Recovery is ahead for both China and Hong Kong insurers, as S&P Global Ratings’ latest report revealed.
For China, this is off the back of new business written coming from the return of face-to-face sales and the end of a pandemic slump. As the second-largest life insurance market in the world, the eastern nation’s low penetration rates also suggest that there is much growth ahead.
It will, however, be a lot easier for life insurers, as S&P expected steady margins for the line both during this year and 2024. Control fine-tuning will also be continued as regulations get stricter, with measures in place including a more careful management of liability costs.
On the other hand, the property and casualty sector is in for a rougher time. Even though the sector recorded gains in 2022 and some major players’ moves to review their underwriting portfolio, companies are now incurring underwriting pressure given a normalization in vehicle traffic levels. Overly competitive pricing and higher reinsurance costs for customers will cause strains in the market. Extreme weather-related insurance claims, those stemming from climate change, also add to the challenges that the sector faces.
"Chinese insurers generally are contending with volatile markets, steep competition, and interest rate cuts by the People's Bank of China, among many other tests. Regulators have been prodding insurers toward a greater focus on margins," S&P Global Ratings credit analyst WenWen Chen said.
Returning visitors from mainland China will drive the recovery for Hong Kong insurers. S&P said that sales involving mainland visitors will be exceptionally strong in the first half of 2023 as the pent-up insurance demand during the pandemic is released. That said, S&P cautioned that growth will not always be even.
"Earnings for the Hong Kong life insurance industry should stabilize over the next two years, thanks to its top-line recovery," S&P Global ratings credit analyst Judy Chen said. "And higher interest rates will also help ease reserve provisions and improve reinvestment yields."
S&P projected a new business growth for the life sector reaching between 20% to 25% in 2023 before a moderation between 10% to 15% in 2024. In 2022, the sector contracted to 19%.
"With no surprises, the ties that bind Hong Kong insurers and mainland China customers will deepen," Chen said. "Hong Kong's geographic proximity provides an opportunity for its insurers to better serve the mainland's under-penetrated market."
Hong Kong’s insurance sector boasts widening interest rate differentials, opportunities for asset diversification, and the availability of comprehensive healthcare. Insurers in the city-state provide foreign currency-denominated savings and investment policies, as well as more comprehensive critical illness and medical insurance offerings compared to its mainland counterparts.
That said, S&P noted that sales have not yet reached their pre-COVID levels. New business premiums from the mainland rose to HK$9.6 billion in Q1, from HK345 million in the same period last year. The quarterly average between 2015 and 2019, in comparison, was at HK$12.3 billion.
Hong Kong’s population will be the oldest in the world by 2060, according to a recent study from S&P. This leads to growing demand for insurance products in the life sector.
"Large shifts in Hong Kong's population profiles point to the need for higher insurance coverage across life stages--including medical, mortality, and retirement," Chen said.
Like its mainland counterpart, P&C in Hong Kong will see smaller wins overall. The sector will benefit from the resumption of economic activity, driving up demand for both accident and health insurance policies. Deepening connections between Hong Kong and China will also drive-up demand for cross-border coverage, including the ones offered that covers the Greater Bay Area.
Bigger, brand-name players will have a better recovery, but smaller insurers will find it more difficult to gear up for a reboot, given their limited economies.
"Bigger insurers can better capture the turnaround, thanks to their established distribution networks and product offerings. Smaller players may still struggle, leading to a margin squeeze," Chen said.
The advantages are fully in the favour of those who kept their traditional distribution channels intact. Insurers such as AIA and Prudential Hong Kong have continued to invest and maintain an agency force during the pandemic and are now reaping the rewards from the return of visitors.
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