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Following is a speech delivered by Mr Benjamin Tang, Commissioner of Insurance, at a luncheon organised by the Hong Kong Economic and Trade Office in Singapore today (March 15):

HONG KONG - A QUALITY INSURANCE CENTRE

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Good afternoon, ladies and gentlemen,

I am delighted to visit Singapore again and to address such a distinguished luncheon gathering. As underlined in our Financial Secretary's Budget Speech earlier this month, we are determined to maintain Hong Kong as an international financial services hub and Asia's world city. In furtherance of this objective, I am going to share with you our mission of enhancing Hong Kong as a quality insurance centre. I shall brief you on the latest developments of Hong Kong's insurance market, our vision, as well as the business opportunities arising from China's accession to the World Trade Organization (WTO).

Hong Kong and Singapore have a lot of traits and goals in common. We are both external-oriented economies. We are the epitome of globalization and depend highly on foreign trade and investment. Capitalizing on our business friendly environment, over 3,000 overseas corporations have established their regional headquarters or offices in Hong Kong. This number includes nine Singaporean or Singaporean-controlled insurers who carry on insurance business in Hong Kong, capturing about 2% of our insurance market share.

To strengthen future co-operation of insurance regulators in the two places, I have just concluded a Memorandum of Understanding (MOU) with the Monetary Authority of Singapore on mutual assistance and exchange of information.

In the course of sharing our aspirations, I am also mindful of the common problems we are facing. Globalization is not without costs. With the advent of a knowledge-based economy, we are undergoing fundamental economic restructuring. Deflationary pressure remained and our economy underwent a downward adjustment in 2001 with a growth of only 0.1% in real terms. The "911 Incident" has further dampened global economic confidence and has prolonged the process of our economic recovery.

Initial signs now indicate that economic conditions in the United States are improving. In the light of more favourable external factors and our sustained efforts to move up the value chain, the outlook for Hong Kong is bright in the medium and long term. We are forecasting a GDP growth of 1% in real terms for 2002, and real trend growth of 3% over the medium term.

Hong Kong's Insurance Market

Notwithstanding the economic slowdown, provisional 2001 statistics showed that the total gross premiums of the Hong Kong insurance industry reached HK$ 85 billion (S$ 20.2 billion) and sustained a growth rate of 32%.

In 2001, there were strong signs of recovery in the general business market, with gross premiums of approximately HK$ 19.5 billion (S$ 4.6 billion), increased by about 10% over 2000.

The revenue premiums of long term business reached about HK$ 65.5 billion (S$ 15.6 billion) in 2001. This remarkable growth was mainly attributable to the individual life business. In 2001, the number of individual life in-force policies reached 5 million, covering about 74% of Hong Kong's population. Compared with other developed countries such as the United States, United Kingdom and Japan, this market penetration rate is still on the low side and there is ample room for further expansion.

As at 28 February 2002, there were a total of 202 authorized insurers operating in Hong Kong. Of these 202 insurers, 139 were general business insurers, 45 were long term business insurers and the remaining 18 were composite insurance players. These insurers included 29 professional reinsurers and a few specialist insurers engaging in captive, mortgage, credit, marine, alternative risk transfer and title insurance business. Hong Kong's insurance market has a strong international presence. Over half of the authorized insurers are incorporated outside Hong Kong in 25 different countries, with the US companies taking the lead. There are 19 authorized insurers having Chinese equity interests.

With the global trend of market consolidation, our insurance market is evolving. I would like to share with you the challenges we are facing and the measures we take to maintain the market integrity and to strengthen our competitiveness in the international arena.

The Facility for Terrorism Risks in Employees' Compensation Business

Following the terrorist attacks in the United States, direct insurers were unable to obtain reinsurance coverage for terrorism risks commencing from this year. Despite that a terrorism exclusion clause could be inserted in the insurance policies, direct insurers could not repudiate their statutory primary liability from terrorism risks for up-front payment of claims. As a result, direct insurers were financially unable to continue their statutory employees' compensation insurance business due to the lack of reinsurance for terrorism.

To address this undesirable situation, we proposed to provide direct insurers with a facility up to an amount of HK$ 10 billion (S$ 2.4 billion) in aggregate to cover claims arising out of terrorism under their employees' compensation insurance policies. Following the approval of the Finance Committee of the Legislative Council, the Government has separately entered into agreement with most of the direct insurers in Hong Kong. Participation in this facility is voluntary. Direct insurers who have decided not to participate must satisfy the Insurance Authority that they have made adequate reinsurance arrangement.

