HONG KONG SAR, CHINA Trends and Developments Contributed by: Edwin Northover and Jan Buschmann, Debevoise & Plimpton
There has been an early implementation of the sec- ond pillar, so the requirement to prepare ORSAs is already in force. The calculation of the prescribed capital amount under the first pillar is based on the application of risk factors and stress tests with regard to various risks such as market risk, insurance risk and counterparty risk. While the regime for insurers’ report- ing to the IA under the third pillar came into effect on 1 July 2024, regulations on the requirements for dis- closure to the public remain outstanding. The IA has announced that it will likely make some changes to the RBC regime in 2026 based on feedback received from the industry. The transition to the new RBC regime is significant for insurers, since Hong Kong has been one of the last jurisdictions in Asia to operate under a formula-based capital regime. While the Hong Kong RBC regime is similar to Europe’s Solvency II and other risk-based regimes, it is gener- ally regarded as simpler and more pragmatic than some of the existing regimes, in particular Solvency II. ESG Many Hong Kong insurers, in particular the large international insurance groups, increasingly take into account environmental, social and governance (ESG) issues as part of their operations. The trend manifests itself in amended investment policies and mandates (which may no longer permit investments in certain “blacklisted” sectors or entities and may require a cer- tain level of investments in “green” securities). In addi- tion, many insurers and reinsurers reflect ESG issues in their underwriting process – eg, by rejecting cover- age of objects or companies that are problematic from an ESG perspective. Some insurers have adopted nuanced approaches to underwriting. Rather than rejecting coverage alto- gether, they may set underwriting conditions in rela- tion to ESG standards that policyholders must meet or engage with corporate customers to bring envi- ronmental or social standards to an acceptable level before coverage is provided. Such an approach ena- bles insurers to bring about positive change, while reducing ESG risks for both the insurer and the poli- cyholder. However, the approach requires significant
ESG expertise on the part of the insurer to be suc- cessful. Many insurers have issued internal ESG guidelines and incorporated ESG issues into their risk and gov- ernance regimes. While there is currently no manda- tory ESG disclosure regime for insurers in Hong Kong, the IA and a task force of the Hong Kong Federation of Insurers are working on “green insurance” and dis- closure matters. It is expected that a recommended disclosure standard – potentially aligned with the rec- ommendations of the Task Force on Climate-Related Financial Disclosures – will be issued at some point. In October 2023, the Hong Kong Federation of Insur- ers released a climate charter to Hong Kong insurers for sign-up following a consultation process. While this is a self-regulatory commitment, it is evidence of the increasing emphasis that Hong Kong insurers place on ESG issues. Policyholders’ protection scheme A policyholders’ protection scheme with regard to the insolvency of Hong Kong insurers has long been under consideration, and a further consultation took place in early 2023. The IA is now working on final propos- als for the implementation of such a scheme. There is currently no industry-wide scheme (although a few sectoral schemes exist). This is a further measure designed to align the level of policyholder protection in Hong Kong with the standards in other advanced There has been a clear trend towards more proactive investigation and enforcement by the IA in the last few years. An early focus was on compliance with anti-money laundering requirements, and the first- ever fines were imposed by the IA on two insurers in this area. The IA has also focused on the conduct of insurance agents and brokers, in particular most recently on illegal referral arrangements with regard to Mainland Chinese visitors. jurisdictions. Enforcement In terms of conduct supervision, the IA has also reviewed insurers’ complaints handling and compli-
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