Availability of RMB instruments lags demand for insurance – Wim Hekstra profile
China is the driving force of Sun Life Financial Hong Kong’s business but a lack of hedging instruments is a problem, as its chief executive tells Asia Risk
While the UK's politicians have recently flirted with the idea of forcing visitors from certain countries to hand over a "security bond" worth $5,000 to encourage them to leave at the end of their stay, Hong Kong's authorities have instead been using financial instruments to enable foreigners to gain residency.
The Capital Investment Entrant Scheme (CIES) has been in play since 2003 and enables most overseas citizens – though in practice it's overwhelmingly mainland Chinese who apply – with deep pockets to gain residency in Hong Kong if they invest a cool HK$10 million ($1.3 million) for seven years. What is good news for the 1.05 million Chinese who the Hurun Research Institute estimates have personal wealth of at least 10 million yuan ($1.6 million), is also welcomed by Hong Kong's insurers. Wim Hekstra, the recently appointed chief executive of Sun Life Financial's Hong Kong arm, calls the numbers invested in CIES products this year "mind blowing".
There was a large increase in the number of these policies the Canadian insurer sold in 2013, a trend which Hekstra says is behind a significant rise in earnings for the firm. "We have sold over a hundred already this year: people are putting down 10 million dollars a time, it's serious money."
For the year to date – the first three quarters of Sun Life's financial year – the insurance market in Hong Kong has grown by 16%, whereas Sun Life is up almost 50%, Hekstra says. "That's very much driven by mainland demand for these types of products."
While Sun Life is a purely Hong Kong firm – the parent company has had a joint venture, Sun Life Everbright Life Insurance, on the mainland since 2002 – China is an important factor in the development of the onshore market, according to the chief executive.
"You see that connections with China are important, particularly with relation to the fact that mainland Chinese still have a demand for products sold in Hong Kong, and this has been a major driver of the local market."
Currently RMB products make up about 20% of the firm's products but the insurer plans to build on the range and duration of its Chinese currency denominated product offering.
Big fish, small bond
Getting access to the right sort of instrument is the problem, with a lack of depth and duration in the China interbank bond market. Sun Life has almost used up the quota it received last year to access the mainland bond markets, and while it is confident that the People's Bank of China will grant a second one imminently, the uncertainty of not knowing whether the firm will be able to write the business it sells is "a pain" according to Hekstra.
"You don't want to have to go to your distributor and say, 'sorry guys, can you give us two months to get our quota approval through'."
While there are options in the event of exceeding the quota, such as buying dollar assets and hedging them back or using China asset managers to provide the underlyings, these strategies eat into margins. The solution is more diversity of onshore instruments, which Hekstra says will give greater certainty to providers and enable the distribution of a much broader RMB product range.
"A greater diversity of onshore instruments would be helpful in developing the RMB market: the current maximum duration on the China interbank bond market is about seven years."
More RMB-linked instruments would not only enable the firm to structure longer-dated policies but also allow the use of savings structures much more sophisticated than the existing vanilla ones.
"Look at the current RMB product range in Hong Kong: most is relatively short term – even from the banks, and the more access we can get to the China interbank bond market the easier it becomes for us to price long-term life insurance products. We started with a simple savings endowment product; now we are selling universal life products and in the long term we are aiming for whole life products."
Biography – Wim Hekstra 2007 – 2008: General manager strategic partnerships, ING Hong Kong 2008 – 2011: Co-head of insurance and pensions, ING Hong Kong & Macau 2011 – 2013: Head of strategy and business development Asia-Pacific and head of China, ING Asia Pacific 2013 – present: Chief executive, Sun Life Financial Hong Kong |
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