage their risks.” 
 
On the retail side, Mr Breuil said AIG is investing to leverage on technology to deliver better service. 
 
“We are using technology to allow customers and agents to get immediate quotes and immediate claims handling services for example, so we differentiate ourselves with better level of service and using technology to do it.” 
 
Growth drivers & opportunities
Some of the growth drivers which AIG Hong Kong sees include construction projects in Hong Kong and Macau, expansion in casualty and financial lines. 
 
AIG is also continually looking to innovate and enhance its products, and sees cyber liability as an area where it can make headways as companies face increasing exposure to hacking and loss of data, said Mr Breuil. 
 
In the long run, Mr Breuil is also hopeful of opportunities in the Pearl River Delta region, in light of early discussions to explore ways to create a seamless insurance market incorporating Hong Kong and neighbouring Chinese cities. Such a scenario would avail Hong Kong insurers to more opportunities in dynamic cities such as Shenzhen and Guangzhou.
 
 QBE – Maintaining growth momentum
QBE Hong Kong has exhibited a strong growth momentum in recent times coinciding with the appointment of a new management team for the Asia-Pacific region, led by industry veteran Mr David Fried who was on board in April last year. 
 
To reiterate Hong Kong’s importance in the group’s Asia strategy, QBE recently created a parallel regional office here to complement the existing one in Singapore to reflect the equal emphasis on both insurance hubs to its Asia strategy. 
 
Future growth strategies
Its aggressive push in the Hong Kong market has seen it become the second largest general insurer. QBE is also the biggest insurer in the employee compensation business (EC) and the second largest player in the mortgage insurance accounting for 12% of total premiums. Moving forward, QBE Hong Kong has plans to expand its dominance from the EC and mortgage space, where it is the second largest mortgage insurer with 30% market share, into new growth areas primarily in marine, CAR/EAR and liability, said Mr Shaun Standfield, QBE’s Chief Underwriting Officer in Asia. 
 
On top of that, the group has also broadened its sales channel to include bancassurance having integrated Hang Seng Bank’s general insurance book of business in 2012. 
 
“Riding on our solid foundation, we will make use of the bancassurance channel to fuel our organic growth in Hong Kong,” he said. 
 
Product Innovation
QBE has also brought innovative solutions into Hong Kong riding on its network of global know-how, said Mr Standfield. For instance, it collaborated with QBE UK to jointly underwrite the insurance package providing compensation and public liability insurance to the Shatin-Central Link retail extension project for MTR. 
 
“More will come this year,” he added, indicating plans to adopt more of such approaches. 
 
Price pressure & low investment yield
On the proposed regulatory changes, Mr Standfield noted the formation of an independent regulator, the setting up of a Policyholders’ Protection Fund (PPF) and the impending risk-based capital regime, would increase the cost of business in the territory. 
 
While Asia remains the fastest growing insurance market in the world, there are significant headwinds on the horizon for insurers in Hong Kong. They include pricing pressure which may eventually erode profitability especially on the long-tail claims, as well as the continued low investment yield environment. 
 
Priorities
Amid the increasingly competitive market, QBE would be more selective in a bid to find profitable segments to write, stated Mr Standfield. 
 
Its other priorities include improving cost efficiency, focusing on talent recruitment and retention as well as strengthening its overall risk management framework.

 Zurich – Innovating to succeed
Zurich General Insurance has set its priority on moving into new product areas, improving its customer experience as well as enhancing risk awareness amongst corporates, said its Hong Kong CEO Eric Hui. 

The second largest general insurer by gross premiums in Hong Kong, Zurich is looking to deepen its offerings in areas like cyber liability and medical insurance. 
 
“We’re moving into a new line of business which is group medical, and we’ve been building a team to expand our medical business. We hope to serve various segments of clients, whether SMEs or big corporations,” said Mr Hui. 
 
Besides medical insurance, he added that Zurich was looking to make inroads into cyber liability and have rolled out cyber products in Hong Kong. However, he admitted that awareness and realisation of cyber risk is still relatively low in Hong Kong. 
 
“Cyber take-up is still slow here but we see this as an emerging risk and are trying to raise awareness much more with the brokers or directly with companies,” he said. 
 
“In general, we’re increasing our overall effort to make corporates see what their exposures are and what we can offer to help them manage these exposures.” 
 
Customer experience
Zurich Insurance is also stepping up efforts to understand the needs of customers even more than before and thus provide them with the desired service. 
 
Like many of its global counterparts, Zurich has been actively enhancing its technological offerings, which include recent launches of mobile apps for different market segments. They serve various needs such as claims processing, risk assessment, risk awareness, regulatory compliance and others. 
 
Talent management
A key area of competition in the non-life space relates to talent management. Zurich continues to invest significantly to build up its own talent pool, said Mr Hui who himself has risen through the ranks of the company having started as a management trainee in the early days. 
 
“We’re doing a lot to build up our own leaders and doing a lot of training especially in the technical areas such as actuarial, underwriting and claims. It’s a fact that we don’t see many young people coming into the industry, so it’s important that we grow our people well.” 
 
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