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Enoch Yiu

INVESTMENT-LINKED insurance products may be hot right now but Pacific Century Insurance is reluctant to follow the fashion.

The insurer is traditional at heart. It may have bowed to pressure in March by introducing an investment-linked policy, but it has no plans to go any further.

'Many clients told our agents that they wanted to buy investment-linked products so we also had to launch an investment-linked product in March,' said Andrew Yang Fan-shing, deputy chairman and chief executive.

'But I don't think we should promote too many of these kinds of products. Investment-linked products are very trendy, but they may not be in the best interests of the customers.

'It is a fact that many policyholders fancy these high-return products but I wonder if they all understand the risks involved.'

Products include a combination of life protection policies and a range of investment funds. Policyholders can decide in which funds they want to invest their premium.

Under a more traditional scheme, the insurance companies are responsible for investing the premium and guarantee returns to policyholders.

Fund-linked products have been popular in overseas markets for years. It is only recently that they have made their way to Hong Kong.

According to a report issued by Standard & Poor's this week, the popularity of investment-linked products is rising fast.

Total premium sales in investment-linked products increased to HK$5.1 billion last year, compared with HK$3.8 billion in 2000, the report said.

Of all new individual life policies sold last year, 39 per cent were investment-linked policies, compared with 37 per cent the previous year.

Yet after introducing its investment-linked product in March, just 1 per cent of Pacific Century Insurance's new policies sold in the first six months were investment-linked policies.

This may have been due to the firm's failure to press its 1,700 agents to sell these products.

'There is no guarantee, no certainty for the clients who purchased these products. This has violated the basic principle of insurance companies which have the mission to provide certainty and financial support to the policyholders,' Mr Yang said.

He added that investment-linked policies usually allowed the policyholders to get back their premium plus investment returns for three to five years.

In contrast, traditional policies allow policyholders to get back only their premium when they retire or their family would get compensation on the death of the policyholder.

'The beauty of the insurance policy is to force the policyholder to save money for a rainy day. The short-term investment-linked products simply do not have a forced-saving nature.'

Mr Yang admitted the lack of promotion in investment-linked products had led Pacific Century Insurance to fail to capture those clients who wanted high returns.

'We may sell fewer policies now. But when the market starts coming back for the traditional policies, it will be the time for our sales to increase again. I don't think this date would be too far away.'

He believes policyholders soon will find out the setbacks of the investment-linked products, given that the current equity and bonds markets are weak.

'When policyholders are getting their fingers burnt from losses of the funds in their insurance policies, they are likely to go back to traditional products. This would be the time for us to see a rapid growth in our traditional policies again.'

Pacific Century Insurance, the eighth largest insurer in Hong Kong, is 44.94 per cent owned by Richard Li Tzar-kai's Pacific Century Regional Developments (PCRD).

In the first six months, Pacific Century Insurance reported a net profit of HK$84 million, up 22 per cent from a year earlier. But the increase was mainly from investment returns, which increased by 116.4 per cent year on year.

But total premium income dropped by 12.7 per cent year on year to HK$831.3 million due to a decrease of new policies sold during the first half of the year.

Mr Yang said the drop was mainly because the company had lost about 300 agents to rivals in the first half. It now had about 1,700 agents, compared with 2,000 at the end of last year.

The insurer plans to restore the number of agents back to 2,000 by the middle of next year by launching programmes to recruit more new agents.

'The more agents we have, the more policies we can sell,' Mr Yang said.

However, the insurer would like to recruit new agents and would not pay high salaries to entice experienced agents to jump ship: 'It is just too expensive. It is not worth expending a huge sum of money to increase our sales force.'

Industry sources said that to acquire top agents who would lead a team of 200 to 300 to switch companies, the insurer may need to pay up to HK$20 million to these team leaders and it may need to pay the whole team HK$100 million.

In terms of the firm's future, there were talks between controlling shareholder PCRD and potential buyers to dispose of its stake last year, but apparently they came to nothing.

Mr Yang believes the shareholding of the company will remain stable, as will his position in the company.

He has previously said he wanted to find a successor but has yet to find a suitable candidate. Mr Yang said if he could not find a successor when his contract expired in 2004, he would be willing to stay in the company.

Insurance rating agency AM Best in August affirmed an A-rating (excellent) for the financial strength of Pacific Century Insurance due to its strong capitalisation, stable operating performance, sound investment strategy and products.

It also said Pacific Century Insurance's major challenge ahead was to recruit more high quality agents.

Its extensive agent force had historically been a competitive advantage.

However, its ability to sustain growth had been challenged by several factors, including intensified competition for qualified agents and increasingly popular alternative distribution channels such as bancassurance, AM Best said.

'These problems reflect a changing industry landscape, which the company must address in order to be competitive,' AM Best said.

S&P assigned a Bpi rating to Pacific Century Insurance that reflected the insurer's moderate financial strength mainly due to its high reliance on reinsurance arrangements.

But S&P also said Pacific Century Insurance was in a satisfactory position to compete with rivals as it was now the eighth largest in the market.

Graphic: cvpcgbz



Insurer sticks with the fundamentals