Friday, January 19, 2018

John Leung warns of ‘grey rhinos’

John Leung, chief executive of Hong Kong’s Insurance Authority, is warning the city’s insurance industry that it may face some challenges in 2018 after several years of strong premium growth.

“There are some black swans and grey rhinos out there on the horizon,” Leung told industry participants during a speech at the FT Insurance Summit at the Four Seasons hotel in Hong Kong on Thursday. “The word ‘resilience’ may become a buzzword in 2018.”

The head of the city’s new independent insurance regulator did not detail what risks he was referring to, but the warning about swans and rhinos echoes a front-page editorial in The People’s Daily from July, which said that Chinese regulators “need to enhance the sense of urgency to prevent and resolve financial risks” and should not turn a deaf ear “both against the ‘black swan’, but also against ‘grey rhinoceroses’”.

While a black swan event is widely understood as a risk that is difficult to predict, such as the global financial crisis, the grey rhino hasn’t yet captured the public imagination to the same extent — but refers to an obvious risk that is ignored until it is too late, such as Donald Trump’s presidential run or, in the case of China, a market collapse.

Even so, the industry in Hong Kong continues to grow for now, as the authority revealed earlier this month when it published statistics for 2016, which showed that total gross premiums had increased by 20.7% to HK$451.7 billion (US$58 billion).

However, he also urged the industry to focus more of its efforts on the annuity side of the life business, which makes up just 3% of premiums. By contrast, the individual life sector comprises 95% of total life business and is largely driven by sales to Chinese customers, though the authority has stopped publishing statistics on mainland sales.

Despite his talk of various shadowy animals on the horizon, Leung also pointed to opportunities. In particular, he championed the industry’s move towards digitisation and heralded two new initiatives launched by the authority during the past few weeks — its so-called insurtech sandbox and a fast-track scheme for digital-only insurers.

The sandbox, he explained, helps authorised insurers experiment with new insurtech and other technology applications without the need to achieve full compliance with the IA’s usual regulatory requirements, allowing insurers to gain real market data and collect user feedback in a controlled environment before their formal launch in the market.

The fast-track pilot scheme has created a dedicated queue for new authorisation applications from insurers using purely digital distribution channels. Leung said that it will speed up the authorisation process by giving the authority an opportunity to review proposed digital distribution channels at an early stage.

“We’ve already seen very positive responses,” he said. “The speed at which these initiatives have been rolled out demonstrate our determination to embrace technology by introducing flexibility to the existing supervisory requirements.”

He also spoke once again about the potential for insurers and reinsurers in Hong Kong from the Chinese government’s Belt-and-Road scheme, as well as the opportunity for the city to become a captive-insurance hub for companies involved in the infrastructure-building programme.

More broadly, Leung articulated the authority’s core values, which will guide its phased takeover of direct regulation of the insurance industry by 2019 and the implementation of risk-based capital by 2022 or possibly later.

There may be some risks that lie ahead for the industry in Hong Kong, but the general message from Leung — and from other speakers at the summit — was one of guarded optimism. Beware rhinos, but don’t forget that Hong Kong is a tiger.

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