HONG KONG (Reuters) - AIA Group Ltd. surged 17 percent in its Hong Kong debut as investors, chasing exposure to Asia's fast-growing life insurance business, piled into the record offering in the world's hottest IPO market.

The better-than-expected listing is a relief for bailed-out insurer American International Group Inc. (AIG) after a two-year effort to sell its Asian unit, including a failed takeover attempt from British insurer Prudential plc.

Encouraged by the first-day pop, AIG exercised the green-shoe in full, taking the IPO size to $20.5 billion. That makes it the third-biggest IPO ever, behind Agricultural Bank of China Ltd and Industrial and Commercial Bank of China Ltd.

The strong start boosted AIA's market value above the $35.5 billion Prudential had initially offered for AIA in March, vindicating AIG's decision not to accept a $30.4 billion bid that followed.

AIA CEO Mark Tucker will now battle it out with Prudential to grab a greater share of the $358 billion Asia-Pacific life insurance market after spending about 17 years building Prudential's Asian business.

Diversifying quickly into bancassurance - selling insurance products through banks - is one of the battles Mr. Tucker has on his hands, as he drives growth at AIA after the wounds inflicted by AIG's near-collapse.

"The successful IPO would turn management's full attention back to the core business. The IPO and the separation from AIG took up some of management's time," said Sally Yim, senior analyst of financial institutions group at Moody's Investor Service.

"Whoever is able to diversify into bancassurance and at the same time strengthen their agency productivity will be the winner in Asia," she added.