Key Takeaways
- Hong Kong is one of the world’s most lucrative life insurance markets, with insurers collecting HKD 638 billion in annual gross premiums, the majority of which (59%) pertains to life insurance. Driving the lion’s share of the life insurers’ business are whole life plans that offer lifetime protection with a savings element, accounting for 77% of the in-force life insurance premiums by value and 72% by volume.
- However, whole life plans carry certain relative drawbacks for policyholders, such as:
- Potential Conflicts of Interest: 96% of life insurance premiums originate via intermediary channels, such as agents, who receive the highest proportion of first year premium payouts for whole life insurance, higher than that of term life insurance, thereby incentivising them to sell whole life policies;
- Conservative Risk Appetite: 60% of five of Hong Kong’s leading insurers’ investments are in debt securities, reflecting a conservative investment profile that may not align with individual policyholders’ investment goals and risk appetites, potentially resulting in lower returns. For instance, between 2020-24, returns on the portfolios of Hong Kong’s largest life insurers lagged the S&P 500 index – and did so by a notable margin – in all but one year;
- High Premiums: a comparison of premiums charged by traditional life insurers in Hong Kong revealed that whole life insurance policies can be up to 22x more expensive than term life policies from the same insurer for the same payment term and coverage for customers with similar profiles. Furthermore, whole life insurance policies have “low leverage”, i.e., much of the premium goes towards investing rather than protection, such that if the same premium amount was instead put towards a term life insurance plan then it would yield a much greater protection component;
- Discounted Surrender Value: almost 2/3rds of Hong Kongers terminate their policies. Surrendering a whole life insurance policy during the initial few years post-purchase can subsume the entirety of one’s premiums paid. In fact, it can take between 14-19 years before achieving break-even upon surrendering a whole life insurance policy, before accounting for inflation and the opportunity cost of not having invested elsewhere;
- Hidden Costs: we estimate that life insurers paid ~HKD 33 billion in commissions to intermediaries in 2024, a portion of which may be implicitly passed on by insurers to policyholders in the form of higher premiums. Furthermore, profit-sharing of the non-guaranteed savings component of a whole life policy (i.e., 5-15% is often retained by the insurer) can translate into an effective performance fee that’s well in excess of what’s typically charged by other investment avenues, such as wealth managers; and
- Low Fulfilment Ratio: Moreover, these non-guaranteed payouts frequently fail to materialise as illustrated at the time of policy purchase, with the average long-term (11+ years) fulfilment ratio of 135 whole life insurance policies issued by 10 leading Hong Kong insurers averaging 79%, with only 6/135 policies in force for 11+ years delivering a fulfilment ratio of at least 100%.
- In light of these drawbacks, an alternative approach, known as “Buy Term, Invest the Rest (‘BTIR’)”, has begun to gain popularity, especially in the West. BTIR involves opting for cheaper term life plans and investing the premium differential independently of whole life insurance policies, such as via wealth managers.
- The BTIR strategy possesses several benefits, such as:
- Lower Premiums: as previously highlighted, whole life insurance policies can be up to 22x more expensive than term life policies from the same insurer;
- More Investment Control: policyholders can invest as per their own personal investment needs, risk appetites, and financial goals;
- Higher Return Potential: insurers tend to invest more conservatively, thus investing with a more moderate or aggressive allocation can yield potentially higher returns; and
- Greater Liquidity: investments made outside of insurance plans in the case of BTIR should be easier to liquidate without incurring exorbitant surrender charges.
- What’s made the case for BTIR even stronger is the rise of digital D2C players, such as virtual insurers (e.g., Bowtie) and WealthTechs (e.g., Syfe), ushering in BTIR 2.0.
- BTIR 2.0 benefits from:
- A More Intuitive User Journey: digital-centric user journeys that are seamless and fast (e.g., onboarding / application completion within 10 minutes);
- Lower Costs: lower costs from saving on overheads (e.g., offices, relationship manager salaries) and intermediary commissions, with the ability to pass these cost savings on to end-customers in the form of lower premiums for term insurance (~14.1x lower) and lower fees for wealth management (~1.9x lower); and
- Higher Returns: higher long-term returns than a traditional BTIR approach, significantly outperforming not only whole life insurance (by ~2.5-6.8x), but also the traditional BTIR 1.0 by ~1.3x.
The Future Picture
- Consequently, we believe that as BTIR gains momentum in the coming years, a whole host of industry stakeholders will experience significant impact:
- Insureds: prior to choosing between a whole life insurance policy and BTIR, insureds need to bear in mind a range of factors, including their risk appetite, financial discipline, investment acumen, time availability, liquidity need, cash flow predictability, and legacy planning concerns;
- Insurers: a four-fold strategy is required of insurers to contend with the rise of BTIR, including protecting margins in their whole life business by launching innovative new features, penetrating the un-/under-insured segment via low-cost / more affordable term life insurance plans, proliferating into investment / wealth management solutions as an additional means of cross-selling to term life policyholders, and pioneering investment-linked products (“ILPs”) with more flexibility of investment choice and higher returns;
- Agencies: insurance agencies should look to evolve their agency workforce from insurance sales-oriented persons to holistic financial planners, capable of addressing policyholders’ insurance and investment needs;
- Wealth Managers: partner with insurers to tap their term life insurance policyholder base, such as via referral arrangements or white-label enablement; and
- Regulators: to close the HKD 6.9 trillion gap in Hong Kongers’ mortality protection needs, regulators can support BTIR as a means to help plug the sizeable coverage gap un- / under-insured customer segment.
How We Can Help
- Quinlan & Associates can support the bespoke needs of various industry stakeholders through strategy consulting, operating model development, and corporate training delivery:
- Insurer: Craft a strategic blueprint to help grow the D2C / term life business and enter the investment landscape;
- Insurance Agency: Explore the case for transforming into a holistic financial advisory provider by expanding beyond just insurance sales;
- Wealth Manager: Provide assistance in formation of beneficial partnerships with insurers to unlock cross-selling synergies; and
- Regulator: Gauge the current status of Hong Kong’s mortality protection gap to leverage the resulting insights for developing a suitable strategy and implementation plan to tackle the same.
