Carlos Eduardo Coelho
Partner, Head of the Insurance Practice, MdME
“Modern financial services industry”; “1+4” adequate diversification development strategy”; “cross-border insurance”; “Guandong-Macau in-depth Cooperation Zone in Hengquin”, “Talent importation regime” are concepts and jargons are enshrined in the day-to-day talks of Macau leaders and opinion makers.
Much has been said about the push for diversification of Macau’s economy (old news already, one might say!). As conveyed by the Monetary Authority of Macau (“AMCM”) not so long ago, the financial industry became the second largest sector in the SAR’s GDP after the city’s core industry gaming.
One could question if this diversification (and modernization) of the financial services industry is indeed being achieved, and, if so, how? A quick skim through the 2023 Chief Executive Policy Address shows that the Government instruments to achieve such policy goal focus on development of the bond and wealth management market, finance leasing, Renminbi clearing, private equities and green finance. Whilst, so far, some of these initiatives might have been successful (just look at the number of bond issuances made in Macau the past few years), others (finance leasing) are still far away from making any relevant impact on the purported diversification.
The new kid on the block is the Wealth Management industry. When referring to Wealth Management (“WM”) we are talking about financial services dealing with the investment needs of affluent clients, i.e., financial services focused on advising private high-net worth individuals on how to invest their portfolios and plan their finances to meet respective goals. The provision of WM services may require the usage of legal structures (for example for succession planning) such as Trusts. This is more so because individuals are nowadays looking for more tailored, specific legacy planning solutions to meet their unique needs.
By the end of 2022, and as a preparatory step for the development of this new industry, Macau Trust Law was enacted. A Trust is an arrangement by which a trustor transfers the ownership (and control) of certain assets to a trustee, who holds, manages and disposes of such assets in the interest of one or more beneficiaries. By nature, a Trust arrangement allows for protection and preservation of assets/wealth and customization and control on how such assets/wealth are used (risk isolation).
Despite the insurance industry being an historical and essential element of Macau financial services industry, an uninformed glance at the 2023 Chief Executive Policy Address could lead one to think that the Macau insurance stakeholders have been left behind from the Government diversification goal plans. Nothing could be more wrong! Besides other specific initiatives fostered by the Central Government (aimed at the development of special insurance products such as cross-border commercial medical care and pension related products) and the growing cross-border motor insurance products, insurance stakeholders have indeed a preeminent say in the development of a Macau home grown WM industry. And the Trust Law just paved the way for it to happen!
So how would this unfold?
First and foremost, insurance companies are one of the limited entities that can act as Trustees. As such, there will be a new line of business and new revenue streams for them to develop (either directly, or preferably, by using a third party (group) licensed company developing this business independently, but always aligned with their commercial interests).
More relevant is the opportunity to design and develop new insurance products making the most out of the advantages allowed by Trust arrangements – Insurance Trust; Stand-by Trust. Bearing in mind that life insurance can be considered as a financial asset given its capability to build cash value or to be converted into cash, these new solutions shall allow for preservation of assets and control of risks, the main function of insurance, whilst also allowing for the assets to be managed according to the client’s instructions.
These innovative solutions allow the trustor/policyholder to arrange for the Trust (previously set by himself) to be the beneficiary of its life insurance policy. The Trust remains in a “standby state” as long as the trustor/policyholder is living, being only activated once the trustor/policyholder passes away. The death benefit arising from the life insurance policy will then be credited to the Trust and the trustee will execute, manage and distribute the estate according to the trustor wishes. This allows for the trustor to decide on how to distribute investment proceeds and use underlying proceeds (specially for investors whose children are too young to handle financial matters or are otherwise unable to manage high-value property) and also facilitate private wealth growth via the professional management and investment activities undertaken by the trustee.
Other alternatives can also be considered (think of the possibility of a Trust being directly a policyholder or even referral services between insurers and trustee companies). However, what really matters is that the novelty of such solutions and its combined benefits of preserving wealth, protecting beneficiary rights and segregating property (risk isolation) make it an appealing, unique WM means.
All this means the insurance industry (life and general insurers, intermediaries, regulator, other stakeholders) have an indispensable say in the development of a sustainable WM industry with Macau characteristics. But for that to work out, this industry shall have to assume its position as a main actor in the construction of a modern financial services industry. The private stakeholders will need to get together in one voice and assert they wish to be a part of this policy goal, so that they would then be granted paths (i.e. specific insurance-related opportunities) to pursue them.
But they cannot be left alone in this process.
AMCM attitude should become more open minded and pro-business by not limiting, instead allowing, new market entrants with innovative solutions, by curtailing unnecessary bureaucracy or outdated limitations and by fostering initiatives from incumbent market players without obviously jeopardizing a healthy competition.
The decision makers should look at the worldwide trends running around and push for the “modern” in “finance“ to actually enter into play by considering growing realities such as ‘digital-first’ business models; Insurtech (and the advantages of its the collaboration with traditional insurance); regulatory sandboxes (to allow experiments that might come to be relevant to our market – flexible coverage options?; micro insurance?; peer-to-peer insurance?); foster the usage of Internet of Things, advanced analytics and machine learning (AI) to develop the insurance market.
Macau should trust its insurance industry! I trust!
