It was an experience writing my thoughts while on the plane about to enter into the “jerebu” (aka haze) of Kuala Lumpur. I thought to myself, what did I achieve over the last couple of days running around in Victoria Harbour, Gloucester road, Wan Chai and Quarry Bay over in Hong Kong lurching my luggage while chasing after the MRT. During such times inspiration perhaps flow more prominently. I thought it would be great to recap those ideas, imagination, moment in time or perhaps remarks that were made by associates and companions ….
Hong Kong’s non-life insurance industry at a glimpse | surprisingly the market is not on Risk based (RBC) yet. The idea behind this, at least from my perspective, is that the government thinks market freedom or liberation is perhaps more important than guarding against any insurer within the market from failing. With 126 insurers operating non-life business in a small domestic market it is rather not strategic for strict regimented management by the regulator, it would be more strategic to ensure those insurers are able to compete, not just domestically but to be able to provide a viable platform for international business expansion. Of course, operating within the regulatory framework is a requirement but this should not be translated into any regimental controls.
Hong Kong insurance market must grow beyond its shores otherwise it would eventually lose out to other more vibrant markets…. perhaps we can make some comparisons with our Malaysian tightly controlled market; that little rigidity as magnified in Central Bank’s micro managing insurers to the extent where any changes to tariff wordings are closely scrutinised and surely an act that is certain to create barriers for players to expand beyond the Malaysian shores….
Already, Hong Kong government has started work towards increasing self regulation for the industry so that it can continue to expand the premium base more aggressively, drawing more premium back to Hong Kong from international markets; something that is a contrary of what’s our Central Bank is trying to do. There is a need to strive towards balancing policyholder protection and freedom for the market to manoeuvre if we need to attain that international markets status….
Noticeably, one past-time of the market is probably making up partnerships among friendly competitors, firstly for linking capacity to reinsurance support, establishing pool to writing specialised risks both for domestic and international markets, and supporting global accounts overseas where another competitor may has its network of branches to front those risks for them.
Talking about this thing called “fronting”, can’t help for it is worth some mentioning – it is to Hong Kong market that fronting is not something uncommon, for they have no RBC framework that create unnecessary higher than normal unearned premium reserving with occasional need to stress ones’ capital adequacy level that would somehow affect how such translation is being presented on the balance sheet, no optimisation of local capacity unlike Malaysia’s JPI / GPI 22 and most of all cessions coming in from overseas are most welcoming….
How then does this fronting works and are there any lucrative deals somewhere linking it to?
Usually there are master or captive programmes linking to those fronting contracts.
For example, insurer A has a master programme with an insured having operations in Hong Kong and three other countries, ie. Malaysia, Vietnam and Philippines. Assuming insurer A qoutes a total premium of HK$500,000 for the master programme, insurer A would need to contact their global partner in the other three countries for the locally admitted policy, ie. most regulations require that insurances of any local registered company be insured within the country through a locally licensed insurer. Assuming getting this process done up would cost them the following premiums (for simplistic illustration we assume all the risks are similar and of the same sum insured):
You may asked why Malaysia have such high Premium costs; that’s because it operates in a tariff environment.
Assuming also the Hong Kong operations may requires HK$300,000 premium…. the total costs of the whole programme “master scheme” would be HK$500,000.
In this respect you may also ask why the Hong Kong operations require such a high premium. Basically this is because insurer A requires a higher premium to deal with administration costs, especially those requiring trans-border works, and also to cater for certain differences in coverage (or condition) (ie., DIC) in any event the locally admitted policy does not provide cover for a certain types of loss.
The other two areas that insurer A needs to administer is the reinsurance commission requested by the fronting insurers overseas and the other is to maximise on the cession back to Hong Kong if the differential in rate is sizeable, ie., the rate charged in Hong Kong is much lower than that charged by the fronting insurer. As far as insurer A keeps the reinsurance commission down and optimise the cession level, the master programme is workable, otherwise this global partnership goes nowhere….
Then, will Malaysian insurers one day be able to get to this level of play? Anyway, Malaysian insurers must firstly work towards attaining the much required international rating, ie., S&P, AM Best, Fitch, etc. to reach this level of the game….
The airplane just hit the tarmac of the runway, and rightly or wrongly….that’s it for this post.
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