Is ERM OK in HK?

As part of StrategicRISK’s new Asia Risk Report on Hong Kong, we canvas some of the region’s biggest brokers for their thoughts on enterprise risk management (ERM) in the territory.

We also ask them about the challenges involved in placing insurance cross-border between the Hong Kong and mainland China …

Greater China Aon Risk Solutions chief executive Owen Belman (pictured)

“As in many countries across Asia, there are pockets of excellence that exist in Hong Kong. There are many companies with good levels of external risk management governance. However, when you dig deeper there is not much integration into business decision-making or audit processes. There are many organisations that have implemented ERM, yet do not measure their risk maturity.

“Transactional risk management provides a response that generally satisfies stakeholders and there are not many leaders that see the value of implementing risk management further. Many companies make a business decision and then back-fill the risk management, such as acquisitions, rather than truly utilising ERM as a part of their decision-making process.

“[In relation to placing insurance cross-border] there are three main challenges. First, choice of insurers. China has imposed more restrictive regulatory requirements compared to Hong Kong, such as admitted insurance. There is a limited number of insurers in Hong Kong that have licences in both places so as to fulfil jurisdiction requirement with S&P credit rating. Second, coverage consistent/wording interpretation. Most clients prefer consistent cover between Hong Kong and China. Policy arranging in China usually has lesser benefit/extension relative to policy arrangement in Hong Kong. We have to market the appropriate insurers who are flexible enough to offer policies across both countries. Third, foreign currency, taxation and claims-payment capability.”

JLT Asia chief executive Duncan Howorth

“The general level of ERM maturity in Hong Kong is based on the corporate governance requirements that are in place. The HK stock exchange requires companies to follow Appendix 14 of the Corporate Governance Code. Local companies have limited incentive to develop comprehensive programmes. The larger Hong Kong companies have ERM programmes in place, while the large private firms tend to have little, if anything, in place. Supporting these local companies is a focus for JLT.

“To date, there appears to be little shift towards a more strategic approach to risk management [in Hong Kong]. With limited regulatory drivers the cost versus value-add is the key consideration. Risk specialists such as JLT need to educate clients, and develop value-based solutions to help them start the risk management journey.

“[In relation to placing insurance cross-border] there are a number of challenges requiring clients to take advice from specialist brokers. The RMB is not yet freely exchangeable and so payment of premium and claims can be challenging; CIRC [China Insurance Reguatory Committee] generally requires all policies irrespective of the line of business to be locally admitted; in other words, a policy must be issued in China. There are a limited number of insurers available to trade within China: PICC, Ping An and CPIC, for example.”

Marsh Hong Kong chief executive David Jacob

“The market domination in some industries sets the development of ERM in an informal way. Most Hong Kong enterprises do have their ways to evaluate the business risks; the next step for them is to formalise an internal structured approach, which most Western large enterprises do.

“As more and more Hong Kong companies expand overseas, and more and more mainland China companies utilise Hong Kong as the base for international trades, they are increasingly taking a more strategic approach towards risk management; for example, consolidating and globalising their insurance programmes. This is a natural evolution of business maturity and corporate growth. 

“[In relation to placing insurance cross-border] regulatory issues will always be a concern in any cross-border insurance transactions. However, if properly managed, this should not be a deal inhibitor.”

Lockton Companies (Hong Kong) managing director, corporate and multinational clients, Asia Pacific region, Gregory McCoy

“There is a long way to go before Hong Kong companies truly embrace the benefits of ERM. We are strong ERM advocates, but stress the need for practical application, as there is quite often a ‘woods for the trees’ mentality with ERM. Prioritising and linking solutions to the risks which may most dramatically affect the business or the initiatives that are most going to help the business succeed is the key. A lot of time and expense can be spent on issues that don’t hold sufficient relevance to the business.

“An important issue in Asia’s expansion is the associated legal and regulatory reform that is going with it. The cost of compliance and the penalties for non-compliance, both regulatory and commercial, particularly relating to breaches which impact reputation, are clearly important board-management issues. Environmental liability is also an important example.

“Cross-border reinsurance is common and increasing, although currency issues remain a hindrance. The broader acceptance of the yuan as a global currency will significantly accelerate this.”

More articles, discussions and interviews from our series of country-focused risk reports are available at our Asia Risk Report hub.