Raymond Tam, FSA, led the development of insurance and pension regulations in Hong Kong before retiring in 2020. Here, he shares his insights on the technical development of the Hong Kong market.
First, could you tell us a bit about yourself?
I began my actuarial career in 1979 with life insurance companies in Canada and the United States. While vacationing in Hong Kong in 1987, I made cold calls to three actuaries asking about actuarial opportunities and got two job offers. At the time, I was concerned about the crime rate in Philadelphia, so I moved back home to work as an actuarial consultant in life insurance and pensions.
In 1992, I joined the OCI and soon became the first local-born actuary to serve as assistant commissioner of Insurance (long-term business). As the OCI was only established in 1990, there were no insurance regulations other than the HK$2 million solvency margin. Actuaries were free to choose the reserving methods and assumptions. So I designed life insurance regulations based on Solvency 1 and the appointed actuary system. As the only FSA in the OCI, I needed help from a strong actuarial professional. I urged the Actuarial Association of Hong Kong to reconstitute into the Actuarial Society of Hong Kong and worked on the first Hong Kong statutory mortality table. After completing Solvency 1 in 1995, I was reassigned to design Mandatory Provident Fund (MPF) scheme regulations. In 1998, I joined the new pension regulator Mandatory Provident Fund Scheme Authority as executive director.
After China joined the World Trade Organization, opening up its insurance market, I moved to Shanghai in 2002 to work in a new JV life insurance company. I was invited by the Chinese Insurance Regulatory Commission (CIRC) to join the Actuarial Expert Panel and participated in setting up the China Association of Actuaries. I was in charge of setting up the pension track for actuarial exams and training the first pension actuaries in China. I was the first recipient of the Actuary of the Year Award in China in 2012.
In 2014, I moved back to the Hong Kong regional office working as the chief risk officer (CRO) for Asia. In 2017, I joined the new Insurance Authority as executive director in charge of policy development, including the design of RBC, InsurTech and insurance legislation. I built up the actuarial team before my retirement in 2020.
Given your experience, you have participated in and witnessed generational change in Hong Kong. Could you share with us the demographic and customer trends in Hong Kong today?
Hong Kong has the world’s highest life expectancy and the third-lowest fertility rate, resulting in a rapidly aging population. As the designer of the MPF scheme regulations, I think that the 10% monthly MPF contributions would be inadequate for the retirement needs of most workers. Therefore, many people buy life insurance to save for retirement.
The first foreign insurance company in China was established in 1805, offering general insurance. Foreign companies later expanded into life insurance, but exclusively for foreigners. In 1919, C.V. Starr founded what later became AIG in Shanghai, trying to sell life insurance to the locals. But Chinese people were not interested in life insurance with a payout only upon death. So, Starr invented insurance products with periodic living benefits, and he became very successful. This concept of using life insurance for savings became deeply entrenched. Today in Hong Kong, the dominant products are still whole-life or endowment products with periodic living benefits, particularly favored by older generations.
The younger generations are more health-conscious and have a preference for health insurance, as Hong Kong has the second-most expensive private health care in the world after the United States. Public hospitals are extremely crowded, with 90% of patients served by only 45% of doctors and monthslong waits for services like surgeries. Critical illness coverage is very popular for the younger generations and is either embedded in the insurance policy or as a rider.
In 2019, the government introduced the tax-deductible Voluntary Health Insurance Scheme (VHIS), which encouraged the purchase of approved hospital indemnity insurance plans to divert people away from public hospitals and to private health care. VHIS plans are very popular with younger generations.
Apart from demographics, could you also share more on insurance penetration in the Hong Kong market and further elaborate on the central issues observed in the industry?
Hong Kong has the world’s highest life insurance penetration of 19.4%, and together with nonlife penetration of 2.2%, Hong Kong also has the world’s highest insurance penetration of 21.6%.
This high life insurance penetration is mainly due to the 120,000 licensed individual insurance intermediaries (as of June 2022), or 3.3% of the working population engaged in selling insurance, which is among the highest proportion in the world. There were 1,075,080 new individual life insurance policies sold in 2021 (which translated to 14% of the population, compared to about 3% in the United States or the United Kingdom). Most of the policies are regular premium whole-life policies, which contributed to the high insurance penetration from in-force business renewal premiums.
