Overview

Total gross and net premiums of general insurance business declined slightly by 1.4% to $22,546 million and 2.0% to $15,642 million respectively in 2005. The gross premiums represented 1.6% of the Hong Kong Gross Domestic Product, compared with 1.8% in 2004.

General Liability (comprising mainly employees' compensation ("EC") business), Property Damage, Accident and Health businesses remained the major classes of general insurance business by gross premiums written, each constituted more than 20% of the market total. Motor Vehicle business ranked fourth while the remaining business classes each constituted less than 10% of the total gross premiums.

As a sign of improvement in claims experience, the overall net claims incurred ratio ("NCIR") (i.e. net claims incurred as a percentage of earned premiums) lowered from 52.9% to 48.9% compared with 2004. Reflecting the general saving in claims costs, general insurance business achieved a 12.4% increase in underwriting profit over 2004 to $2,497 million. The underwriting margin (i.e. underwriting profit expressed as a percentage of earned premiums) rose to 16.0% from 14.1% in 2004.

With the exception of Aircraft and Ships businesses, which recorded underwriting losses, all other business classes showed profitable underwriting results in 2005. Property Damage business remained the largest contributor to the overall underwriting profit, followed by Motor Vehicle and Goods in Transit businesses. The underwriting result for General Liability business should be seen in the light of the release of over-provision for prior-year claims by some EC insurers resulting in an aggregate extraordinary underwriting profit of about $200 million for that class of business. Taking into account this extraordinary item, General Liability business reversed from an underwriting loss of $39 million in 2004 to an underwriting profit of $177 million in 2005. Ships business remained the worst performer, attributable to deteriorating claims experience.

Premium Incomes

Total gross premiums (comprising direct and reinsurance inward business) declined slightly by 1.4% to $22,546 million. The decline was mainly attributable to the significant contraction in gross premiums of General Liability business. Net premiums recorded a corresponding decline of 2.0% to $15,642 million. The retention ratio for 2005 was 69.4%, comparable to 69.8% for 2004.

Figure 2.2 Growth of Premium Income for General Insurance Business

Most of the major classes of general insurance business showed a decline in gross premiums in 2005. In particular, General Liability business (dominated by EC business) plunged by 11.8% to $5,578 million in 2005, the second consecutive year of a double-digit percentage decline following 2004, which recorded a 13.3% drop in gross premiums for this line of business. This was largely a reflection of the continuing keen competition in EC business and the resulting rate cuts by insurers seeking to attract or retain business. Besides, Motor Vehicle and Goods in Transit businesses dropped by 4.6% to $2,993 million and slightly by 0.1% to $1,159 million respectively. Property Damage and Accident and Health businesses, on the other hand, grew by 2.5% to $5,272 million and by 6.3% to $4,674 million respectively.

Miscellaneous business (comprising Aircraft, Ships, Pecuniary Loss and Treaty Reinsurance businesses) also recorded a growth of 6.0% in 2005, largely attributable to Pecuniary Loss business which grew by 8.0% to $1,478 million.

Figure 2.3 Growth of Gross Premiums for Major Lines of Business

Composition of Gross Premiums

Direct business and reinsurance inward business accounted for 77.8% and 22.2% respectively of total gross premiums in 2005, showing similar composition as in 2004. General Liability, Property Damage and Accident and Health businesses topped the general insurance sector, constituted 24.7%, 23.4% and 20.7% respectively of the total gross premiums. Motor Vehicle business ranked fourth with its 13.3% share.

Claims

The claims experience for general insurance business improved both in the direct and reinsurance inward business sectors in 2005. Overall NCIR fell by 4 percentage points to 48.9%, largely due to release of excess provisions for outstanding claims, notably in General Liability business.

On direct business, overall NCIR improved from 55.1% to 52.2% in 2005. The star performers were Goods in Transit and Property Damage businesses which recorded the lowest NCIRs, both below 20%.

On reinsurance inward business, overall NCIR improved from 45.5% to 36.3% in 2005.

