HONG KONG (S&P Global Ratings) April 1, 2020--Hong Kong's life insurers face a slump in new-business volumes in 2020 despite the regulator's recent measures to cushion an industry plunge. The sector's growth prospects are dented by ongoing travel restrictions, intensifying economic recession, and rising unemployment rates.
"Revenue and profits will be pressurized in 2020 for Hong Kong insurers due to the challenging operating conditions that have been exacerbated by the COVID-19 outbreak, a flat yield curve, and volatility in capital markets," said S&P Global Ratings Credit analyst Judy Chen. "The regulator's temporary measures to temper the pain haven't gone far enough."
The Hong Kong Insurance Authority (HKIA) recently allowed more insurance products to be distributed through methods that don't involve face-to-face contact. This move signifies to us the heightened pressure on the industry.
S&P Global Ratings expects total premiums in the Hong Kong life insurance market to slide 5%-10% year over year in 2020. This assumes new-business activity drops over 30% and the renewal rate is stable. We estimate a roughly 70% decline in new business related to mainland Chinese visitors amid tighter border controls.
The sector's profitability is likely to weaken given the sharp rout in investment markets and a global recession. We estimate the sector's return on assets will halve to just 0.7% in 2020 from historical levels. In our view, life insurers will strengthen reserve provisions because of the impact of flat yield curves, further contracting their capital buffers.
We see challenges in some other markets in the region, and recently revised our outlook on the Asia-Pacific life sector to negative (see "COVID-19 Will Test Insurers' Resilience," published on RatingsDirect on March 25, 2020).
The first phase of so-called temporary facilitative measures since Feb. 21, 2020, include non-face-to-face sales for Qualifying Deferred Annuity Policy and Voluntary Health Insurance Scheme products. In view of the COVID-19 outbreak, the HKIA extended its measures on March 27, 2020, to cover additional protection-type products. These include term policies, and certain refundable insurance policies without substantial savings components, or renewable insurance policies without cash value. We anticipate that the risk of mis-selling will be manageable with the newly authorized products because the direct and specified insurance benefits have limited investment elements.
"The regulator's responsiveness to the changing market landscape in Hong Kong is proactive but is no panacea and won't prevent a market dip for Hong Kong insurers in 2020," said Ms. Chen. "But a prolonged pandemic could increase insurance awareness, and may help the longer-term recovery of the sector."
We anticipate an acceleration in the evolution of traditional insurance distribution fueled by technology advancements as insurers seek to distribute policies remotely.
In our view, larger players with established digital platforms will likely be better positioned than smaller peers to benefit from the regulator's relaxed temporary measures.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
RELATED RESEARCH
COVID-19 Will Test Insurers' Resilience, March 25, 2020
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 Analyst: | Judy Chen, Hong Kong (852) 2532-8059; Judy.Chen@spglobal.com |
| Secondary Contacts: | WenWen Chen, Hong Kong (852) 2533-3559; wenwen.chen@spglobal.com |
| Eunice Tan, Hong Kong (852) 2533-3553; eunice.tan@spglobal.com |
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