Why wealthy Chinese buy their insurance in Hong Kong; people were using offshore insurance to launder money. “The dividends paid by insurance companies is all clean money”

Why wealthy Chinese buy their insurance in Hong Kong

Jun 3, 2013 12:42pm by Lydia Guo

Wealthy Chinese mainlanders famously love to go shopping in Hong Kong, hungry for items such as milk powder, gold and luxury shoes and handbags. But they also like to buy less high profile items, including insurance policies.

During the first quarter of this year, mainland visitors spent HK$2.8bn ($361m) on premiums for personal policies such as life insurance and annuities, or 12.5 per cent of the total for such premiums, according to Hong Kong’s Office of the Commissioner of Insurance. That is a 55 per cent increase over the amount they spent a year earlier.

Why would mainlanders put insurance policies on their shopping lists? One reason is their desire to transfer capital overseas. Others are diversifying their asset allocation, avoiding a proposed estate tax and the fact that usually premiums are lower but returns higher in Hong Kong compared with mainland China. And, of course, Hong Kong’s health service is generally better.“It’s like going back to the mainland every time I walk into our office,” one agent working for a UK insurer in Hong Kong told beyondbrics. Almost all clients are mainlanders, and insurers are recruiting many Hong Kong-educated mainland graduates in a bid to further boost business.

Insurance companies operating in Hong Kong are not allowed to sell policies in mainland China. Customers must come to Hong Kong and sign policies there.

More and more mainlanders are aware of the advantages of offshore insurance policies. The Hong Kong government began compiling data on mainland visitors from 2005. The amount spent on premiums by mainland visitors went down during the financial crisis but surged dramatically last year, from HK$6.3bn in 2011 to HK$9.9bn. The pace is still picking up this year.

Annual returns for offshore life insurance policies is about 3 to 4 per cent – modest, but still better than the 2.5 per cent return offered in mainland China, agents and people familiar with the Chinese insurance industry said. The lower returns of Chinese insurers are mainly attributed to a comparative shortage of investment channels and higher operating costs.

Many wealthy Chinese have been worried by rumours that authorities are preparing to introduce estate taxes. Early this year, it was rumoured that Shenzhen, a mainland city that borders Hong Kong, would bring in an estate tax on a pilot base. Xu Qin, the mayor of Shenzhen, denied that such a scheme was in imminent, as reported by Chinese media, but that didn’t stop wealthy parents buying life insurances in an attempt to avoid it.

Offshore life insurance seems to be a good option for that purpose, with policies worth as much as $99m being offered to ultra high net worth individuals.

One agent said she had a 20-year-old mainland client who recently bought a five-year policy with an annual premium of HK$3m. “The young man didn’t want to start up his own business with the money so he just bought insurance,” she said. The customer stands to receive dividends of HK$1m a year from the age of 30.

Another agent said people were using offshore insurance to launder money. “The dividends paid by insurance companies is all clean money,” he said. Hong Kong’s insurance authorities have taken steps to tackle money laundering by organizing seminars and amending its guidelines last year.