Life insurance is the dominant line of the insurance industry in the Hong Kong Special Administrative Region (HKSAR). In 2001, life insurance premiums in force in the HKSAR amounted to HK$49.6 billion, or 72 percent of total insurance premiums in force (with non-life accounting for the rest). The life insurance business also represented 3.9 percent of Hong Kong’s gross domestic product (GDP) in 2001, making it a major contributor to the economy.
In terms fo coverage, the number of individual life policies reached 5.5 million as of March 2002, covering more than 80 percent of the population in Hong Kong. Growth momentum is also strong, with growth in premiums of 14.8 percent and 6.8 percent in 2000 and 2001, respectively, compared to Hong Kong’s corresponding GDP growth of 3.2 percent and 0.3 percent.
In addition, the ratio of in-force policies to the population has increased significantly in the past few years – from 49 percent in 1996 to over 80 percent as of March 2002. However, when compared against the ratio of over 200 percent in the US, there still seems to be plenty of room for growth.
As a high-volume transaction generator, the life insurance industry is very relevant to the payments and cash management business. Simply in terms of premium collection, there were around 42 million transaction in Hong Kong in 2001, compared to 52 million automated clearing house payment systems) and 134 million check payments.
The high concentration of payment traffic in the hands of a few cash management services providers makes the competition fierce – out of the 65 players in Hong Kong, the top five already represents 57.7 percent of the market share. The similarities and differences in the cash management process of life insurance companies compared with other industries can be best examined by reviewing the cash cycle in the payment and disbursement areas.
Insurance premiums are the cash flow for life insurance providers. Four major features distinguish the collection process of the life insurance industry. They are the following: the high volume of transactions, the need to invest income, the varying quality of payments; and the nature of an agent-based business.
The numbers of transaction generated by premium collection are enormous. With about 60 percent of premiums paid monthly and 40 percent annually, there are roughly 42 million premium collection transactions in Hong Kong every year. The figure is even more astonishing when looking at individual insurers: AIA, the largest life insurance company in Hong Kong, had 1,479,734 policies as of March 31, 2002, while its annual premium payment volume amounted to HK$11.2 million.
As a result, the life insurance industry is very interested in automating its collection process. Integral measures to reduce transaction volume are being introduced, including a pricing strategy to encourage annual payment. For most life insurers in Hong Kong, there is usually a discount for clients who choose to pay premiums annually instead of monthly.
During the past decade, insurance companies have been outsourcing their cash management requirements top external service providers. At the moment, around 60 to 70 percent of life premiums are paid by direct debit. (To be continued)