This facility represents the joint efforts of the HKSAR Government, insurers and employers to provide continuous protection for employees in Hong Kong. In the long term, we wish to withdraw the facility once the reinsurance market for this particular risk returns.

Corporate Governance

In the prevailing economic climate, we often hear corporate failures. As insurance business mainly involves promises for delivery of services in the future, corporate governance is of particular importance to the insurance sector. I believe that a high standard of corporate governance of insurers is essential in instilling public confidence and conducive to healthy development of the insurance market.

At present, insurers in Hong Kong practise their own corporate governance with varying standards. To enhance the industry's integrity, I shall shortly promulgate a guidance note which sets out the minimum standard of corporate governance that is expected of an insurer.

Professionalism

With rapid development of the insurance market, there is ever-increasing demand for insurance expertise. The market development must be fuelled by brains. As a proactive approach, we have been taking positive steps to promote degree-level insurance education by encouraging universities to launch degree programmes on insurance and risk management.

Equally important is the education needs of insurance intermediaries as they are on the front-line and constitute an overwhelming majority of the insurance practitioners in Hong Kong. To ensure the high professional standard of insurance intermediaries, we have initiated the Insurance Intermediaries Quality Assurance Scheme (IIQAS). Under the IIQAS, all insurance agents and brokers are required to be properly trained and qualified through public examination. Commencing from this year, the Scheme has smoothly proceeded to its second phase. All insurance agents and brokers are now required to attend continuing professional development (CPD) programme to maintain their registration or authorization. Through the CPD programme, we aim to provide a lifelong learning ladder for our insurance intermediaries.

Consumer Education

I strongly believe that transparency and effective communication are the key factors of consumer protection. To upgrade the existing communication channels, we have recently revamped our homepage and launched a quarterly newsletter "I lens". Since 2000, we have also published educational pamphlets to help the general public better understand the role of insurance intermediaries and the matters they should watch out in buying insurance. We shall continue our educational campaign to bridge the information gap between insurance buyers and sellers.

Information Technology

With the increasing popularity of e-commerce, direct sales through electronic means will be employed by insurers and insurance brokers in marketing their products and services. To ensure healthy development of the insurance industry in the new information technology era, we promulgated a guidance note on the use of Internet for insurance activities in 2001. Under the guidance note, insurance service providers are required to explicitly state in the websites their respective authorization status in a jurisdiction. We shall keep the guidance note under constant review to cope with the market development in Hong Kong.

Under the Government's Electronic Service Delivery Scheme, we are also preparing for the electronic submission and dissemination of financial information regarding insurers. The insurance market will become more transparent and the insuring public will be able to gain access to more timely information relating to the operation of individual insurers.

International Co-ordination of Insurance Supervision

As prudential insurance regulators, we are committed to modernizing our insurance regulation to meet the challenges of an increasingly dynamic and competitive marketplace. International co-ordination in the area of supervision and surveillance is not just desirable, but necessary.

Hong Kong is a charter member of the International Association of Insurance Supervisors (IAIS), which aims at enhancing co-operation among insurance supervisors, developing practical standards for insurance supervision and safeguarding the integrity of insurance markets. We are stepping up our participation in the IAIS and its sub-committees. Through the IAIS, we are also involved in the Financial Stability Forum, which strengthens surveillance for promoting financial sector stability and facilitates exchange of information.

China's Accession to the WTO

It would be my inexcusable oversight if I talk about Hong Kong's insurance industry without mentioning the latest development of China's insurance market, in particular after her accession to the WTO.

Given the intimate links between the Mainland and Hong Kong, we shall be able to benefit from the expanded regional business potential and the reduced transaction cost. Hong Kong is the most important source of foreign direct investment for the Mainland. Hong Kong will have much to gain from the spurring effect of China's WTO membership, stemming from the Mainland's ascending economic relations with the rest of the world.

Potential of China's Insurance Market

According to the World Bank, China's GDP for 2000 ranked the sixth in the world and China might rise to the second or third place in 2020. In 2001, China's GDP was estimated to grow strongly by about 7.3% in real terms. With the ever-increasing purchasing power of the Chinese citizens, China's total premium income grew to RMB 211 billion (S$ 48 billion) for 2001, an increase of 32% over 2000.

To keep pace with the market development, the monopoly once enjoyed by a handful of state-owned insurers is now replaced by an array of insurers, including foreign insurers and Chinese-foreign joint-ventures.

