Actions by the mainland Chinese authorities aimed at curtailing capital outflows present significant risks to Hong Kong’s life insurance sector and to international insurance businesses based here.
China UnionPay, the main payment system in mainland China, on 29 October 2016 banned transfers from mainland customers for investment-related insurance products in Hong Kong. China UnionPay had reportedly allowed payments for life insurance policies to exceed the USD50,000 annual cap on personal transfers. This new rule is one of a number of recent central Chinese government measures aimed at curtailing capital outflows and containing the activities of international firms seen as breaking the regulations.
This shift has had immediate impact. In response to the ban, funds used to purchase insurance policies through China UnionPay fell precipitously from CNY8.6 billion in October 2016 to CNY30 million in November 2016.
Now the government has taken steps to curtail sales settled with Visa and MasterCard credit cards, which had provided a separate loophole for individuals able to deposit funds into a credit account to cover purchases. At midnight on 10 December 2016 a ban on credit card payments for such insurance came into force.
This shift presents two major threats to insurers. The first threat is financial. Payments linked to investment insurance sold in Hong Kong had reached a level of HKD30.1 billion (USD3.88 billion) in the first half of 2016, up 116% year-on-year and amounting to as much as half of all sales made in Asia by some big insurers. This lucrative business has now imploded, leaving some insurers heavily exposed.
The second risk is regulatory. Insurers’ sales representatives had previously travelled regularly to meet clients in China from Hong Kong, notwithstanding that their doing so was in breach of rules prohibiting certain sales to mainland customers. The possibility of the arrest of senior company officers or employees is now a real threat.
What had once seemed no more than a misdemeanour, though, has taken on greater significance as a growing debt burden, a falling currency and a slowing economy have turned capital flight into a major national concern for Beijing.
And, as so often in China, the question is not whether an action breaches regulations, but whether the government might enforce the rules.
A crackdown on Hong Kong life insurance policy sales on the mainland is likely to follow, as with GlaxoSmithKline and the pharmaceutical sector in 2014 or with Crown Resorts Limited and casino and junket promotion now. That bigger foreign companies are amongst those selling these life insurance policies only adds to the risk, particularly if tensions with the US rise in the coming months.
In the above context, boards of directors, senior executives and legal counsel should act to mitigate any prospective exposure by:
- Carrying out an internal assessment of agents’ sales into China.
- Appraising the regulatory risks linked to such sales.
- Examining the risks of arrest or other action against senior executives travelling into mainland China in the context of prospective investigations.
- Assessing any financial exposure deriving from a sudden end to this lucrative line of business.
- Assessing any reputational implications.
SVA are available to assist companies by conducting independent investigations to determine what exposure may exist and as to the actual current activities of their sales agencies who might be operating outside of international companies policies and procedures.