The failure of Anglo Starlite Insurance reveals the dangers of cash-flow underwriting, says Fitch

Hong Kong’s non-life insurance sector remains a challenging environment, as evidenced by the recent failure of a small motor insurer, Anglo Starlite Insurance, said Fitch Ratings.

‘The collapse of Anglo Starlite reinforces the agency's long-held view that excessive price competition will test the balance sheets of the city's smaller insurers,’ said Stanley Tsai, director on Fitch's insurance team.

‘Leading up to its failure, Anglo Starlite had consistently underwritten on a cash flow basis and operated at substantial technical losses. The accumulation of underwriting deficits gradually created a shortfall in solvency and led to the motor insurer's demise,’ said Tsai.

Price competition is particularly intense among insurers driven by either cash flow or market-share considerations. Despite the increase in the number of vehicles insured between 2004 and 2008, average premium per vehicle covered fell by 3.8% a year over this period.

‘The moderate increase in average premium rates in 2008 was hardly encouraging either, in the context of the motor market's combined ratio of 111.2%,’ added Mr. Tsai.

Fitch said the capitalisation of the city's non-life insurance sector as a whole remains satisfactory, supported by strengthened hands-on supervision by the insurance regulator.

Pre-emptive measures in ring-fencing liquid assets have played a critical role in enhancing the recovery prospects of Anglo Starlite's policyholders and other creditors, added the rating agency. The insolvency fund managed by the Motor Insurers' Bureau will also provide funding for compulsory third-party liability claims if required.