Despite having the world’s highest life insurance penetration, Hong Kong has an issue of mortality protection gap of HK$6.9 trillion or about HK$2 million per working person, according to a protection gap study released by the Insurance Authority in 2021. Although Hong Kong has the world’s most expensive residential property market, mortgage protection coverage is rarely used, as it is not required by banks. Hong Kong is one of the world’s most expensive places for children’s education, but people only think about using insurance to save money rather than taking out sufficient coverage for premature death. The large number of insurance agents with less than one new policy per month on average cannot be sustained by selling term coverage. Term life constituted about 0.5% of new business premiums, contributing to the high protection gap.
Most of the life insurance policies are participating policies. Some insurers used aggressive investment return assumptions leading to high policy values in policy illustration. The Actuarial Society of Hong Kong has raised the issue of potential unhealthy competition on the assumed rates of return and asked the Insurance Authority to issue guidelines for actuaries to use in policy illustration.
The general insurance sector contributed about 10% of premiums of the industry, divided among 100 insurers. Many players are too small to achieve economies of scale, straining the profitability of the sector. Some actuaries were under pressure to underestimate claim reserves and premium rates. The general insurance actuaries of the Insurance Authority started to review claim reserves, leading to strengthening of reserves and premium rates, resulting in improvements in the combined ratio of the sector.
You shared that Hong Kong has the highest life insurance penetration rate in the world. Could you please share with us the primary products sold in the market? What are the leading platforms or channels preferred in the industry?
The primary products sold in the market are whole life (about 75% measured by annualized premiums) followed by endowment (about 20%). These products often have some form of periodic benefits and are packaged with embedded benefits or riders, like critical illness or hospital indemnity insurance. Market share of term life insurance is only about 0.5% (compared to 20% in the United States).
The leading channel is bancassurance, with about 18,000 licensed technical representatives of the banks producing 41% of premiums. The agency channel had about 90,000 licensed individual insurance intermediaries producing 37% of premiums. The brokerage channel produced 19% and the remaining 4% was from online or direct marketing. The average premium size and lower productivity of insurance agents compared to bank tellers indicate that many insurance agents are part-timers.
The primary bancassurance products are endowments of shorter maturity, with higher rates of return than term deposits but stiff penalties on early surrender. Premium financing is often used with loans from banks on floating interest rates. The Insurance Authority and the Hong Kong Monetary Authority had issued guidelines on premium financing, which is timely, as the U.S. Fed is rapidly raising interest rates, which Hong Kong was expected to follow sooner or later due to the currency peg. The primary products sold by individual insurance agents are whole-life products.
The digital channel has less than 2% market share from five new virtual insurers and a number of multi-channel insurers. The big life players with sizable agency forces might not be too keen on developing the digital channel so as to avoid channel conflicts with their agency channels.
The Hong Kong Monetary Authority is active in developing digital banking and has pushed for the adoption of OpenAPI to facilitate digital banking by four phases and is now already moving into the fourth phase. Development in the digital channel of insurers could be enhanced when the Insurance Authority rolls out OpenAPI.
Most policies were denominated in USD (72%) followed by HKD (23%) in 2021. Insurance companies offered higher investment return on USD policies for several reasons. USD debt securities often have a higher yield than HKD securities. HKD fixed-income securities in longer durations are in short supply, so insurance companies would have to invest in USD securities with additional costs of currency swaps, and longer swaps are not even available. Many HKD debt securities are not rated, thus attracting higher capital charges. It is easier to manage a portfolio of USD fixed-income securities than HKD. Policyholders would favor the higher return on USD policies without worrying about currency risk because of the currency peg.
You’ve discussed the customer demographics, penetration rate and popular products. Now can you provide an overview of major players in the Hong Kong insurance market?
The life insurance market used to be dominated by foreign players operating as subsidiaries of the world’s leading insurance groups. This has gradually evolved into regionalization, with Hong Kong as the insurance center for the Asia region or even worldwide operations. We now have three insurance groups headquartered in Hong Kong under the group-wide supervision of the Insurance Authority.
