With the Hong Kong insurance market continuing to grow rapidly you would expect insurers to be optimistic about the prospects for the market. This optimism is not unbridled, however.
The growth is impressive. According to the most recent figures from the Office of the Commissioner of Insurance for 2011 the non-life market grew by 12.2% with premiums reaching HK$34.8bn.
Property insurance was the biggest growth area with a 20.5% increase while motor premiums jumped 11.4% and general liability grew 10.2%.
Deteriorating bottom line
The profitability of the motor market took something of a hammering as premiums rose with underwriting profit down from HK$105m in 2010 to HK$30m last year on premiums of HK$3.5bn.
China itself is seeing similar rates of growth with insurance premiums hitting ¥1.21tn (£118bn) in the first nine months of the year, up 7.3% from the same period last year, according to the China Insurance Regulatory Commission.
Property and casualty insurance premiums were up 14.87% on the same period last year to ¥399.2bn much of this driven by the massive spending on infrastructure projects, as Chris Colahan, regional chief executive for RSA, acknowledges: "The Chinese government's response to the global economic crisis has been to spend on huge infrastructure projects to help them buy their way out of trouble."
"The idea of us making huge amounts of money in China in the near future is fantasy." Colahan.
But Colahan warns against running away with the idea that this represents a big windfall for western insurers.
"The idea of us making huge amounts of money in China in the near future is fantasy. All overseas insurers combined have less than 1% of the market," he says.
"There are significant challenges on the regulatory front and very entrenched distribution through local insurers."
The insurance market in Hong Kong in particular is holding its breath as it waits to assess the impact of a series of regulatory changes that will see the OCI superseded by a new Independent Insurance Authority next year. This is expected to bring in new rules for insurers and intermediaries.
"We see a more risk-based capital approach emerging across the region which will give an advangtage to those firms already with a Solvency II mentality." Noble.
Martin Noble, from KPMG's Financial Services Regulatory Center of Excellence for Asia Pacific, felt that Western insurers had little to worry about from the new era of regulation.
"One of the key changes here will be that the regulator will have a lot of additional resources," he says.
"Hong Kong is mainly a domestic market which is not large but it is a regional hub which therefore puts a focus on group risk.
"We see a more risk-based capital approach emerging across the region which will give an advantage to those firms already with a solvency II mentality."
This sentiment was echoed by Colahan speaking from the insurer perspective. "It is more attractive for us to be in markets where there is some risk-based capital regime", he said.
The big unknown is the potential impact on the intermediary sector. There are an estimated 4000 firms operating in the general insurance market in Hong Kong that haven't previously been exposed to rigorous regulation. Opinion on the likely impact is divided.
"Ever since I came to Hong Kong there has been a lot of talk of consolidation on the insurance broking side but I have yet to see it happen." Frei.
Rudolf Frei, managing director of IBNR Insurance Consulting, strikes a sceptical note.
"Ever since I came to Hong Kong there has been a lot of talk of consolidation on the insurance broking side but I have yet to see it happen. The Hong Kong approach to regulation will be practical and sensible," he says.
Colahan also took a wait and see stance on consolidation: "People have been saying that it has to happen here for some time. Regulation might prove the trigger."
The claims arena in the region has been challenging for the market after 2011's unprecedented series of natural catastrophes but, overall, it has managed well.
"The Thai floods in particular exposed some of the lack of expertise and claims handling capacity but it was an extreme year," says Frei.
Some of the explanation for this lies in the growing complexity of claims in the modern world, says Colahan, who also highlighted the Thai floods, especially the contingent business interruption claims as being the main area of outstanding claims.
"We are at the beginning of a steep learning curve when it comes to the complexity of the global supply chain", he says, citing the impact on the motor component sector as an example.
Following the Japanese tsunami several manufacturers moved component manufacture to Thailand, only to be hit by floods a few months later.
Noble also highlights the slow progress in New Zealand where there has been a continuous series of earthquakes in the Christchurch region which has left some dangerous sites off limits to adjusters for long periods.
"Up to 10% of claims costs in the region could be fraud." Frei
Another issue that draws a different response depending on who you talk to is fraud.
Noble sums up the general market feeling on the topic, acknowledging that "the issue of fraud doesn't tend to be on the agenda as an increasing trend".
But Frei warns against such complacency: "Up to 10% of claims costs in the region could be fraud.
"The catalyst for action could be a major fraud across several companies or it could come from the new regulation in Hong Kong if it puts a lot of emphasis on transparency. But I don't see much action on that front".
Colahan sees a more complex picture: "Fraud is not such a significant issue as in the west but we are seeing the emergence of some fraud in employers' compensation and motor but I don't think we have reached a tipping point.
"If we do there will be some major issues in tackling this because there is no shared database and little co-operation between insurers."
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