HONG KONG SAR, CHINA Trends and Developments Contributed by: Edwin Northover and Jan Buschmann, Debevoise & Plimpton
business to internal and external offshore reinsurers, often based on regulatory capital considerations. This trend is expected to continue as insurers react to the new risk-based capital regime (see the Risk-based capital section). In terms of alternative risk transfer, a legal and regula- tory regime for insurance-linked securities (ILS) came into effect in 2021. Following the example of Singa- pore, Hong Kong put in place a grant scheme to sup- port its initial ILS issuances. To date, there have been six issuances under the new regime. While the length of the approval process and the relative lack of local expertise with regard to such issuances continue to be a factor, Hong Kong’s preferential status with Main- land China is likely to result in further risk transfer of Chinese risks to the capital markets through Hong Kong-based ILS. Insurance Connect and the Greater Bay Area The IA and relevant government departments continue to liaise with Mainland Chinese regulators on arrange- ments for Hong Kong insurers to open service cen- tres in designated Mainland locations, such as Qianhai and Nansha. The service centres will allow Hong Kong insurers to service policies issued to Mainland Chi- nese customers, including with regard to claims and complaints handling. Discussions are also ongoing regarding a poten- tial future “Insurance Connect” regime under which Hong Kong-authorised insurers would be permitted to sell certain products in the Greater Bay Area (an area comprising Hong Kong, Macau and a number of cities in Guangdong province). The features of such a regime remain challenging, particularly given the strict exchange control regulations in the Mainland, which cannot be addressed in the same way as for existing “Connect” schemes for stocks and bonds. Another aspect of the integration of the Greater Bay Area is the design of cross-border products, such as motor insurance covering Hong Kong-registered vehi- cles for travel into other parts of the Greater Bay Area and medical products covering policyholders across the Greater Bay Area. As an important step in this direction, since 1 July 2023, Hong Kong private car drivers entering Guangdong province have been able
to purchase motor insurance from Hong Kong insurers with coverage of statutory third-party liability motor insurance for the Mainland, thereby eliminating the need for the purchase of separate motor insurance
from Mainland insurers. Group-wide supervision
In 2021, the IA implemented the supervisory regime for Hong Kong-based insurance groups. The regime is built on the principles issued by the International Association of Insurance Supervisors (IAIS). Three insurance groups are currently subject to group super- vision, namely AIA, FWD and (the formerly UK-based) Prudential. The group supervision regime imposes group-wide capital requirements, generally based on an aggre- gation of capital requirements and eligible capital resources of local operations in the relevant jurisdic- tions. It also includes requirements for capital instru- ments that need to be met for such instruments to be recognised as Tier 1 or Tier 2 capital on a group basis. The requirements are generally aligned with corresponding IAIS recommendations. In addition, the group-wide regime imposes extensive group-wide governance requirements. Among other requirements, major acquisitions made by an insur- ance group have to be assessed through a framework specific to the insurance group and, if assessed to be material, approved by the IA. Key persons of the “des- ignated holding company” of the group are subject to fit and proper requirements and approval of the IA. Risk-based capital Another regulatory focus has been the risk-based capital (RBC) regime for Hong Kong authorised insur- ers that came into effect on 1 July 2024. The Hong Kong RBC regime is based on three pillars, namely: • quantitative requirements for the determination of a “prescribed capital amount” reflecting the risks to which the insurer is exposed; • qualitative assessment of risks, including through an own risk and solvency assessment (ORSA); and • reporting and disclosure of solvency-related infor- mation to the regulator and the public.
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