The bancassurance channel, with 41% premiums, is dominated by players connected to leading banks, particularly bank-note issuing banks. The agency channel, with 37% premiums, is led by players with sizable tied agencies. Finally, the brokerage channel with 19% is more relied upon by the medium-sized players to complement their own tied agencies. Chinese players are also gaining market share.
The life market is more concentrated and dominated by the top dozen or so life players, with the remaining players each having a market share of less than 1%. The nonlife market is less concentrated, with over 100 nonlife players. The top 10 players have a 42% market share, and a number of these are foreign players. The next 10 players have a 21% market share, and the rest are smaller and mostly local players.
The new requirements under the International Financial Reporting Standard (IFRS) 17 and risk-based capital (RBC) are likely to raise the business volume of smaller players to achieve economies of scale.
Hong Kong has a key role in the development of the Guangdong-Hong Kong-Macau Greater Bay Area (GBA) including the area of insurance. The insurance penetration rate of China is much lower than that of Hong Kong. There will be huge future growth opportunities as the integration between Hong Kong and the GBA continue to develop.
Are there any recent regulatory or compliance changes that heavily impact the insurance market in Hong Kong?
Insurers around the world are heavily affected by IFRS 17, and Hong Kong is no exception. While foreign players have global resources, many smaller local players were not ready for IFRS 17 and wanted a later implementation date similar to some other countries. The Insurance Authority, together with the industry, had lobbied for a phase-in implementation for the smaller players. Fortunately, the effective date was deferred by the International Accounting Standards Board (IASB) to Jan. 1, 2022, and eventually to Jan. 1 2023, providing more time for preparation.
The current solvency regime of Hong Kong came into being in 1995 when I was the assistant commissioner. There are major shortcomings, particularly in life insurance. On the liability side, net premium valuation tied to risk-free rates led to depressed solvency when interest rates were low. On the asset side, the flat 4% solvency charge is grossly inadequate. My most urgent task in the Insurance Authority was to develop the RBC solvency regime. The RBC solvency regime, the Hong Kong version of Solvency 2, will heavily impact the insurance market in Hong Kong.
Recognizing that IFRS 17 and RBC will be more challenging to local players and smaller insurers, the Insurance Authority worked with the industry body Hong Kong Federation of Insurers (HKFI) to help the industry. The HKFI provided a series of IFRS17 training sessions to insurance companies. The HKFI also worked with the Actuarial Society of Hong Kong to provide a draft template for the own risk solvency assessment (ORSA) report. There are also actuarial consultancies that provide packaged technical services more suitable for smaller players whose resources are more restrained.
We understand that Hong Kong has done relatively well in containing the spread of COVID-19 as compared to many other countries. Could you share the impact that COVID-19 has had on Hong Kong and any lessons learned?
Hong Kong did relatively well in containing the spread of COVID-19 in 2020 and 2021, with only a handful of new local cases or even no new local cases for many consecutive days. Based on this experience, a local insurer offered customers applying for insurance between Jan. 1 and March 31, 2022, free COVID coverage of HK$180,000 if infected on or before April 30, 2022.
With Omicron, new cases started to grow and exceeded 1,000 new cases on Feb. 9, 2022. Two days later, the insurer reduced the COVID coverage to HK$2,800, a reduction of 98.5% or 64 times. By April 30, 2022, Hong Kong had 1.2 million reported and confirmed cases and even up to as many as 4 million cases were not reported.
There are lessons to be learned in this case. Actuaries should not rely only on local experience data of two years for COVID, known to come up with new variants that are more contagious. Even before the insurer launched free COVID coverage, Omicron was found to be more contagious and already spreading rapidly around the world in December 2021. Interestingly, both the chief actuary and CEO are FSAs. Fortunately, this is only an isolated case.
COVID did not cause solvency issues for insurers, as it did in Taiwan. There was one general insurer that became insolvent but unrelated to COVID. Premiums of the general insurance sector continued to grow in 2020 and 2021. Underwriting profits also increased as economic activities were subdued by COVID, leading to lower claims.
