Top managers of insurance companies are always occupied by the thought of expanding market share. A good place for this is Hong Kong, as it currently does not have any anti-trust or competition legislation concerning monopoly activities or market dominance – theoretically speaking, an insurer can expand its market share to whatever extent it desires.
Overall, market analysis shows that the general (non-life) market has more insurers than it can healthily support. This has resulted in stiff competition and enormous cuts in premium rates. When these drop to an unrealistic level, this will inevitably generate underwriting losses. In 1999, the general insurance sector recorded unfavourable underwriting results for the third consecutive year. Stronger players see this as good timing for acquiring their weaker competitors. In a way, market consolidation may have a positive impact on the general sector, as it will alleviate the pressure on competition and allow readjustment of premium rates.
According to the Annual Report 2000, published by the Office of the Commissioner of Insurance, the total gross premium income generated by the insurance industry represented more than 4% of the Hong Kong gross domestic product in 1999, taking up an important role in the local financial sector.
At present, Hong Kong has close to 180 authorised life and general insurers (excluding Lloyd's and pure reinsurers) for a population of around 6.5 million. This reflects a high density of insurers, compared to other countries in the Asia Pacific region, and also leads to fierce competition among the market players. Analysts predict that the local market will not be able to support the current number of insurers in the long term.
Ways of expanding
Mergers and acquisitions are common in the Hong Kong insurance market and continue to represent a significant means by which insurers pursue the objectives of economic growth and expansion. Hong Kong law does not provide for a pure merger of companies – the absorption of one company by another, whereby the latter retains its own name and identity and acquires the assets and liabilities of the former, which ceases to exist as a separate business entity. As such, market consolidation in Hong Kong is usually structured in one of two ways:
No matter which alternative is used, the insurance licence of the target company is a non-transferable asset. Furthermore, both alternatives involve a number of regulating issues.
If the target company is an authorised insurer incorporated in Hong Kong, acquiring a controlling stake in the company will require the prior approval of the Hong Kong Insurance Authority (HKIA). The vetting procedure may take a few weeks and the acquirer will be required to submit various documents to the HKIA, including its financial information for the past three years. If the share acquisition will lead to any change in the management control of the target company, such change will also be subject to the prior approval of the HKIA.
In the case of an asset acquisition where an insurer will transfer its general insurance portfolio to another insurer, prior approval of the HKIA must be obtained under section 25d of the Insurance Companies Ordinance (ICO).
It is essential that the transferor and transferee companies closely follow the application procedures stipulated in section 25d which, among other things, include the preparation of a report setting out the particulars of the transfer and of all legal proceedings relating to the policies included in the transfer. The transferor is required to publish a notice in the Gazette and the relevant Chinese and English newspapers, announcing that a transfer application has been lodged with the HKIA. In addition to the announcement, a copy of such notice must also be sent to each affected policyholder. In order to provide the affected policyholders with a full picture of the transfer, section 25d requires that they must have the opportunity to inspect the transfer report and make written representations to the HKIA objecting to the transfer.
General insurance policies are categorised into 17 different classes. The transferee insurer may be authorised to conduct some, but not all, of the classes of general insurance businesses. As such, one of the crucial requirements for approving the transfer is that the transferee insurer must have all the relevant classes of licences to which the transferred policies belong. In addition, the HKIA will also assess whether the transferee insurer has the appropriate expertise and sufficient resources to accept the insurance portfolio.
Once the HKIA has granted its approval, the transferor and transferee insurer should execute a formal sale and purchase agreement for the portfolio transfer. Provided that all the transferring policyholders have been informed of such execution, the transferee insurer will step into the shoes of the transferor insurer and will become the insurer of the transferred policies.
The statutory regime for a life insurance portfolio transfer is laid down in section 24 of the ICO that involves the initiation of a court approval process by way of a petition. Of course, in so doing, the transferee insurer must be, or will become, an authorised insurer in Hong Kong when the court finally approves the transfer. Similar to the case of general portfolio transfer, the transferee insurer must possess the appropriate life insurance licences for accepting the insurance portfolio.
Under the petition process, a scheme must be formulated to provide for the terms of the transfer and an independent actuary must be appointed to review the scheme and estimate the likely effect of the transfer on policyholders of the transferor and transferee insurers. Usually, the transferor and transferee insurers will also obtain the clearance of the HKIA before the petition is filed with the court. The affected policyholders should also be notified of the terms of the scheme and the opinion of the independent actuary.
The right to object
One noteworthy point is that policyholders from the transferor and transferee insurers will have the right to object to the transfer in court. It is not uncommon that affected policyholders will raise objections, notwithstanding that the independent actuary may have decided that no adverse effect will be imposed on the policyholders' reasonable expectations and security as a result of the transfer. Grounds of such objection may be that the policyholder does not want to have his monies under the policy invested by the new insurer or that the policyholder has less confidence in the new insurer.
On the other hand, the court may also raise questions relating to the scheme with a view to ensure that the affected policyholders are adequately protected after the transfer. Such questions may sometimes relate to the actuarial aspect of the transfer. Hence both the transferor and transferee insurers should be well prepared to answer any such actuarial questions that may be raised.
Once the court approves the petition and all the insurance business of the transferor company is transferred to the transferee insurer, the HKIA may require the transferor insurer to be de-authorised from carrying on any insurance business in Hong Kong.
It remains to be seen how the market will react to the ever-increasing competition. However, consolidation and convergence, not only among insurers themselves but also between insurers and other financial institutions, seem to be the inevitable trend.