China's Commitments to Market Access

After joining the WTO, China is committed to further widening market access to foreign participants. Specifically, China allows 50% foreign ownership for life insurance and 51% ownership for non-life insurance upon accession and wholly owned subsidiaries in two years. Foreign life insurers are allowed to sell health, group and annuities insurance within three years, while foreign non-life insurers are allowed to provide the full range of general insurance in two years.

Foreign insurers are allowed access to Dalian, Shanghai, Guangzhou, Shenzhen and Foshan upon accession. Access will be permitted to Beijing, Chengdu, Chongqing, Fuzhou, Suzhou, Xiamen, Ningpo, Shenyang, Wuhan and Tianjin in two years. All geographical limitations will be removed in three years.

In respect of reinsurance, the compulsory cession requirements will be phased out after four years upon accession.

Wholly foreign-owned subsidiaries will be allowed to conduct brokerage for insurance of large-scale commercial risks, and brokerage for international marine, aviation, and transport insurance and reinsurance within five years after accession.

Hong Kong's Advantages

China is changing and so is Hong Kong. Under the smooth operation of "One Country, Two Systems", Hong Kong is well poised to develop into an important insurance centre having regard to our high standard of insurance supervision, well-developed telecommunications, rule of law and free flow of information. To attain a win-win situation for the Mainland and Hong Kong, both the Central People's Government and the Government of the HKSAR are now discussing the proposal of establishing the Closer Economic Partnership Arrangement (CEPA), which is akin to a bilateral free trade agreement. The CEPA, if materialized, will provide Hong Kong insurers with further business opportunities in the Mainland.

Heralded as "The Wall Street of China", Hong Kong's reputation is built on our proven track record, a clear vision of the direction of economic development, a multitude of infra-structural advantages, and two distinctive attributes:

First, Hong Kong is the world's freest economy. According to the 2002 Index of Economic Freedom published by the Heritage Foundation, Hong Kong continues to rank the freest economy in the world for the eighth consecutive year. We have no control on foreign exchange or transfer of funds. Hong Kong currency is freely convertible in the international market. We subscribe to the belief that market competition is the best guarantee for economic efficiency and consumer welfare. As such we do not require pre-approval of new insurance products. Insurers and insurance intermediaries have unfettered discretion in the setting of premiums, commissions, discounts as well as policy terms and conditions.

Second, Hong Kong has a supportive regulatory authority. Our insurance market is regulated by the Insurance Companies Ordinance. As the Insurance Authority, I am conferred with the power under the Ordinance to regulate and supervise the insurance industry for the protection of policyholders. We are proactive market enablers. Subject to the insurers' fulfillment of our prudential regulatory requirements, we always stand ready to facilitate entry of any newcomers, irrespective of their places of incorporation. This supportive stance is fully reflected in our special regulatory treatments to captive insurance and reinsurance business.

Captive insurance is increasingly regarded as an important risk management tool for multinational conglomerates. To encourage multinational conglomerates to establish their own captives in Hong Kong, our insurance legislation was amended in 1997 to provide regulatory concessions to captive insurers, mainly in terms of the reduced capital and solvency margin requirements.

Reinsurance forms an integral part of Hong Kong's insurance industry. Apart from spreading of risks, professional reinsurers may assist direct insurers in providing them with technical underwriting skills and expertise. Therefore it is of such importance that all insurers in Hong Kong are statutorily required to have adequate reinsurance arrangements in place. Having regard to this special nature of business, there are exemptions for professional reinsurers from compliance with certain regulatory requirements, e.g. the "No-composite Rule" in authorization does not apply to professional reinsurers and they are further exempted from the requirement of maintaining assets in Hong Kong. Professional reinsurers in Hong Kong are additionally able to take advantage of our concessionary tax rate at 8% (half of the standard profits tax rate) for their offshore reinsurance business.

Concluding Remarks

I am convinced that China's accession to the WTO will reinforce Hong Kong's role as the gateway to this fast-developing insurance market. In campaigning for publicity of our competitive edges since 1997, we have successfully attracted two captive insurers, six professional reinsurers, ten specialist insurers and six life insurers to Hong Kong, and more are on the way. The SAR Government will strive to provide all insurers operating in Hong Kong with an open, fair and reliable business environment. I am confident that Hong Kong is able to develop into another insurance niche in the 21st century, on a par with any well-known insurance centres worldwide.

Thank you.

End/Friday, March 15, 2002

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