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00011 HANG SENG BANK
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Research Report

15/10/2020 17:03

Hong Kong insurers' growth and profit to take COVID-19 hit

[ET Net News Agency, 15 October 2020] Revenue and profits of Hong Kong insurers will be
squeezed in 2020 owing to the volatile capital markets and lower-for-longer interest rates
amid the COVID-19 pandemic, according to the reports titled "Hong Kong Life" and "Hong
Kong Property/Casualty" that S&P Global Ratings published today.
In particular, a decline in visitors from mainland China and rising unemployment amid an
intensifying economic slowdown will lead to the first contraction in life insurance
premiums in decades. The credit rating agency views the credit trend for Hong Kong's life
insurance sector as negative.
S&P's insurance industry and country risk assessment (IICRA) for both the life and
property/casualty (P/C) insurance sectors in Hong Kong is low. Hong Kong's prudent
regulation and proactive supervision support the development of its financial sector.
It thinks these factors will continue to provide stable operating conditions for Hong
Kong's P/C insurance sector. S&P believes profitability remains a key strength for Hong
Kong's life insurance sector, supported by sound profit margins and resilient fee income.
The sector's low levels of embedded guarantees within insurance products and the
availability of long-duration investments limit product risks. While the growth momentum
dipped in 2020, demand for insurance protection is likely to remain resilient.
The agency believes Hong Kong's availability to settle insurance policies in foreign
currency and its high-end medical and protection products will continue to attract
offshore customers. The inherent long-term growth potential for such products supports the
sector's prospective profits. It expects Hong Kong life insurers' return on assets to
recover to above 1% in 2021 and 2022, from 0.7% in 2020.
The impact of the COVID-19 pandemic on Hong Kong's P/C insurers is moderate compared to
that on life insurers. S&P expects the Hong Kong P/C insurance industry to maintain
profitable underwriting despite mounting compliance-related expenses over the next two
years. COVID-19-related claims will likely be manageable in 2020, given the general
exclusion of infectious diseases in policy terms and conditions.
S&P forecast the sector's combined ratio will be 98%-99% in 2020-2022. The sector will
likely contract in 2020 in view of the economic downturn and moderating hikes in premium
rates.
The Hong Kong insurance industry's governance and risk awareness will likely strengthen
amid an evolving regulatory framework. Although the Hong Kong insurance regulator is a
latecomer to the risk-based capital regime, we expect it to incorporate learnings from
earlier regional adopters. S&P believes Hong Kong's life insurers are better placed than
their P/C counterparts to adopt the new capital regime. The larger life insurers are
mostly foreign-owned and have prior exposures to the new framework. (KL)

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