Hong Kong to implement risk-based capital regime for insurers

On 6 July 2023, the Insurance (Amendment) Ordinance 2023 was enacted by the Legislative Council (“Amendment Ordinance”)¹. The Amendment Ordinance amends the Insurance Ordinance (Cap. 41) (“IO”) and implements a risk-based capital (“RBC”) regime for insurers in Hong Kong in alignment with the core principles issued by the International Association of Insurance Supervisors. The Insurance Authority (“IA”) will launch a public consultation on subsidiary legislation and prepare for detailed requirements of the RBC regime. The target effective date of the RBC regime is expected to be in 2024.

Existing rule-based regime 

The existing rule-based capital adequacy regime assesses an insurer's capital adequacy based on its solvency margin, which is linked to the premium income and level of insurance liabilities. This will be replaced by the RBC regime, with the effect that the capital requirements imposed on insurers will be commensurate with the risks they bear, which will take into account factors such as assets and liability matching, risk profile and mix of products.  

The RBC regime 

The RBC framework covers three pillars as follows:

• Pillar 1 consists of the quantitative requirements, including capital adequacy and valuation assessment.
• Pillar 2 sets out the qualitative requirements, including corporate governance, enterprise risk management, and own risk and solvency assessment.
• Pillar 3 covers periodic submission of information to the regulator and periodic disclosure of information to the public by the insurers. 

Key proposals introduced by the Bill

The Amendment Ordinance introduces updates to the IO for implementation of the RBC regime and empowers the IA to prescribe detailed requirements through subsidiary legislation. The key updates include: 

1. IA's new regulatory and intervention powers
   The IA may now require insurers to engage individuals with specified skills to submit reports on specific matters at their own expense. It may also require general business insurers failing to comply with the solvency requirements to submit plans or proposals for the restoration of a sound financial position, similar to the prevailing requirement on long term business insurers. 
    
2. Valuation and capital requirements
   Under the Amendment Ordinance, the IA is granted subsidiary legislative power to establish solvency control levels and valuation methodologies to determine how capital requirements will be met. The new framework introduces two explicit solvency control levels: (i) the prescribed capital amount, falling below which may trigger regulatory intervention actions on solvency grounds; and (ii) the minimum capital amount, the level of capital below which the IA may exercise its strongest powers of intervention. 
    
3. Fund requirements
   Under the rule-based capital regime, life insurers are required to maintain different funds and accounts for each long term class of life insurance business separately.
   Under the new regime, these funds and accounts are grouped into separate funds and accounts for classes C, G, and H (i.e. linked business and certain pensions business) and other businesses. The classification of funds groups classes of insurance businesses with similar risks and enhances the protection for policyholders by requiring insurers to separate funds of participating businesses from those of non-participating businesses. 
    
4. Requirement for insurers incorporated outside Hong Kong with all or most business in Hong Kong 
   The Amendment Ordinance introduces the concept of a "designated insurer" and allows the IA to designate foreign-incorporated insurers (if it is of the opinion that the insurers carry on a majority of their insurance business in or from Hong Kong) so that the requirements imposed on them regarding valuation, capital and funds requirements, and approval of certain personnel are aligned with the requirements imposed on Hong Kong-incorporated insurers.
    
5. Approval requirement of and objection to shareholder controllers
   The Amendment Ordinance also mandates a separate regulatory approval for minority shareholder controllers who intend to become majority controllers by acquiring 50% or more of the voting power of an insurance company. This requirement applies irrespective of whether the shareholder controller has previously obtained approval for achieving 15% or more of the company's voting power. Under the new framework, the IA is further empowered to object to an approved shareholder controller if it determines that the shareholder controller is no longer fit and proper. 
    
6. Appointment of actuary 
   The Amendment Ordinance requires general insurers to appoint approved actuaries and file periodic actuarial reports regularly. This requirement ensures that general business insurers have an actuary approved by the IA to carry out valuations and submit regular actuarial reports, similar to the existing requirement imposed on long term business insurers. 

We will continue to monitor the developments of the new RBC regime. For advice on compliance-related issues, please get in touch with Joyce Chan or your usual Clyde & Co contact.

¹  Insurance (Amendment) Ordinance 2023