Two themes are expected to drive the insurance industry in Hong Kong. One is integrating with mainland China via the Greater Bay Area (GBA), the idea of merging Hong Kong’s international financial sector with Shenzhen’s tech industry to create a global rival to Silicon Valley. The other is fintech, which is seen as an enabler of a GBA-wide business.
That’s what regulators, industry bodies and some insurance companies are talking about. There are likewise two reasons to think that these ideas will be realized.
First, the politics driving cross-border integration is inevitably setting the direction: Hong Kong’s elite is parroting “GBA” left, right and center. (Beijing is expected to announce measures to spur integration on February 21.)
Second, and more compelling, is that the economics look very attractive to Hong Kong-based insurance companies. Integration means huge business opportunities, and technology is the likeliest means of realizing them.
Let’s take a look at the numbers.
Liu Anlin, deputy chairman and president of China Life Insurance (Overseas), says in the first half of 2018, Hong Kong’s population of 7.4 million people took out 13 million life-insurance policies. In other words, the local market is saturated.
Much of the Hong Kong industry’s growth is due to mainland Chinese visitors: for example, they accounted last year for about 63% of critical-illness policies sold in the city, up from 58% in 2017. (Liu, like the others cited in this story, spoke at a conference last week in Hong Kong organized by CLIO.)
There is a growing opportunity across the border, meanwhile. Guangdong Province boasts a GDP of Rmb8.9 trillion. Per capita income is relatively low, at Rmb3,900, but residents are increasingly eager for insurance products. Most of them can’t travel to Hong Kong to buy them. Meanwhile, more Hongkongers are expected to retire in the more affordable Guangdong, but will continue to buy insurance.
Moses Cheng, chairman of the Hong Kong Insurance Authority, notes that 27% of household finance in mainland China has poured into insurance, investment and savings products. Wealth management and medical insurance are the most popular retail products, but whereas 18% of Hong Kong households own such cover, only 6% of households in major Guangdong cities do.
Three growth areas
James Lau, Hong Kong Secretary for Financial Services and the Treasury, says integration creates opportunities for other insurance sectors, including maritime insurance and catastrophe insurance. In particular, he sees bright prospects for cat bonds, letting Hong Kong’s capital markets securitize catastrophe risk; among the main cities in the GBA, last year typhoons and other disasters triggered Rmb4.5 billion in claims and compensation.
What is needed, he says, is a cross-border legal framework to allow a sort of “Cat-bond Connect”, in which Hong Kong-based insurers provide catastrophe coverage to clients in mainland GBA cities such as Shenzhen or Guangzhou, or Macau.
A third area can be added: the I.A.’s Cheng says there is a huge demand in the GBA for commercial insurance. Corporations operating in Guangdong may want to set up captive insurance businesses, be they multinationals or domestic companies and state-owned enterprises. But the expertise lies with Hong Kong’s insurers.
Right now, Hong Kong’s government, regulator and insurers are pushing Guangdong authorities to let them set up after-sales service centers, to handle claims, renewals and other customer needs. From there, says Secretary Lau, the hope is that Hong Kong’s insurers can eventually sell products directly to customers in Guangdong and Macau.
But how? Via technology, says Chan Pui-leung, chairman of the Hong Kong Federation of Insurers (day job: general manager, China Taiping Life Insurance, H.K.). “Do we do this traditionally, or are there innovative ways to do so?” Noting the size of the Guangdong market compared to Hong Kong’s, he says a conventional bricks-and-mortar approach would be too expensive.
Secretary Lau added that, if Hong Kong insurers were to be able to sell directly into the GBA, they’d need to rely on innovation and tech-driven connectivity.
Carol Hui Mei-ying, executive director of the HKIA, says only fintech can overcome the challenges of scaling a business across borders. “Fintech is good for lowering costs and increasing efficiency,” she said, noting that the I.A. is trying to push this by licensing purely digital insurers in Hong Kong.
Cool ideas, few specifics
The real problem is that both GBA and the fintech required to make it something tangible are both vague.
In the case of cross-border integration, the holdup is Beijing’s capital controls and its restrictions of people traversing the border.
I.A.’s Cheng says insurers can’t operate smoothly in a GBA context so long as customers can’t pay for Hong Kong insurance premiums from a mainland bank account. This is one driver for the industry’s demand for after-sale service offices in Guangdong.
Then there’s the insurtech part. There are plenty of interesting ideas being considered to help Hong Kong insurers access the GBA market. The I.A.’s Hui notes that blockchain could be used to verify customer identities, handle compliance, and process claims.
But if GBA remains a foggy concept, the clouds thicken around digital solutions. Plenty of regulators and industry players have called for a government-led eKYC utility, on or off a blockchain. None have emerged.
Timothy Leung, deputy general manager at Tencent, the creator of WeChat, suggests cross-border integration of insurance will rely on two themes.
First will be the use of scenarios for selling insurance; in other words, Zhong An-style micro policies around, say, whether an airplane takes off on time. Leung thinks this sort of policy should apply to health and critical illness coverage.
“In the mainland, we use WeChat to record the number of steps users take every day,” he said. Users like to know their ranking, and this desire gives Tencent insight into their activities, such as whether they go hiking. “A good scenario penetration would remind people to pay attention to their health and of their need for health insurance,” he said.
That’s for product. As for cross-border integration, Leung noted that WeChat Pay is currently piloting a scheme that allows Hongkongers who access the app with their own bank accounts to pay for services in mainland China.
The I.A.’s Hui said, “If you can clear up the [cross-border] payments issue, everything else can work.”
Leung suggested if mainland payment apps are bundled with blockchain for identity verification, it could create conditions in which Hong Kong insurers can sell products into the GBA.
Such a blockchain would, however, be overseen by central authorities rather than be fully decentralized, Leung noted.
How exactly is this supposed to work?
This discussion leaves us with important questions. Will Beijing allow some form of relaxation on capital controls to make GBA a reality for insurance companies (among others)?
Is scenario-based insurance, in which people could be penalized for not, say, recording X number of steps on their WeChat app, compatible with international regulatory and consumer-protection standards?
Will Hong Kong-based insurers really be able to compete on a level playing field in Guangdong Province? If they rely on “fintech”, does that mean they must operate on Chinese super apps to access payments?
Is a utility, public-private blockchain for digital identity going to be workable, and under whose rules?
The GBA discussion for insurers has been about Hong Kong firms accessing the GBA, but what happens when mainland internet companies receive virtual banking licenses – who will end up with the most compelling insurance offerings on their platform?
Finally, how prepared are Hong Kong’s largely traditional insurers to seize the opportunity in GBA, should it arise? The incumbents, despite their various digital initiatives, are still tied to their traditional agency models – a business model that is unlikely to work in the GBA. As CLIO’s Liu said, “We have to look more at fintech” to compete.