Prompted by regulatory changes and a desire to invest in Hong Kong’s success, Lloyd’s continues to grow its presence
Marine insurance is of course the oldest form of insurance with origins in the Greek and Roman civilisations. In the 17th century we begin to see a form of marine insurance more familiar to us today, led by the Lloyd’s coffee houses in London.
Unlike private insurers Lloyd’s is an insurance market in itself, made up of syndicates that insure and spread risks of different businesses, organizations and individuals. The Lloyd’s market has evolved over time into a sophisticated market that takes on a myriad of risks. But marine still has an important presence particularly in a market such as Hong Kong.
Lloyd’s was insuring maritime trade business originating or connected to Hong Kong since the mid-19th century. But it wasn’t until 1952 that it was first authorised to do business in the territory, through legal representatives and the Lloyd’s Agency network.
Lloyd’s lands in Hong Kong
“In 1997, prompted by regulatory changes, and a desire to invest, we appointed a Corporation of Lloyd’s employee, opened an office and started hiring staff to promote and protect our presence here,” says the current Lloyd’s representative, Thomas Haddrill.
“Following the investment made by the Corporation in 1997, we have only seen that investment from the market grow,” he says.
“In the 1990s we were represented by a couple of coverholders (intermediaries that can bind insurance on behalf of a Lloyd’s syndicate), and one syndicate office. Today there are nine syndicates and 30 coverholders.”
The significance of maritime trade to Hong Kong is reflected in the 30% share of the overall business written by Lloyd’s in Hong Kong. This figure compares to just 8% written in Lloyd’s in London. With a growing middle class in the region and national trading initiatives taking off, other classes of business are growing exponentially, as Mr Haddrill explains.
“In addition to the traditional ocean going marine business of cargo, hull and liability, yacht business is a growing area. With the rapid growth in high net worth individuals in the region, super yachts are generating growing volumes of business.
Vast potential for premium growth
“As the projects originating from China’s Belt and Road Initiative begin to gain traction, other business conducted by the syndicates includes regional reinsurance business, together with casualty, liability lines, financial and professional risks. Political risk and trade credits are also areas for risk transfers that are growing apace. This demand is driven by a lot of overseas investment in infrastructure across Asia. Originated by financiers and banks that now require that insurance support be built.
“Up to now the majority of projects listed as Belt and Road have been financed by the Chinese government or state supported enterprises. Increasingly private investment will play a role. Hong Kong is in a great position to advance that as an agenda and build a risk management and insurance capability around it.”
Leading reinsurer, Swiss Re released a report on the insurance implications of the Belt and Road Initiative. It estimated that the potential increase in insurance premium in the Asia Pacific would be in the tens of billions of dollars, equivalent to four or five times Hong Kong’s current non-life market. The challenge will be to find a concentrated, coordinated way to deliver capacity to those solutions and to also originate the opportunities. Hong Kong is in the driving seat to do both.
Enhancing Hong Kong’s marine insurance environment
Recent incentives introduced by the Hong Kong Government to enhance the attractiveness of Hong Kong as a place to do insurance business has been welcomed by Lloyd’s.
“We certainly welcome the Government’s incentives, particularly the tax concessions for marine insurers.
“There are already tax breaks for reinsurance written outside Hong Kong and similar incentives for insurance captives. With these latest incentives for marine business Hong Kong is creating a compelling environment. And Hong Kong is perfectly located to tap into the China market.
“China is the largest market in the region for non-life insurance, and it’s the fastest growing in the world. From an economic perspective it is the country that has dragged the world into growth since the financial crisis. It has to be the focus for any insurer doing business in Asia. Hong Kong also has the added catchment area to draw in business not just from China,” he adds.
“Here in Lloyd’s Hong Kong, 81% of our business is done in North Asia – Hong Kong, South Korea, Taiwan and China Macao. These are all mature markets. In some ways China is still emerging. But in many ways, with its technological innovation and distribution channels, it is one of the most sophisticated. The level of investment is astonishing.
“I’m convinced that Hong Kong could be a perfect conduit for capacity and international expertise going into China, as we also learn from and partner with the country.”
Despite the ideal environment that Hong Kong provides for marine insurers, in common with the rest of the world it is a market awash with capacity and a lack of underwriting discipline.
“The returns have been reducing in recent years,” says Mr Haddrill. “It is a very challenging market for both cargo and other marine lines. Values are increasing and premiums are not matching that increase. The volumes of business are growing without an adequate understanding of what the risks are and those being priced in.”
Nurturing the market
As a giant in the insurance market with vast resources and immeasurable experience Lloyd’s is attempting to offer all insurance practitioners and insured parties with the tools to get better results.
Globally, Lloyd’s writes about £1bn in cargo business each year. It is in its interest to offer what assistance it can in an ailing market. This year Lloyd’s issued a report entitled “Goods to Go”.
“GTG is a new methodology for modelling cargo risk,” says Mr Haddrill.
“It aims to enhance the way insurers model their risk, manage their accumulations, and mitigate aggregations in the cargo insurance industry.”
A sister publication aimed at the marine market entitled “Steering the Course” improves risk selection and insight. A lot of the methodology involved in the risk models is practical and can be applied to the shipping industry. “We then handle the transfer side,” he says.
Currently Hong Kong is suffering from a lack of new talent in the marine insurance sector. In this case Lloyd’s is being more hands on in addressing the issue.
“We are doing some outreach in training and education in Hong Kong, says Mr Haddrill. “This is primarily through our work with the Vocational Training Council’s Work and Learn Insurance Programme, and the Hong Kong Federation of Insurers.”
In January 2019 a group of 20 Hong Kong students, including marine insurance professionals benefitting from government-funded internships, will be taken to London. There they will embark on an immersive two-week work and learn programme.
“We have partnered with the Chartered Insurance Institute for this programme. And CII will be providing the educational input before the students move on to the Lloyd’s building for some intensive practical experience,” Mr Haddrill concludes.
This story was first published in Hong Kong Maritime Hub – Taking It To The Next Level.