Figure 2.5 Net Claims Incurred Ratio

Technical Reserves

Technical reserves, comprising outstanding claims provision (including provision for incurred but not reported claims), unearned premiums and unexpired risks provision slightly rose by 1.9% to $26,617 million.

Overall technical reserve ratio (i.e. technical reserves expressed as a percentage of net premiums written) strengthened from 163.6% in 2004 to 170.2% in 2005. Among the major classes of business, the technical reserve ratio of General Liability business increased the most, from 271.3% in 2004 to 316.5% in 2005. Notably, the technical reserve ratios of General Liability and Motor Vehicle businesses remained the highest of general insurance business classes in 2005, though the technical reserve ratio of Motor Vehicle business slightly decreased from 206.8% in 2004 to 205.3% in 2005.

Underwriting Results

The overall underwriting profit increased from $2,222 million in 2004 to $2,497 million in 2005, representing a rise of 12.4%.

With the exception of Aircraft and Ships businesses which recorded underwriting losses of $5 million and $156 million respectively in 2005, all other business classes recorded underwriting profits. Property Damage business remained the largest contributor to the overall underwriting profit of the general insurance business in 2005, achieving an underwriting profit of $995 million and an 11.3% increase over 2004. Motor Vehicle business and Goods in Transit business came next, registering $446 million and $399 million in underwriting profits respectively. General Liability business, attributable to the releases by some EC insurers of past claims over-provisions, showed a turnaround to an underwriting profit of $177 million, reversing from an underwriting loss of $39 million in 2004. Excluding this extraordinary item, EC business, the major component of General Liability business continued to incur an underwriting loss. Ships business remained the worst performer, with its underwriting loss deteriorated further from $82 million in 2004 to $156 million in 2005 as a result of worsened claims experience.

On direct business, the underwriting profit increased from $1,197 million to $1,441 million. All business classes maintained a profitable position, except for EC business, Ships business and Aircraft business. Property Damage business continued to record the highest underwriting profit ($435 million), followed by Motor Vehicle business ($384 million), Goods in Transit business ($376 million) and General Liability (non-EC) business ($306 million). On the other hand, Ships business was the worst performer recording an underwriting loss of $175 million in 2005. As for EC and Aircraft businesses, an underwriting loss of $136 million and $1 million was recorded respectively in 2005.

On reinsurance inward business, the underwriting profit also increased from $1,025 million to $1,057 million. Except for Aircraft business which recorded an underwriting loss of $4 million, all other classes of reinsurance business recorded an underwriting profit. Similar to direct business, Property Damage business was the best performer, recording an underwriting profit of $560 million.

Figure 2.8 Underwriting Margin of Major Lines of Business

Statutory Business

Statutory business comprises three classes of direct business - Motor Vehicle, Employees' Compensation (classified as General Liability-Statutory business) and Launch and Vessel Liability businesses (classified as Ships-Statutory business). In 2005, they altogether contributed $5,546 million in gross premiums to the general insurance business market, representing 31.6% of total direct business gross premiums. EC business, after receding from its top position as the largest class in terms of gross premiums for direct business in 2004, declined further by one more rank to the third position in 2005. Its market share in the direct business market reduced from 19.2% in 2004 to 15.9% in 2005.

Motor Vehicle Business

Gross premiums for direct Motor Vehicle business decreased by 3.3% to $2,742 million in 2005, while the number of vehicles covered increased by 3.8% to 587,130, reflecting a downward adjustment of premium rates persisting in the Motor insurance market in 2005. However, due to an improved NCIR from 48.4% to 42.1% recorded in 2005, the underwriting margin of direct Motor Vehicle business increased from 12.6% in 2004 to 17.0% in 2005.

Employees' Compensation Business

Following the severe rate cut that happened across the EC insurance market in 2004, EC business remained highly competitive, creating continuing pressures on its premium rates. As a result, gross premiums of EC business dropped by as much as 20.1% in 2005, repeating the experience for 2004 when a fall of 21.2% in gross premiums was recorded. In 2005, the number of EC policies in force decreased slightly by 1.4% to 299,330, reversing the increasing trend for the past 4 years. The underwriting result, on the other hand, improved from an underwriting loss of $264 million in 2004 to a loss of $136 million, mainly due to the release of over-provisions for claims in prior years.

