Coming of age in Asia’s growing insurance sector

With a rapidly ageing population to service, Hong Kong’s insurance market boasts huge potential, but must be prepared to adapt

Coming of age in Asia’s growing insurance sector
With an ageing Asian population, Hong Kong has become a major hub for insurance 

In the past few decades, Hong Kong has become a major hub for insurance. By the end of June 2016, 161 insurers – including 14 of the world’s top 20 – were authorised to conduct business in Hong Kong. The insurance market in the region has come a long way since 1981, when HSBC Insurance (Asia) was first founded. Hong Kong is a mature insurance market, with talented professionals and a well-established legal structure. As of the end of 2015, the industry’s gross premium amounted to HKD 374.1bn ($48bn).

As part of the Pearl River Delta, Hong Kong is in a good position to be an important insurance and risk management centre for investments under the Chinese Government’s Belt and Road Initiative. Furthermore, as mainland enterprises are seeking to ‘go global’, they will favourably consider the advantages in establishing captive insurance companies in Hong Kong for insurance arrangements and risks management of their overseas businesses.

World Finance spoke to Candy Yuen, Chief Executive Officer of HSBC Insurance (Asia), to discuss Hong Kong’s insurance sector, HSBC’s position within it, and the challenges the industry is currently facing.

How has HSBC managed to become such a strong contender in Hong Kong’s insurance market?
We are well positioned with regards to the nature of Hong Kong’s insurance market for a number of reasons. First, we have a strong heritage and a strong brand both globally and locally, where we as a bank have been serving customers for 150 years. Second, we are a global and universal bank. The group serves customers worldwide from over 6,100 offices in 73 countries, in territories both in Asia and around the globe. This gives us, the insurance business in Hong Kong, the advantages of leveraging and synergising the strength, experience and learning from other markets.

Third, we already have a leading presence in the Hong Kong insurance and Mandatory Provident Fund markets; we ranked first in the Mandatory Provident Fund market as of June 2016 in terms of total assets under management, and we are a leading insurance company in terms of both in force and new business premiums. Finally, we have been enjoying a long and strong relationship with our customers built from our customer-centric services, offerings and extensive customer touch points, including in-branch and digital. Doing the right thing for our customers is paramount to the maintenance and deepening of this bond, and is accomplished by knowing our customers.

Hong Kong remains a high-growth sector in the region as those in the city look to fill their protection gap with insurance products

At HSBC, we excel at consumer insights, where we dedicate ourselves to producing consumer surveys, reports and tools, such as The Future of Retirement, The Value of Education, The Power of Protection and the HSBC Retirement Monitor, among others.

How has the recent economic slowdown in Asia impacted Hong Kong?
Recently, impacts from an economic slowdown in Asia are a very real concern for those in Hong Kong. Hong Kongers are now more vulnerable than ever to the protection gap created upon the loss of a breadwinner. According to Swiss Re’s Asia-Pacific 2015 Mortality Protection Gap report, Hong Kong’s mortality protection gap in 2014 was approximately HKD 4.2trn ($538bn), up from HKD 3trn ($391bn) in 2010.

According to a HSBC customer survey, 70 percent of our customers have a protection gap and require on average around three times their current coverage to achieve adequate protection. One can imagine the breadth of coverage needed to protect their loved ones in the event of an unfortunate incident.

However, Hong Kong remains a high-growth sector in the region, as those in the city look to fill their protection gap and fulfil their goals, hopes and dreams with insurance products. The continuous low interest rate environment has spurred high net worth individuals to see universal life insurance products as an attractive savings option, while enjoying life protection. The life insurance industry is recording historic growth, primarily driven by demand for Hong Kong insurance products by non-resident customers.

What is the most important issue affecting the insurance industry in Asia today?
hsbc-fig-1Like many parts of the world, demographic change is a prominent issue affecting the insurance industry, with far-reaching social implications. It is forecast Asia will account for 62 percent of the aged population globally by 2050, and so the need for pensions and old-age protection will stimulate demand for insurance coverage.

Healthcare reform is also on the agenda of several Asia-Pacific countries. This will create incentives for insurers to develop a wider variety of medical and health insurance products and better position themselves in formulating their marketing and pricing strategies.

In particular, society is currently experiencing an increased exposure to ‘longevity risk’. What this means is people are living longer than expected (see Fig 1), and hence run a higher risk of outliving their savings in light of increased healthcare costs as they live longer. According to the latest Power of Protection report by HSBC, 69 percent of Hong Kong residents worry most about their health, with healthcare costs posing the biggest health-related concern. As such, besides life protection products, HSBC Insurance has been addressing this concern through launching new health products, such as critical illness insurance plans, in 2016.

What sort of challenges does this present to the insurance sector and how can they be resolved?
Hong Kong has the highest average lifespan in the world (81.2 years for men and 87.3 years for women), according to recent Hong Kong and Japanese Government censuses. In a world of extending lifespans, it has become increasingly difficult for traditional pension plans to be the sole source of retirement funds. In Hong Kong, the burden to support the elderly has increasingly shifted to the younger generation, with mounting pressure as the number of senior citizens grows.

This will also result in increased stress on age-related spending for governments, as the population aged 60 or over will outweigh young citizens by 2050, resulting in a smaller tax base. This will mean defined benefit pension plans will be more likely to become underfunded, and this will be exacerbated by a low interest rate environment. Our survey also shows more than 63 percent of people with self-paid life cover do not know what the pay-outs from their policies would be, or do not think they are enough. The survey results also identify 53 percent of Hong Kongers think someone else should take responsibility for funding the cost of their personal healthcare, and 60 percent of people believe someone else should be responsible for ensuring their family’s financial stability.

To cope with this challenge, insurers will need to deploy a holistic retirement strategy and a new business model to address retirement needs. We will also need to be aware of the limitations of protection plans offered by employers, as they usually only provide a basic level of protection.

Our survey also shows that people who plan most actively are more confident in their future than those who do not. It is important to conduct personal planning and hold a regular financial ‘check-up’ with a trusted financial advisor. To help society further plan for their life after work, HSBC launched the Retirement Monitor, becoming the first and only firm to release retirement spend indicators using real statistics in the market. This information is publicly available and updated quarterly to reflect the latest changes in prices and consumer behaviours. We aim to help our customers achieve their ambitions, hopes and dreams, including their retirement aspirations.

Where do you see the Hong Kong insurance sector going in the next few years?
Insurers will be deploying digital as an enabler to improve customer engagement and experience, and as a key distribution channel. Fintech and digitalisation have become the main focuses among governments, regulators and insurance companies. These present ample opportunities for the industry to leverage new technologies to improve customer offerings and enhance its omni-channel experience.

Traditional insurers are expected to face much competition within the industry, while smart deployment of technology can capture the tremendous opportunities in this rapidly growing insurance space. Both regulators and industry players have been striving to catch up with the latest technology in order to serve the best interest of our customers in Hong Kong, as well as to ensure a healthy industry growth. As an example, we have also launched a simple term product, sold online, which has been well received by our customers.

We expect the industry to introduce more lifestyle-centric offers to relate insurance to the daily lives of customers. Insurers strive to use lifestyle offerings to build long-standing, meaningful relationships with customers. New ecosystems will be evolved. Lastly, there will be changes in the regulatory landscape in Hong Kong, as the Office of the Commissioner of Insurance transits to the Independent Insurance Authority. We look forward to continuing to work closely with the Insurance Authority for the future and the betterment of the community.