On 1 January 2015, the new Guidance Note on Underwriting (GN15) regulatory framework of Hong Kong comes into effect. The GN15 implementation signals significant changes to the Investment Linked Assurance Scheme (ILAS) industry and challenges for those companies unprepared for it.
At present, it appears that the insurance industry will struggle to have new product offerings in place before the New Year, and as a result, some of the older and smaller brokerages will struggle to survive without the large upfront commissions their business models depend on; regular premium ILAS product sales are estimated to fall by up to 80%.
Structured solutions
Capstone Financial was formed over six years ago in Hong Kong by three owner directors, based upon the belief that we wanted to build a more client focused and technology driven solution for advisers and their Hong Kong resident clients.
Since then, we have rapidly grown into one of the more established local brokerages and expanded into markets like Shanghai (China) and Kuala Lumpur (Malaysia). With a robust base of over 1000 clients and boasting both insurance and SFC licenses, Capstone anticipates competing in an industry-wide business structure that rewards client relationships over short-term sales.
The company has been moving away from the typical ‘quantity over quality’ recruitment strategy, by focusing on recruiting experienced advisers, and assisting them in managing larger client banks through superior IT infrastructure and asset management support.
A brokerage is only as good as our advisers and the culture we create, so by focusing on staff development and support we have built excellent staff and client retention, which will be critical in the new GN15 environment.
It is our opinion that the regulatory changes associated with GN15 are necessary and have been inevitable for some time. We have focused from the beginning on protection, lump sums and shorter term ILAS plans, such as 5 Year Generali Vision, while most of the market has maintained the typical (and soon to be antiquated) long term focus on regular savings.
Quality not quantity
The company’s remuneration strategy has been designed to create a long term view in our advisers, with a blend of recurring income through ongoing fee paying services and commissions; which will most likely be mirrored by other companies moving forward. Remuneration will be a difficult issue for firms which historically market long- term savings, with basic salaries becoming more prevalent as new advisers try to gain a foothold in the Hong Kong market and companies having to support this process.
With new lump sum products looking like they will have a maximum term of five years, and regular savings sales set to plummet, Capstone will join other advisers in moving a larger portion of our client book to SFC regulated platforms, while diversifying our insurance business with a focus on expanding corporate benefits and our other online propositions.
The company’s recent moves ahead of the new regulation have been to strengthen our investment committee in order to build an in-house discretionary management platform. This has been through the arrival of Tony Arkey, former head of Hong Kong Asset Management and Ryan Dodgson, former owner of Premium Finance Group in Shanghai. By moving into the discretionary management of assets, Capstone Financial will provide a more wide-ranging and proactive set of services to its clients.
Capstone is charging into the online space with offerings in the health and life insurance space, while many other industry leading competitors who are still focused on preliminary GN15 compliance.
In the Hong Kong market and globally, the company utilizes an online aggregator strategy to openly present more client friendly and functional products than those currently available in the market.
Through this channel of taking general insurance online, we can efficiently compete with larger brokers and harness our highly skilled adviser network for cases that require additional personal support.
2015 will signal significant changes to the Hong Kong ILAS market; with larger well capitalized firms thriving by utilizing both the SFC and new Insurance Authority (IA) framework to ensure that clients are no longer subject to the typical ‘one size fits all’ method of advising. We are likely to see fund platforms become more prevalent, highlighting the value of working with an SFC licensed firm, a rapid diversification of insurance product lines, and smaller firms struggling to achieve the capital adequacy required to compete in the new market environment.
Four key points on GN15 regulation
- GN15 will benefit companies with existing recurring income models
- Non-insurance based investment vehicles will become more prevalent, requiring SFC licensing
- The industry in Hong Kong will go through a period of consolidation, with larger companies able to leverage pre-existing client banks
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Further significant regulatory changes will follow as the Insurance Authority takes over from the existing self-regulatory model