Launch and Vessel Liability Business

Gross premiums of Launch and Vessel Liability business increased from $20 million in 2004 to $22 million in 2005, with the number of launches, ferry vessels and pleasure vessels covered being increased by 7.3% to 6,529. Such business posted an underwriting profit of $8 million as compared with $4 million in 2004.

Pure Reinsurers' Business

Pure reinsurers (i.e. insurers that are only authorised to carry on reinsurance business in or from Hong Kong) recorded a decline in gross premiums by 14.3% to $2,030 million in 2005. However, their total underwriting profit increased from $622 million in 2004 to $633 million in 2005, a slight increase of 1.8% over 2004. The top 5 pure reinsurers took up a total market share of 81.5%, in terms of gross premiums, indicating the continuing high concentration of business in the pure reinsurers' market persisted in 2005.

Assets Maintained in Hong Kong

Pursuant to the local asset requirement under section 25A of the ICO, insurers other than pure reinsurers and captive insurers carrying on general insurance business in or from Hong Kong are required to maintain assets in Hong Kong to match their local insurance liabilities. As at their financial year ended in 2005, these insurers maintained assets in Hong Kong totalling $70,892 million, a 9.3% decrease over 2004. Mortgage portfolio remained the largest asset type, registering $29,418 million or 41.5% of total local assets, followed by Deposits and Cash (23.7%) and Fixed and Variable Interest Securities (16.2%).

Market Analysis

A total of 126 insurers reported to the IA on their Hong Kong general insurance business for 2005. Of these insurers, 97 made underwriting profits while 29 suffered underwriting losses.

In 2005, gross premiums written by the top 10 and top 20 insurers amounted to $8,516 million and $13,255 million respectively. These premiums represented 37.7% and 58.8% of the market share, similar to the corresponding figures of 36.7% and 57.8% recorded in 2004. At the lower end of the scale, 26 insurers wrote gross premiums below the $0.2 million level in 2005.

Comparing with the market share of the top 10 general business insurers by overall gross premiums (37.7%), the market share of the top 10 insurers by gross premiums of individual major classes of general insurance business was higher, namely Accident and Health business (65.2%), Motor Vehicle business (61.7%), Property Damage business (48.9%) and EC business (60.8%).

Market Performance for the First Three Quarters of 2006

According to the provisional statistics for the first three quarters of 2006, general insurance business remained stable and gross premiums recorded a slight decline of 0.4% to $18,026 million compared with the corresponding period of 2005. Net premiums, on the other hand, increased by 0.5% to $12,856 million due to a marginally higher retention rate.

Overall underwriting profit of general insurance business substantially increased from $860 million to $2,034 million. This was mainly attributable to the general improvement in the claims experience recorded in the industry. More prominent was the significant improvement in the underwriting performance of Ships business, which turned from a loss of $575 million to a profit of $42 million. Property Damage business remained the largest contributor to the overall underwriting profit, albeit reducing from a profit of $731 million to $612 million.

On direct business, gross and net premiums increased by 2.8% to $14,394 million and 5.9% to $10,421 million respectively in the first three quarters of 2006. With the significantly improved performance of Ships business, the underwriting result of direct business achieved a profit of $1,207 million in the first three quarters of 2006, up from $351 million for the corresponding period of 2005. As regards the two major classes of compulsory insurance business, i.e. Motor Vehicle business and employees' compensation business (EC), underwriting profit of Motor Vehicle business moderately increased from $162 million to $196 million whereas EC business turned from a loss of $160 million to a profit of $21 million largely due to the significant release of over-provision for past claims.

On reinsurance inward business, gross and net premiums decreased by 11.1% to $3,632 million and 17.4% to $2,435 million respectively. Underwriting result continued to be profitable, with an increase in profit from $509 million to $827 million due to improvement in claims experience.