In its latest annual report, the Hong Kong Federation of Insurers (HKFI) announced that it is contemplating seeking exemptions from the Competition Ordinance, which will go into effect next year. The ordinance will “prohibit conduct that prevents, restricts or distorts competition”.
If the Competition Ordinance is to serve its purpose, then the Competition Commission should not grant any exemptions requested by the insurance industry. The reason why Hong Kong insurers currently overcharge for most of their services and do not offer better products is because players in the industry engage in very limited competition.
One of the major factors contributing to this phenomenon is the fact that the industry has been allowed to form cartel-like bodies (HKFI, PIBA, CIB) for the purpose of pseudo-regulating itself.
Currently, Hong Kong insurers do not sell commission-free ILAS products directly to consumers. As a result, all ILAS products have extremely high fees, which in part finance large sales commissions. Any consumer who might wish to purchase ILAS is forced to go through an agent or broker and to pay a massive commission, even if the consumer doesn’t need the service of an intermediary.
The reason why insurers do not offer ILAS products directly to consumers is probably because the vast majority of Hong Kong consumers have no reason to buy these products (even if the fees were low). Packaging funds in an insurance policy does nothing except expose consumers to unnecessary risks that do not exist when buying funds directly or through a fund platform like Fundsupermart. For example, consumers who buy ILAS lose all SFC regulatory protection; they typically have a much lower-qualified intermediary; and they are exposed to the credit risks of the policy issuer. Due to these severe drawbacks, insurers must pay large commissions to motivate an unethical/unqualified sales force to trick consumers into buying products which they are better off not owning.
Although ILAS is bad for most Hong Kongers, it could potentially be useful to some foreigners, assuming the fees were reasonable. This is because some countries give favorable tax treatment to investment products which are issued by insurance companies. Thus, some foreigners might be interested in purchasing cheap commission-free ILAS products.
So why don’t insurers offer such products?
It may be because the market is too small for such an initiative to be profitable, but more likely it is because a cartel of insurance brokers would boycott the products of any insurance company who tried to do this.
iFAST (a leading fund platform provider) was subjected to such treatment last year when it offered Singapore consumers a 50% rebate on commissions for term and whole life insurance. [See here.]
iFAST Central is a fund platform which is very similar to ILAS, except it is cheaper, better, and not offered by an insurance company.
iFAST’s platform fee is a maximum of 0.3% per year, but it can be as low as 0.1% for individuals who invest large sums.
The platform fee for ILAS products is multiples higher, usually 1% to 1.5% per year (in addition to other outrageous fees which finance commissions).
Insurance companies should be able to offer their service at a price which is competitive with iFAST’s price, but they are not doing it. They seem to have agreed with each other (either explicitly or implicitly) to not wage a price war.
In a fair marketplace, they would be forced to compete with iFAST’s prices, but instead, all of them play dirty by literally bribing brokers with obscenely large commissions that are not fully disclosed to consumers. iFAST does not play this deceptive corruption game, since its fees are transparent.
It is probably no coincidence that all insurers offer brokers roughly the same unconscionable commission rates. These standardized rates are likely the result of “price fixing”, and the high costs are ultimately passed on to consumers.
As soon as the Competition Law goes into effect, the Competition Commission should eradicate this corrupt, anti-competitive practice of bribing brokers with ever larger commissions.
Ideally, commissions should be banned altogether. A growing number of developed countries have decided to do this, including the UK and Australia.