Hong Kong’s position as a regional centre for insurance and gateway to and from China is helping international investors reduce risk, according to Marsh Hong Kong’s Lei Yu.
Regarded as “Asia’s insurer”, Hong Kong’s insurance industry dominates the region. Having more than 160 insurance companies and reinsurers licensed locally creates a competitive market with the expertise to connect and advise investors worldwide.
Lei Yu, Managing Director and Chief Executive Officer of Marsh (Hong Kong) Limited, says Hong Kong has an exceptional depth of regional knowledge about local liabilities plus highly-skilled associated professional services providers who have strong connections with insurers globally. She believes the scene is set for dynamic growth in Hong Kong, making it the go-to destination for international investors seeking to mitigate their risks while investing in Belt and Road projects.
Chief Executive of the Hong Kong Special Administration Region Carrie Lam recently added to the optimism of Hong Kong’s insurance industry by announcing that the China Banking and Insurance Regulatory Commission is to give preferential treatment to Hong Kong’s reinsurance companies that work with mainland insurance companies seeking to do business offshore. In addition, Hong Kong’s Insurance Authority is establishing a facilitation platform for Belt and Road opportunities with the Hong Kong Government providing HK$50 million (US$6.36 million) over three years to boost industry training.
Steps to mitigate risk
Hong Kong’s status as an internationally-recognised centre for financial, legal and professional services is crucial for deal makers venturing into unfamiliar territory since it provides the expertise to guide them through the challenges they face.
Yu says for Belt and Road projects, investors making cross-border deals need to pay attention to local conditions such as the political climate, local laws, financial environment and economic development.
Yu thinks companies tend to focus too much on the upside of potential opportunities coming out of a deal, instead of looking at the potential for a downside, and how best to protect their investment if that happens. She says there are four areas deal makers must assess before signing contracts:
- Political and geopolitical risk
- Natural disaster risk
- Operational risk
- Commercial risk
Surprisingly, commercial risk is often overlooked. For example, Marsh’s research reveals not all deals are set on firm ground, with more than 50% of large infrastructure projects not bankable without either multilateral or government bank support. In tandem with identifying risk, deal makers need to undertake thorough due diligence and maintain proper management oversight over local projects.
Hong Kong advantages
Marsh Hong Kong operates as a risk consultant for local and cross-border projects, providing technical expertise and analysis, quantifying risk, assessing the level investors are willing to individually bear and then transferring that knowledge to an industry partner. Investors who are managing risk in this way with a knowledgeable consultancy undertake extensive due diligence which also helps to make a project more bankable, explains Yu.
Having Hong Kong’s regional savvy insurers work alongside mainland investors helps reduce cross-border issues. For example, when a Chinese mainland corporate and a regional company co-invest, Hong Kong’s more experienced industry, with their international pool of talent and perspectives, can provide professional advice on regional jurisdictions which vary in the maturity of their investment products.
Mitigating loss
Although Hong Kong’s insurers have a long history of underwriting large infrastructure projects, the associated risks and exposure can be sizeable.
During a panel discussion at the Belt and Road Summit organised by the HKTDC in June 2018 in Hong Kong, experts explained that more than 50 types of risks are associated with large-scale infrastructure projects. While these may range from natural disasters and legal liability, new insurance solutions are swiftly being adopted to provide cover for political and environmental risks, as well as terrorism and cyber security.
Even when due diligence has been covered, unexpected losses can occur. At this stage, according to Yu, it is still not too late if investors act swiftly. “Insurance doesn’t cover 100% of losses. There will always be risk sharing, with limits to indemnity and deductibles that corporates need to consider. It may be too late to buy insurance after the event, but there are many other ways to mitigate risks from, for example, a disaster or regime change,” she says.
Yu recommends engaging a risk adviser to help assess damage, reduce potential losses and reassess risks in the future. Alternatively, Hong Kong’s experienced loss adjusters can use their forensic insurance expertise to examine contracts for clauses or potential grey areas that could open the way to a claim or support an investor’s position. In either circumstance, whether prior or post investment, Hong Kong’s insurance, services industries and arbitration are helping reduce risks for those seeking to invest in Belt and Road projects.
