Chinese capital controls and their impact on the Hong Kong insurance market

In October 2015, the media reported that top Chinese Communist party officials plan to dismantle Chinese capital control by 2020. In its Five Year Plan for 2016–2020, released in March 2016, the Chinese Government also forecast continued capital account liberalisation and internationalisation of the Renminbi. If, or when, capital controls are indeed loosened, the volume of capital waiting to be released into the international markets is potentially enormous.

Attractiveness of Hong Kong

In recent years, Hong Kong insurance companies have had a taste of what may be to come, with a steep increase in policies being bought by Mainland Chinese clients. According to data published by the Hong Kong Office of the Commissioner of Insurance (“OCI”), visitors from the Mainland spent approximately HK$ 3 billion on new insurance policies in 2009 but this rose to HK$ 31.6 billion in 2015, representing 24% of total new office premiums in 2015.

There are a number reasons why Mainland Chinese may decide to purchase insurance policies in Hong Kong. First, there are large number of insurers in Hong Kong and they are often perceived to provide a better level of service than their counterparts in China. Second, life insurance policies sold in Hong Kong generally offer better rates since life expectancy in Hong Kong is higher. Third, policies are generally denominated in US dollars or Hong Kong dollars. Finally, and more controversially, Hong Kong insurance policies are viewed by some as being out of reach of the Mainland authorities in the event of bankruptcy or a corruption conviction in the Mainland.

Capital control measures targeting Hong Kong insurance policies

Capital control regulations have long existed in China and individuals have long looked to circumvent capital outflow restrictions by purchasing overseas financial assets, including insurance products. The Chinese Government is aware of and concerned by this trend, especially at a time when the rate of growth in the Chinese economy appears to have slowed down and the Renminbi has been facing depreciation pressures. Insurance products which allow policyholders to cash out within a short period of time also attract risks of money laundering. A number of recent measures have therefore targeted individuals seeking to transfer capital out of China by purchasing insurance in Hong Kong and demonstrate that the loosening of capital controls is neither a foregone conclusion nor a one-way street.

Since 4 February 2016, the State Administration of Foreign Exchange (the “SAFE”) has imposed a cap of US$ 5,000 on purchases of insurance products overseas made using China UnionPay cards. China UnionPay is the dominant credit card issuer in China.

The People’s Bank of China, China’s central bank, has since 12 March 2016 prohibited the use of electronic payment services by Mainland Chinese in relation to any life insurance or investment related products. Individuals can still use these payment services for insurances in relation to personal accident, medical expenses and travel but such transactions are capped at RM 30,000.

Most recently, on 22 April 2016, the China Insurance Regulatory Commission (the “CIRC”) issued a statement highlighting the risks involved in purchasing Hong Kong insurance policies, including that:

• such policies are not protected by Mainland Chinese laws;
•  legal fees for insurance disputes are high in Hong Kong;
• insurance policies are settled in foreign currencies and buyers face exchange-rate risks;
• policyholders may lose all their investment if they surrender such policies within two years; and
• the Hong Kong Insurance Claims Complaint Bureau handles claims only up to HK$ 1 million.

Effectiveness of the capital control measures

It has been reported that a number of insurers feared that these measures would drastically reduce the number of insurance policies bought by Mainland Chinese. Data from the OCI appears to show a more mixed picture.

Chinese visitors still paid HK$ 13.2 billion in new premiums in the first quarter of 2016, representing 34% of the total new premiums in Hong Kong. There are also reports that some brokers have helped their clients circumvent the restriction imposed by SAFE by swiping their client’s UnionPay card multiple times, when selling a high value insurance plan (although some insurance companies have already restricted the number of transactions per year to 10 and each transaction at US$ 5,000).

Some individuals have been choosing to purchase insurance by Visa or MasterCard, albeit incurring additional fees, as these two service providers are not subject to the SAFE restriction. The RM 30,000 restriction imposed by People’s Bank of China may also be of less significant impact since payment online is generally less popular than UnionPay and customers who use an online payment method are generally interested in insurance products below the limit.

Contrary forces

The Hong Kong insurance market appears phlegmatic. The Hong Kong Federation of Insurers issued a statement describing the UnionPay restriction as “a short-term administrative impact on the payment method but it shall not affect the big picture”.

The broader picture is, however, complex. The Hong Kong insurance market highlights the potential gains for those able to provide a home for Chinese capital, but also the fragility of such models as China adjusts its capital controls and, whilst they remain in place, seeks to ensure they are observed.