The life insurance sector is more affected by COVID due to the loss of business from Mainland Chinese visitors. Players with Macau operations diverted some Mainland Chinese visitors to Macau where the border was still open.
Insurance intermediaries were affected by COVID, as some customers were concerned about face-to-face meetings with them. To address this issue, the Insurance Authority rolled out a range of temporary facilitative measures to enable intermediaries to distribute protection-type products while avoiding face-to-face interactions, such as digital, telemarketing, postal or video call applications.
Premiums of new life insurance business from local customers actually increased slightly in 2020 and substantially in 2021. The income of individual insurance agents was cushioned by renewal commissions as they were selling mainly regular premium whole life products. Bancassurance agents are banking staff where banking services were their main duties with limited impact from lower insurance sales. As a result, the number of licensed individual insurance intermediaries remained rather stable in 2020 and 2021 at around 120,000.
One implication from COVID-19 that has been brought up is the use of technology. Together with the fact that Hong Kong is the leading financial center in the region, do you have any insights on the insurance innovations and technology shifts in the Hong Kong market recently?
When I was in charge of InsurTech at the Insurance Authority, I came up with two new initiatives:
- Fast-track approval of new virtual insurers
- InsurTech Sandbox
There are now four new virtual insurers approved under the fast track. After the entrance of these new virtual insurers, the big players increased investment in technology and raised the caliber of their “chief technology officer.”
The industry body Hong Kong Federation of Insurers (HKFI) was also very supportive and proactive in using insurance innovations and technology to serve the industry. HKFI launched a motor insurance platform, the Motor Insurance DLT-based Authentication System (MIDAS), that harnessed blockchain to ensure the authenticity of motor insurance policies to address the issue of fake policies from illegal insurance brokers.
Another innovation of the HKFI is the launch of the Insurance Fraud Prevention Claims Database (IFPCD), using state-of-the-art artificial intelligence technology to detect insurance fraud, particularly those involving multiple claims and syndicates. IFPCD would cover auto, medical and personal accident insurance. Succeeding phases will cover segments including life and travel insurance.
Hong Kong also benefits from next door neighbor Shenzhen, the Silicon Valley of China, which provides some of the leading insurance innovations and technologies as well as talent.
What is your view on the potential challenges and opportunities for the Hong Kong insurance industry in the future?
A major challenge is to cope with IFRS 17 and RBC at the same time, both involve a lot of actuarial work and need a lot of actuaries. The Insurance Authority is pushing for a short transition period of three years. While local and Chinese players want to have more time to get prepared, foreign players who are already under Solvency 2 or RBC regimes in their home jurisdictions want to have early adoption of RBC to streamline their work.
This could be more challenging for general insurers with more than 100 players in a modest-sized market. We expect to see some consolidation activities where smaller players might team up with others to achieve better economies of scale. This could, in turn, improve the overall profitability of the industry with more growth opportunities.
There are also opportunities for insurers to use innovations and technology in the agency channel. The current productivity of less than one new life insurance policy per agent per month means a lot of opportunities to grow from this low base. The market share for term insurance of 0.67% has the potential to grow to 20% in the United States.
You have had the privilege to work and live in different countries. Could you provide some advice for actuaries interested in moving to Hong Kong?
Despite being the place with the most SOA members outside of the United States and Canada, Hong Kong still has a shortage of actuaries. There are opportunities to work on IFRS17 and RBC for people with varying levels of experience, from fresh graduates to seasoned professionals. The working environment for actuaries in Hong Kong is more challenging than in other countries that have well-established procedures and manuals. You may encounter problems with too many options to choose from or no precedents to follow. You may want to have discussions with colleagues before deciding on the option to choose. We have longer office hours, and it is normal to work overtime, but Hong Kong is an exciting place to live.
As a leading insurance hub, Hong Kong has 13 of the world’s top 20 insurance groups operating, many with their regional and global headquarters here. Many C-suite roles are occupied by actuaries, including CEO, CFO, COO, CIO, CDO and CMO. There are more opportunities open to actuaries compared to other places, so you may stick with traditional roles or try less traditional roles for actuaries. You can choose between breadth (e.g., working in headquarters) or depth (e.g., focusing on Hong Kong).
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.