Enriching Lives: A History of Insurance in Hong Kong, 1841-2010

Chapter 7 - The Development of Life Insurance and Bancassurance in the Post-Handover Decade

Chapter 7 The Development of Life Insurance and Bancassurance in the Post-Handover Decade The global rise of bancassurance in the last thirty years had Hong Kong the international financial centre following the fad and catching up with the world. Over the past five years, Hong Kong’s insurers formed strategic alliances with domestic banks to build up insurance sales pipelines and get a piece of the action. This set off a re-alignment of retail banking and a demand for financial planning services. This chain of events spurred on a diversification of the local insurance industry. — Insurance Professionals, July 2002 The handover on 1 July 1997 made Hong Kong a Special Administrative Region (SAR) within China. Around that time, the provisional government set about adding seats in the Legislative Council to represent such specific industries and other ‘functions’, such as finance, insurance, real estate, and commerce; hence these members were representatives of ‘functional constituencies’. On 24 March of the same year, the HKFI’s special joint session submitted a proposal to the preparatory committee of the SAR government, pointing out that insurance has a crucial role in Hong Kong’s financial market. The proposal also stressed that the sector already satisfied the four criteria used to designate functional constituencies in the SAR’s first Legislative Council. The HKFI actively encouraged industry practitioners to register to vote and run for office. Finally, in 1998, the HKFI was assigned the first-ever functional seat in the Legislative Council. Bernard Charnwut Chan, now president of the Asia Insurance Co. Ltd., won the election. At the time those vying for the seat included AIA’s Deputy Managing Director Alex Wong; Union’s General Manager Steven Lau, and National Mutual’s Y. K. Chan. 180 Enriching Lives Fig. 7.1 Members of the HKFI’s special joint session travel to Beijing to lobby for a functional seat on Hong Kong’s Legislative Council, March 1996. Three Crises (1) The impact of the financial crisis A few months after the handover, Hong Kong was swept up in the region’s much-noted financial crisis. Within a year the Hang Seng Index had plunged by 60%, from the 7 August 1997 high of 16,673 to the nadir of 6,600 on 13 August 1998. Property prices dropped by more than half, pushing many homeowners into negative equity territory. Beginning in 181 The Development of Life Insurance and Bancassurance September 1997, the GDP slipped for five consecutive quarters. In 1998, the economy contracted by 5%, the worst performance since World War II. Needless to say, the insurance sector suffered. Both premium revenues and income dropped precipitously. There was a surfeit of insurers, resulting in over-capacity and ruthless rate-cutting. In 1999, gross and net premium revenues decreased, respectively, by 8% and 9% from the previous year. The sector reported a loss of $1.38 billion. But by 2000 the downturn had reversed. Gross and net premiums for general insurance showed growth of 7% and 9% respectively. But in March 2001, HIH Insurance Ltd. and its seventeen entities in Australia were ordered by the Australian government to liquidate. HIH’s three subsidiaries in Hong Kong were taken into receivership by the OCI for failing to meet the capital requirement necessary for claims compensation. In light of this, in early 2002 the OCI tightened the captive-insurance ceiling for all general insurers by limiting it to no more than 10% of the company’s share capital. (2) The impact of 9/11 On 11 September 2001, the twin towers of the World Trade Centre in New York were destroyed by two hijacked commercial airliners. It was an enormous blow to the general insurance sector globally. By some estimates, the industry suffered a loss of US$50 billion to US$70 billion worldwide; the bulk of the burden fell on re-insurers. Because most local insurers were not exposed to risk coverage in the United States, only five firms posted losses (totalling roughly $60 million) directly related to 9/11. The indirect impact on the local sector, however, was substantial. On the day following the catastrophe, stock prices for publicly traded insurers such as Manulife, Chinese Life, and Pacific Century all plunged by more than 20%, even though the latter two firms do not count the United States as their primary markets. A small Japanese-owned firm in Hong Kong sustained such heavy losses that it...