Addressing the challenges facing insurance firms in Hong Kong
New regulatory frameworks, the impact of climate change on risk management, and the growing importance of environmental, social, and governance (ESG) concerns are creating changes and challenges for insurance firms. Digitalization also poses new opportunities for firms as they work to achieve efficiencies and keep up with growing demand for innovative products and services.
Bloomberg recently convened a group of insurance-industry experts to discuss these and other issues at an insurers-only event. The event took place at Bloomberg’s Hong Kong office and had a unique focus on challenges facing the insurance industry in Hong Kong. Here are key insights from the event.
Anticipating growth
Greater Bay Area (GBA) China — which includes both Hong Kong and Macao — just reopened to the world in February 2023, which has put the region’s insurance industry in the spotlight.
“Sitting in Hong Kong, it’s really hard to talk about Hong Kong insurance without talking about life insurance,” said Steven Lam, Senior Analyst at Bloomberg Intelligence, at the event. “We are making a lot of headlines in terms of mainland visitors coming here to buy policies.”
“To conceptualize how much growth we can get for this year… our view is that [the industry] will probably grow by as much as 70% in 2023 versus 2022,” added Lam. “That will be basically back to 70% of the 2019 level.”
Beyond the headline growth potential, however, Hong Kong insurers are benefiting from other developments. For example, the Hong Kong government’s pilot insurance-linked securities (ILS) grant scheme — which subsidizes up to HK $12 million of the upfront costs of the issuance of ILS — was recently extended for two more years.
The industry is also grappling with the effects of climate change. The West Pacific may experience as many as eight to 10 typhoons that hit the coast in 2023 — as well as “more activities in the northwest Pacific in comparison to the last few years” — according to event panelist Franz Josef Hahn, CEO of Peak Reinsurance.
Embracing ESG
As climate change-related issues increasingly affect insurers, they are prioritizing changes that help them adapt.
When asked via a poll question if insurance firms should have a Net Zero commitment, for example, 53% of event attendees who responded said “Yes” (another 35% said “Maybe,” and 12% said “No”). And when asked which of three climate-related efforts insurance firms should focus on over the next 5-10 years, 64% of attendee respondents selected “sourcing credible ESG data to produce data-driven insights for decision-making on investment or risk management.”
Several factors are driving insurance firms to embrace ESG. One is considering the long-term perspective.
“The insurance industry is here to help the public, to share the risks, so our investment horizon is very long because we want people to live longer,” said Terry Yung, Chief Investment Officer, BOC Group Life Assurance. “We need to keep the world good and sustainable to help our customers.”
Reducing risk is a second factor, according to Yung, and seizing on ESG as a trend is a third. (“We see in the market there’s a lot of new opportunities linked to new ESG insurance products,” said Yung.)
Adjusting to regulations
The Hong Kong insurance industry is also undergoing a significant regulatory shift with the implementation of new guidelines — including the Hong Kong Risk-based Capital Framework (HKRBC), which designates that a firm’s insured capital requirements are now based on the risk they carry, and the International Financial Reporting Standard (IFRS) 9 and 17, which changed the way insurance companies need to report their financial statements.
HKRBC, in particular, is having a major impact on the Hong Kong insurance market.
Going digital
Technology is helping insurers adapt their asset allocations, as well as other aspects of their business, to industry changes.
Going digital in the investment process is helping insurance firms achieve operational efficiencies and unlock new insights. But getting there takes a wealth of coordination and effort. For YF Life Insurance, which revamped its investment process in 2019 over an 18-month period, the journey was complicated.
“You have to involve a lot of different people internally — from finance, actuarial, risk, and other functions — to make sure the end-to-end process is well developed and implemented on a timely basis,” said Dennis Luk, Head of Investment at YF Life Insurance. “You must also involve a wide range of external stakeholders including your asset managers and service vendors. There are circumstances in which working with consultants would be highly beneficial.”
But while the journey can be complicated, the benefits are great once the system is live.
“You have improved automation… if you have a timely data connection, you almost have the real-time positions of your portfolio,” said Luk. “Of course it’s also likely to save you some costs, since you have more automation in the process. You can also generate a lot of more interesting data analyses because you have all the data loading on one single platform.”
A partner for change
Ultimately, putting ESG data to use, adapting to regulations, and embracing digitalization are all important for insurance firms in Hong Kong and beyond.
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