Thursday, October 19, 2017

Peak Re: Hong Kong’s role as a reinsurance hub

Hong Kong is on the path to becoming a dedicated hub for mainland China’s reinsurance needs after the city’s insurance regulator signed an agreement with its Chinese counterpart in May to develop mutual recognition of the solvency regimes in the two markets.

The agreement could mark the first step towards developing an integrated insurance and reinsurance market between the two places, with Hong Kong ultimately being recognised as an onshore jurisdiction for regulatory purposes. While this is still a few years away from being realised, with some potential pitfalls along the way, both sides are working hard to fulfil the potential of this vision and are committed to its success.

Indeed, alongside banking and finance, insurance is seen as a key pillar of China’s Belt and Road initiative. Enabling Hong Kong to write Chinese business on an equal footing will help these projects to attract international finance and thereby facilitate the government in achieving its highest-priority national objectives.

“While certain details are relatively vague at this moment in time, the high-level concept behind the agreement is very positive for Hong Kong,” says Andrew Mak, deputy head of underwriting at Peak Re. “For Peak Re, we would certainly like to have more engagement with the market to apply our expertise. We’ve been quite successful at capturing business in Europe and the US, and what we want now is to attract those additional capital flows in the market to do Chinese reinsurance business out of Hong Kong.”

What is equivalence?
At present, the Office of the Commissioner of Insurance in Hong Kong and the China Insurance Regulatory Commission (CIRC) on the mainland are developing their own risk-based solvency regulatory regimes. Under the Equivalence Assessment Framework Agreement on Solvency Regulatory Regime, supervision of the insurance industry in both jurisdictions would be harmonised, thereby avoiding regulatory overlap and facilitating cooperation.

“The mutual equivalence recognition of the solvency regulatory regimes between the two places will promote the development of the insurance industry on both sides and encourage cross-border business,” said John Leung, the commissioner of insurance in Hong Kong. “Before the completion of assessment, both sides agreed on a transitional regulatory arrangement which recognises the solvency regime of each other as the same or similar to that of another. We will then discuss with the CIRC on the specific measures under the transitional arrangement.”

The goal is to complete the equivalence assessment within four years, by which time Hong Kong will have adopted its Solvency 2-style risk-based capital regulatory framework, bringing it in line with the mainland’s China Risk Oriented Solvency System (C-ROSS).

Chen Wenhui, vice-chairman of CIRC, has said that mutual equivalence recognition will “strengthen the cooperation between the two insurance sectors and enhance the regulatory efficiency and market effectiveness of both places”.

The 18 reinsurers operating in Hong Kong have welcomed the news as a significant step forward for the industry.

Why it matters
Demand for insurance tends to outstrip economic growth in countries that are developing rapidly. This is especially true in China, where premiums are currently less than 5% of its gross dome
stic product — and are forecast to grow at twice the pace of economic growth.

Such forecasts are not unrealistic. At the moment, short-tail risks such as property, engineering and motor are a significant driver of growth, but this will change as China’s growing wealth eventually produces demand for greater sophistication. For example, the life industry is growing very strongly currently but is driven by a desire for investment products. As demand shifts towards genuine risk transfer, the market can expect substantial growth on the life side. At the same time, China is still a developing country that is building considerable amounts of physical infrastructure.

“When you look at where the majority of the growth in the future is coming from, it’s China,” says Mak.

While most reinsurers in Hong Kong currently enjoy sufficient access to mainland business, there are hurdles to broadening and deepening their operations at a pace commensurate with Chinese growth and the evolving needs of its economy.

“Becoming a reinsurer in China is not easy,” says Mak. “So a lot of companies are exploring alliances and there’s a lot of Chinese capital in search of  diversification. It’s still the case that China only has one dominant reinsurance company. For a market that size, they need more reinsurers to be working there.”

Creating a level playing field with China would allow reinsurers to take advantage of Hong Kong’s financial infrastructure and business-friendly environment to help mainland insurance companies transfer risk and manage their capital effectively.

Why Hong Kong
As a mature financial centre, Hong Kong offers a suite of resources that cannot be quickly replicated onshore in China, from consultation, accounting and actuarial talent, to a banking sector that can  support the development of solutions that will be needed as the Chinese market evolves.

With the growing insurable value on the mainland, the insurance market will not be able to absorb all of the aggregation because reinsurers’ risk appetite is bound by considerations such as financial strength, the macro environment and the nature of the losses. As a result, they will need to develop alternative solutions to securitise these exposures.

“All the insurance companies in China are becoming very sophisticated in the way they buy reinsurance,” says Peak Re’s Mak. “Other than the conventional treaty arrangements, I’m sure that in the future there will be other instruments that can be arranged in Hong Kong.”

Whether this is through insurance-linked securities, parametric triggers or other tools for securitising portfolios, Hong Kong is well placed to innovate these solutions for the Chinese market.

Of course, Hong Kong also offers advantages compared to onshore Chinese jurisdictions, as well as the advantage of liquidity versus both onshore and offshore peers — the government tends not to interfere in capital flows, which is not the case in China, and Hong Kong is still the preferred global centre for renminbi clearance ahead of rival reinsurance centres in London, Bermuda or Singapore.

Stronger and deeper financial ties between Hong Kong and the mainland go hand in hand with the increasing integration of the Pearl River Delta economic region, symbolised by the physical link provided by a new bridge to Macau and Zhuhai, and a high-speed rail link to Shenzhen and Guangzhou.

“Equivalency, Belt and Road, and the river delta are all coming together,” says Mak. “This is a strong message to the markets and a positive sign for reinsurers.”


Andrew Mak,
deputy head of
underwriting at
Peak Re

Peak Re
General enquiry:
info@peak-re.com
Tel: +852 3509 6666

 

 

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