Can tax incentives boost Hong Kong’s market?

April 1 2020 by Andrew Tjaardstra

As Hong Kong’s (re)insurance market suffers from the impacts of Covid-19 and the recent protests, it’s vitally important the government continues to press forward with boosting the sector which makes up a significant portion of GDP.

The Hong Kong Financial Services Development Council (FSDC) government advisory committee, which includes chief executive of Asia Insurance Winnie Wong, has come up with extensive recommendations to help the SAR compete with regional rival Singapore in being a regional (re)insurance hub.

The FSDC argues that aggressive tax incentives for (re)insurance is a key reason why Singapore has become the world’s third insurance centre behind London and New York; Hong Kong is fourth.

Patrick Rozario, managing director Moore Advisory Services Hong Kong, told InsuranceAsia News (IAN): “The FSDC’s recommendations will help to further support the development of the insurance sector, in particular in areas of life insurance, health and retirement coverage in Hong Kong.”

Tax recommendations
The FSDC wants the government to extend the applicability of preferential tax rates (e.g. taxation at half-rate) to additional classes of P&C business; and also to extend the reinsurance tax incentives to direct insurers in respect of their reinsurance business.

In addition, the FSDC is advising LegCo to provide preferential tax rates (e.g. taxation at half-rate) to Hong Kong’s insurance and reinsurance brokers; provide a tax exemption on interest income derived from all fixed income / bond investments of insurance funds; and provide a tax exemption on the investment income of Hong Kong insurers if their insurance funds’ assets are managed in Hong Kong.

Patrick Chan, director and general manager at Nova Insurance, and chairman of the Confederation of Insurance Brokers, told IAN: “The CIB welcome and support the tax recommendations by FSDC which, if being adopted, will help to enhance and grow Hong Kong’s insurance industry.”

He added: “The proposal of offering preferential tax rates to Hong Kong insurance and reinsurance brokers from the activity relating to reinsurance business and certain general insurance business would no doubt drive our members to further explore those opportunities.”

In a nod to Hong Kong as an overseas hub, the FSDC also wants tax issues addressed where the Hong Kong resident parent companies or regional holding companies / headquarters manage the assets of their overseas insurance group entities in Hong Kong; and provide a tax deduction for the increase in reserves statutorily required by the regulator.

There are also a host of measures for tax benefits for individuals.

Andrew Mak, deputy head of underwriting, P&C at Peak Re has also welcomed the proposals saying they would benefit insurers, reinsurers and (re)insurance brokers alike.

Hong Kong is today far behind Singapore when it comes to specialist lines including marine.

Figures show Hong Kong’s gross premiums from “ships” in 2018 were US$311.7 million (HK$2.44 billion)  compared to Singapore’s hull and liability businesses, which earned gross premiums of US$917 million (SG$1.25 billion).

Although the Hong Kong has been competing more with Chinese ports in recent years, the report notes there is a significant room for growth as Hong Kong is geographically well placed to benefit from both the Greater Bay Area and Belt and Road initiatives.

The government is aware it needs to act and has already introduced the Inland Revenue (Amendment) (Profits tax concessions for Insurance-related businesses) Bill 2019, which is being scrutinised by LegCo.

Tthe bill offers a concessionary tax rate (i.e. taxed at half of the standard rate) for profits from the underwriting of marine insurance and the underwriting of specialty risks.

However, there is still plenty of room for more action.

Moore’s Rozario wants more specifics.

He said: “The FSDC’s recommendation still stop short of support / reform in specialty insurance like marine insurance, construction and project insurance, as Hong Kong has fallen behind from other insurance centres and hasn’t been developing these areas. The FSDC is aware of the issues and indicated that the government will propose support in the future for these areas, but the point is the government has been discussing these for years.”

Rozario continued: “It’s also important to develop the expertise for underwriting specialty insurance, maybe the FSDC could also consider incentives for developing human resources in these areas.”

The Hong Kong government has taken some good strides towards support for the market over recent years.

However, LegCo will need to make sure the legislation is passed and implemented quickly to avoid long delays such as the amount of time it took them to set-up the Insurance Authority.

Praveen Deswani, chairman of the Hong Kong Federation of Insurers noted: “We appreciate FSDC’s efforts in exploring ways to enhance the competitiveness of Hong Kong as an insurance hub and their recommendations in new tax incentives. Amid the Covid-19 and in view of the economic downturn, more facilitation measures will be needed and welcomed to help keep sustainable growth of our industry.”