Hong Kong's insurance industry is poised for a sustained period of relative stability, according to international rating agency, Standard & Poor's. Despite the perennial threat of earnings pressure, low interest rates and volatile investment markets, S&P expects the sector to achieve satisfactory growth through to 2005. According to its findings, the ratings agency predicts that the drivers that will characterize the sector's growth are related to the low insurance penetration numbers on the life side and improved pricing and reserving within the non-life sector.

The report entitled 'Hong Kong Insurance Outlook 2004-2005' emphasizes that the SAR's insurance sector has weathered the potentially shattering blow characterized by intense competition, volatile investment markets and the outbreak of the Severe Acute Respiratory Syndrome. Following the recent unfavourable environment, S&P estimates that it is unlikely that ratings on Hong Kong insurance companies will slide over the short term.

On the life insurance side, S&P has projected that the financial strength of the territory's industry will remain favourable for the time being. The report points to the sophistication of the Hong Kong life market compared to other regional sectors as working to its advantage. Strong asset and liability management policies, actuarial practices and operating management will ensure that Hong Kong's life companies could manage any foreseeable tremors in the industry.

In the fluctuating 2003 period, the ratio of total life premiums to Hong Kong's GDP was around 6.3%, When compared with more mature markets, the figure was relatively low, which S&P argues highlights that the life sector has much room to grow.

The report also stipulates an additional avenue that will steer the industry's fortunes will the industry's response to the be the savvy investor operating in the age of volatile equity markets and low interest rates.

In response to these potentially punishing factors, S&P reports that Hong Kong-operating life insurers have responded with a new range of sophisticated products that offer better yields that low interest rate deposits and resemble wealth management type plans.

One such platform that is driving and will continue to influence the sustainability of the sector is the bancassurance distribution channel and the continuing popularity of insurance saving products. As bancassurance products are presently generating higher returns than bank deposits, S&P predicts that the attractiveness of these products will continue to post healthy premiums for the industry.

In its report, S&P assigned high ratings to Hong Kong's three major bank-owned insurance companies. According to the rating agency, HSBC Life (International), Hang Seng Life and Bank of China Group Insurance all possess the ability to broaden its in-force premium business through a sizable customer base.

As far as challenges go, the life insurance space could be influenced by interest rates and general market volatility. However, the ratings agency held the belief that the expanding inequality between larger and smaller insurers could present a greater problem. Coupled with an overcrowded market, S&P predicted that smaller life companies would struggle in the face policy poaching and would need to find a specialised alcove to survive.

"Perhaps the most obvious defect afflicting both sides of the broader industry in Hong Kong is the disparity between the larger and the smaller operators," stresses Ian Thompson, S&P's managing director for financial services ratings in the Asia-Pacific region. "Both the life and the non-life sectors in the territory are overcrowded and smaller companies that cannot find their own niche may find themselves pushed out of the market."

Despite a relaxation on premium rates, S&P believes that the territory's non-life sector will remain stable, as companies have turned to disciplined pricing as a result of increased competition in the sector.

A more fragmented arena that the life side, the non-life sector will continue to typified by reserved market share percentages. The report concludes that among Hong Kong's 120 non-life providers, the five leading companies take a combined 22% market share, with the largest office grabbing a modest 6% of the business.

S&P also discloses that the three largest business lines by total premium percentage in the non-life sphere are property damage (22%), employee compensation liability (18%) and accident and health (18%).

Although underwriting profits spawned from the non-life sectored are expected to level out with the HK$ 23.7 billion ($3 billion) in total premium income in 2003, S&P expects that the sector has built a resilience platform against returning to the poor underwriting days of the 1990s.

Although the Hong Kong insurance industry is not moving ahead all guns blazing, the market is coasting along nicely, which S&P doesn't see changing anytime in the short term.