HSBC Focuses on Bancassurance in Emerging Markets as Its Competition Changes

   By Iris Lai, News Bureau Manager of Hong Kong, A.M. Best

HONG KONG (BestWire) - HSBC Insurance, a subsidiary of HSBC Holdings plc, sees no significant impact from a flurry of acquisitions and consolidation moves triggered by the divestiture of American International Group Inc.'s life insurance assets in Asia.

"Competitors always change," said David Fried, group general manager and group head of insurance at HSBC. In the light of changing market scene, HSBC Insurance "continues to do a lot more on what we've been doing," said Fried in an interview.

Prudential plc's pending acquisition of AIG's Asian life assets, AIA Group, is a "very complex transaction" that is being closely reviewed by regulators and market players, he said. HSBC Insurance has not seen any potential merger and acquisition opportunities for itself, Fried added.

HSBC Insurance's strategy is different to that of AIA, which is more of an agency model, said Fried. HSBC is taking on a bancassurance strategy with a focus on cross-selling of insurance products. It sees its growth coming from banking customers.

The Customer Base

Globally, Fried said the company aims to raise the insurance penetration of HSBC's banking clients to 20% from current level of 11%. With 100 million global banking customers, this means one-fifth of HSBC's clients would purchase insurance policies from the bank.

HSBC Insurance is "positive" about its growth plan as there is still a lot of room to grow in Hong Kong and global markets, he said.

In Asia, 5.8% and 10.9% of HSBC's banking customers hold a life and nonlife insurance policy from the bank, respectively. The global penetration level is 6% for life and 28% for nonlife policies, and 8.3% for life and 6.7% for nonlife policies in Hong Kong.

With a total profit of US$2.5 billion in 2009, Fried said insurance is a "substantial business" for HSBC, contributing 18% of the group's profit. The business is aligned with trends in global private banking in meeting diversified product needs of customers.

HSBC Insurance's future growth will come from Asia and other emerging markets, which now account for 49% and 21% of global insurance profit, respectively. The remaining 30% of insurance profit came from markets in the United States and Europe, according to Fried.

The company expects "robust growth" from emerging markets, given their strong economic growth, low insurance penetration and increasing demand for insurance and saving products. In Asia, Fried said China, India and Vietnam are the focus of expansion.

China Strategy

In China, HSBC's 50-50 life joint venture with Beijing-based asset and investment management company National Trust Ltd. started operations last August. The Shanghai-based life venture is selling annuity and endowment products, and the overall value of these policies is about 20 times the market average, according to Fried.

"In China, we have a clear focus on the mass affluent market," said Fried. The insurer is looking at a "niche development" strategy in China because domestic insurers already dominate nearly 95% of the mass market. Fried said the company "is not seeking to go out for the mass."

With 30 distribution outlets through branches of HSBC Bank, Hang Seng Bank and Bank of Communications, HSBC's life venture now ranks sixth in Shanghai for bancassurance market share. The life insurer plans to increase its distribution networks to 40 outlets.

HSBC holds a 16.8% stake in China's second-largest life insurer, Ping An Insurance, as the largest shareholder. This investment contributed 21% of HSBC Insurance's total profit in 2009.

HSBC Insurance is looking for further development of yuan-dominated insurance policies, which it recently introduced in Hong Kong. Fried said the insurer sees demand for this product and it is working with regulators in Hong Kong and China for further its potential, although investment is a major issue due to liquidity problems related to the yuan currency.

Global Markets

Vietnam is "strategically important" to HSBC's emerging markets growth, said Fried. HSBC Insurance increased its shareholding in Bao Viet Holdings to 18% from 10%, totaling 1.88 trillion dong (US$105.3 million) last October.

HSBC is subject to government decisions as to whether the company can further increase its stake to 25%. Fried said HSBC will invest US$6 million in Bao Viet's new share issuance in order to sustain its 18% stake in the company.

A strategic review of business in the United Kingdom, in which it experienced a difficult year in 2009, led HSBC to exit noncore businesses including insurance brokerage and motor insurance.

HSBC Insurance is now focusing on life, pension and investment business in the United Kingdom, where it is seeing positive growth from these lines, said Fried.

For commercial and corporate clients, HSBC Insurance has a strategic alliance with broker Marsh after it sold HSBC Insurance Brokers Ltd. to the global insurance intermediary last year.

Despite the global financial crisis and current credit crisis in Greece, Fried said HSBC's insurance business has achieved sustainable and resilient growth. Globally, HSBC Insurance posted a 6% rise in profit in 2009.

In South America, Fried said HSBC Insurance saw strong growth in Mexico and Brazil and it continues to develop the business in this region.

Europe's upcoming Solvency II regulatory regime is good for the financial services industry, said Fried. The financial crisis highlighted the importance of risk management for insurance industry, thus Fried said HSBC Insurance has implemented the risk-based capital model.

Product Development

With an aging population in many markets, Fried said there is an increasing demand for long-term care products in Asia. Although there is a trend for individual pension solutions, many governments have yet to offer tax incentives to drive the development of private pension schemes in Asia.

Individual savings and pension products enjoy significant tax benefits from governments in the United Kingdom and the United States. In Asia, the promotion of this product still requires a lot of work between the insurance industry and government, noted Fried. HSBC Insurance offers fixed annuities but not life annuity products in Asia.

The financial crisis has returned insurance demand to "back-to-basics" life protection and long-term saving products, according to Fried. Prior to the crisis, growth in many markets like China and India was prompted by the sale of investment-linked products. Now, Fried said he sees a growth in traditional life and saving products with guaranteed returns.

Overall, investment-linked products accounted for 30% of HSBC's total life insurance sales. Fried said "we don't see any new trend" for this insurance demand. In distribution strategy, Fried said HSBC Insurance is not "an agency company" and it aims to further develop bancassurance channels.

HSBC Insurance is looking to enhance its distribution channels with non-branch networks such as automated teller machines, online banking and inbound calling centers. In Asia, Fried said a majority of insurance sales still comes from the face-to-face branch network.

The insurer is promoting its alternative channels to more individuals in a bid to utilize the bank's established networks. Fried cited Hong Kong and Mexico respectively as having 50% and 65% of nonlife products sales, respectively, outside banking branches.

In Hong Kong, ATM travel insurance achieved 20% of total distribution sales in the first two weeks of launch. Fried said this channel now contributes 35% of travel insurance distribution.

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Iris Lai is the news bureau manager of Hong Kong at A.M. Best reporting financial insurance news for Asia Pacific. She has been writing reports for topics on insurance, reinsurance and takaful sectors and market and regulatory trends across the region. Lai is now writing for BestWeek Asia Pacific, BestWires and Best's Review, under A.M. Best. She can be reached at Iris.Lai@ambest.com.