HONG KONG (S&P Global Ratings) June 21, 2023--The return of visitors from mainland China is helping to kickstart industry growth for Hong Kong insurers. S&P Global Ratings believes sales to mainland visitors should be exceptionally strong in the first half of 2023, following the release of pent-up insurance demand during the pandemic. Social mobility in the local market is also supporting growth. But recovery won't always be even.
"Earnings for the Hong Kong life insurance industry should stabilize over the next two years, thanks to its top-line recovery," said S&P Global Ratings credit analyst Judy Chen. "And higher interest rate will also help ease reserve provisions and improve reinvestment yields."
We forecast new-business growth for the life sector will reach 20%-25% in 2023 before moderating to 10%-15% in 2024, from a 19% contraction in 2022. On the other hand, the growth for property & casualty (P&C) sector is less volatile and will likely sustain at more than 5% over the next two years, based on our estimates.
MAINLAND CHINA OFFERS STRONG DEMAND
"With no surprises, the ties that bind Hong Kong insurers and mainland China customers will deepen," said Ms. Chen. "Hong Kong's geographic proximity provides an opportunity for its insurers to better serve the mainland's under-penetrated market."
Full cross-border travel resumed in February 2023, after which the average case size of new life policies from mainlanders more than doubled to about HK$280,000 in the first quarter of 2023, from about HK$126,000 in 2019 before the onset of the pandemic.
Mainland China customers are drawn to Hong Kong because of its widening interest rate differential, opportunities for asset diversification, and the availability of comprehensive healthcare. Hong Kong insurers provide foreign currency-denominated savings and investment policies, and more well-rounded critical illness and medical insurance offerings than their mainland counterparts.
Despite the strong rebound, sales are yet to be restored to pre-COVID level. The new-business premiums from the mainland surged to HK$9.6 billion in the first quarter of 2023, from HK$345 million in the same period last year. This compares with quarterly average of HK$12.3 billion between 2015 and 2019.
Chart 1
HONG KONG'S STRUCTURAL CHANGES ARE FUELING DEMAND
"Large shifts in Hong Kong's population profiles point to the need for higher insurance coverage across life stages--including medical, mortality, and retirement," said Ms. Chen.
Growing demand for insurance products within Hong Kong is partly attributable to its aging population and protection gaps. Hong Kong's population will become the oldest in the world by 2060, as measured by the age-dependency ratio (the number of elderly population relative to the working age population). For more details, see our recent study "Global Aging 2023: The Clock Ticks," published on RatingsDirect on Jan. 18, 2023.
For the first quarter of 2023, the life industry reported 15% year-on-year growth in weighted new sales for its local segment.
RESUMPTION OF ECONOMIC ACTIVITY WILL SQUEEZE P&C PROFITS
For P&C insurers, the wins will be smaller. The sector's growth prospect will benefit from the full resumption of economic activity. Demand for accident and health insurance policies will pick up as travel resumes. Hong Kong's deepening connections with the mainland also creates new demand for cross-border coverage, such as motor insurance policies covering the Greater Bay Area.
"Resuming economic activities come at a cost. We expect the underwriting profit of Hong Kong's P&C sector to narrow in 2023 and 2024 as mobility normalizes," said Ms. Chen.
Underwriting results were exceptionally strong during the pandemic because of reduced traffic and claims. We forecast the combined ratio will return to its 10-year historical average of around 95%, from 90% in 2022. A combined ratio of less than 100% indicates an underwriting profit.
RECOVERY WON'T BE EVEN
"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," said Ms. Chen.
Customers will differentiate in terms of brand and service, a strength of large insurers. Traditional distribution channels such as agents and banks remain the key distribution for the life market. Insurers (such as AIA International Ltd. and Prudential Hong Kong Ltd.) that continued to invest and maintain an agency force during the pandemic have been able to benefit from the return of visitors.
Smaller insurers will find it more difficult to gear up for a sales reboot, given their limited economies of scale and therefore higher costs for distribution, technology, compliance, and product development.
For all players, the rebounding reliance on offshore business could lead to increasing volatility and higher vulnerability to capital outflow controls and spillovers from mainland China. The growth in business with mainland China therefore does not come without risk.
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analysts: | Judy Chen, Hong Kong + 852 2532 8059; Judy.Chen@spglobal.com |
| WenWen Chen, Hong Kong + 852 2533 3559; wenwen.chen@spglobal.com | |
| Secondary Contact: | Eunice Tan, Singapore + 65 6530 6418; eunice.tan@spglobal.com |
| Media Contact: | Ning Ma, Hong Kong (852) 2912-3029; ning.ma@spglobal.com |
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