Year 2008 - Insurance Industry after current finanical tsunami

18 2008 YEARBOOK 二 〇 〇 八 年 年 刊 Feature Captive Insurance and the China Dimension A New Opportunity for Hong Kong? Rising from the Financial Turmoil With the current economic and financial turmoil globally, there has been much discussion on the gloom and severity of the crisis. However, as the running theme of this yearbook suggests, one must look beyond the current financial crisis and focus on what it all means to our insurance industry when we emerge from it so that we can best prepare ourselves to grasp the opportunities arising from it. One outcome of the financial turmoil, I believe, will be the increasing demand for captive insurance and so an opportunity clearly exists for Hong Kong to establish itself as a captive domicile in Asia in which Singapore is now the dominant player.Whilst this is not the first time the idea of establishing Hong Kong as a captive domicile has been proposed, it is the China dimension and in particular the internalisation of large Mainland conglomerates that provides a new and powerful dynamic for Hong Kong to consider positive actions to develop as a competitive and recognised “onshore” captive insurance centre for the Mainland. Captive Insurance - Its Role A captive insurance company is in its simplest form a subsidiary company that only insures the risk of its parents. Captive insurance differs from conventional insurance in concept, in that whilst conventional insurance is a means whereby an organisation can transfer out its risk, captive insurance is used today by the vast majority of major corporations primarily to manage and contain risk within the organisation. It is seen as a key tool both in quantifying risk and in risk reduction. In this respect the rationale for captives has changed fundamentally from the early days when it arose in response to the lack of suitable capacity for industry specific risk in the conventional market and was also seen as a tax planning mechanism. Captive Insurance- the Opportunity for Hong Kong I believe the global financial crisis will fuel the demand for captives as the global insurance capacity shrinks and insurance markets harden also as major corporates seek greater efficiencies through more effective ways of risk management. There is also a strong potential for captive growth in Asia, as companies in the region, including Mainland, have tended to be “under-insured” in comparison to international standards.As risk management matures as a discipline in the region, organisations can reap the benefit by retention of and internal management of selected own risks. Secondly, the increased pressure for regulation will accelerate the existing trend for captives to move onshore and Hong Kong is particularly well positioned to become the onshore captive domicile for Mainland companies. Hong Kong offers the Mainland the advantages of working and accumulating assets under One Country whilst enjoying