HK insurers face higher credit risk on RMB business: Fitch

November 27, 2014 17:22
Hong Kong's life insurance segment has maintained its robust growth with the support of mainland tourists. Photo: Bloomberg

Hong Kong insurers are likely to face higher credit risk as they increase their reliance on mainland partners, Fitch Ratings Inc. said.

“As there are not enough yuan-denominated investment channels for renminbi policy providers, they will have to cooperate with rated life insurance companies or reinsurance companies in China, which are difficult to find,” Terrence Wong, director of insurance at the international ratings agency, told reporters on Thursday.

While such a strategy mitigates the Hong Kong insurers' foreign exchange and liquidity risks, it raises the concentration risks related to reliance on Chinese reinsurers.

“This would cast reliance and concentration risks on Hong Kong insurers, and if their mainland counterparts have credit risk, such risk could be transferred to the Hong Kong partners,” Wong said.

Many life insurers have launched yuan-denominated policies in view of the favorable currency trend. In the first half of this year, renminbi policies accounted for 9.6 percent of the total new life business, and 10.8 percent for the whole of 2013, according to data from the Office of the Commissioner of Insurance.

Fitch said the outlook for Hong Kong insurance business remains stable, but the rating may be revised to negative if insurers suffer severe underwriting volatility including price competition, market volatility or a dramatic shift in the interest rate curve over a prolonged period.

At the same time, tighter regulation could cast operational risks on insurers, the agency said.

Industry consolidation

Wong expects a proposal filed with the Legislative Council to establish an Independent Insurance Authority (IIA) will trigger a consolidation in the industry.

The IIA is a statutory licensing regime to regulate insurance intermediaries which are currently supervised by three self-regulatory bodies.

“We expect there will be a change in the way insurers run their business after the bill enacted,” Wong said.

At the same time, introduction of a risk-based capital (RBC) regime might put pressure on the operations of insurers.

“It is likely that we will see a market consolidation after the new capital regime is put in place as insurers will face higher compliance and administrative costs, especially in the case of small insurers,” he said.

“Merger and acquisition activities would help improve insurers’ capital efficiency, while large international ones might not be heavily affected if they have already adopted the RBC framework,” Wong added.

Continued growth 

The industry will maintain its growth in the near term, with the life insurance segment supported by mainland visitors.

“The penetration rate of life insurance in Hong Kong is already very high, probably each person has more than one life policy, but we still expect a double-digit growth in the sector for next year as it is supported by mainland travelers,” Wong said.

The life insurance segment has reported an average annual growth of 14 percent over the past three years despite the high penetration rate in the local market.

New business premiums of life policies sold to non-Hong Kong residents accounted for about 28 percent of the total individual new business in the first half, compared with 25 percent for the whole 2013.

“We expect purchasers from outside Hong Kong to reach 33 percent at most by the year-end,” he said.

At the same time, new business premiums for non-life insurance will grow between 3 to 8 percent next year, compared with 2.1 percent in the first three months of this year and 7 percent in 2013.

Hong Kong recorded about 41 million mainland tourists last year.

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Ayishah Ma is a financial reporter on Greater China issues.