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Hong Kong: An Assessment of Growth

Apart from a brief interruption caused by the global financial crisis in 2008-09, the Hong Kong life market grew by a minimum of 10% a year from 1993 to 2016. In 2017, Hong Kong had the second highest level of life penetration in the world after Taiwan, up from 21st place in the space of only 16 years. In terms of life insurance density, Hong Kong ranked first in the world. This growth momentum was maintained despite the near-extinction of unit-linked insurance caused by increasingly stringent consumer protection regulations. But can this be sustained?

The exceptional growth rate in 2016 (23.79%) was caused partly by a surge in mainland visitor business and partly by strong sales of short-period endowments, particularly by China Life. The below-trend growth rate in 2017 (8.55%) was caused by a combination of factors, including a clamp-down on offshore insurance buying by the mainland Chinese authorities, the withdrawal of China Life from the short-term endowment market, the enforcement of more conservative projections of non-guaranteed policy returns, and the increasing returns available from competing investment channels (bank deposit accounts, bond funds and equities). These led to a 15.8% reduction in new business sales for 2017, within which, visitor new business dropped by 27.9% and resident new business by 4.1%. According to preliminary figures for the first half of 2018, the market growth rate fell to a fresh low of 6.9%.

A modest growth has been seen in demand for retirement annuities. Hong Kong’s ageing population means that more people are saving more money for retirement. According to Axco’s Insurance Market Report for Hong Kong, 21.8% of the population was aged 60 and above in 2015. This figure is predicted to almost double to 40.6% in 2050. Despite criticism over administration costs and investment performance, Hong Kong’s introduction of compulsory individual pensions known as mandatory provident funds (MPF) in 2000 is now being actively boosted by the government, which is concerned about the adequacy of retirement provision for this rapidly-ageing population. Several recent initiatives could rally growth in the sector, such as the government’s desire to introduce tax relief to encourage greater voluntary contributions to MPF schemes and the development of an internet portal that will allow employees to more easily and actively manage their MPF balances. However, it is widely believed that this will not compensate for the fact that Hong Kong's most insurance-aware cohort is moving from the accumulation to the draw-down phase of its life-cycle.

So, growth in Hong Kong clearly has a number of issues. Most observers believe that the ‘glory days’ of the Hong Kong life market are passed. Insurers are facing enormous cost pressures from current regulatory initiatives. Although the proposed risk-based capital system will probably be quite ‘light-weight’ compared, for example, with the EU's Solvency II, it will nonetheless increase the cost of manufacturing life policies, particularly the short-period deposit-replacement endowments which have fuelled much of the market's recent growth. Life policies may therefore become less competitive relative to other forms of investment.

Further complications include the fact that the clampdown on capital flight from the mainland is unlikely to be relaxed. In the meantime, mainland insurers are rapidly catching up with their Hong Kong competitors in terms of the pricing and comprehensiveness of their protection products. Internet-based distribution, communication and customer service functions on the mainland are far in advance of their largely agent-based and paper-based Hong Kong equivalents.

Despite its problems with growth in the industry, Hong Kong remains one of the most open economies in the world. A rapid expansion of the size of the leading insurers' agency forces, growing health awareness and therefore greater demand for critical illness and private medical riders and An uncertain investment environment encouraging savers to "warehouse" their uncommitted investment cash in short-term endowments paying higher interest than a bank deposit account have all acted as growth drivers in the past, perhaps the cycle could repeat.