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May 2021

Regulations for building a (re)insurance hub

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Source: Asia Insurance Review | May 2021

From introducing new legislative frameworks to preparing for a new capital regime and introducing temporary measures to facilitate InsurTech development during the pandemic, Hong Kong’s Insurance Authority (IA) has had a very busy year. We spoke to the IA’s 
Mr Clement Cheung to find out more.
By Amir Sadiq
 
 
Hong Kong has for a long time been a core market for (re)insurance in Asia Pacific and over the last year or so, its regulator, the Insurance Authority (IA) has taken great strides to consolidate its position as a regional hub.
 
Most recently in March this year, the group-wide supervision legislative framework (GWS) came into effect, providing a comprehensive range of direct regulatory powers for the IA to supervise the designated insurance holding companies of multinational insurance groups.
 
“The framework is in full alignment with prevailing international standards and best practices, positioning Hong Kong as an ideal base for insurance groups and a coordinator of supervisory efforts among all relevant jurisdictions in Asia Pacific,” IA CEO Clement Cheung told Asia Insurance Review.
 
Having engaged closely with key industry stakeholders in developing the Guideline on Group Supervision, which covers enterprise risk management, corporate governance, capital requirements and public disclosure, he expects that it will facilitate the formal designation of the three related insurance groups – AIA, FWD and Prudential – by the middle of this year.
 
And in preparation for the introduction of the risk-based capital (RBC) regime, the IA has conducted three rounds of quantitative impact studies and is in the process of developing capital rules for industry consultation later this year, paving the way for an amendment bill to be introduced into the Legislative Council in 2022.
 
Leveraging national strategies
One of Hong Kong’s advantages is that it stands to gain much from any development initiatives from mainland China, such as the development of the Greater Bay Area (GBA) and the Belt and Road Initiative (BRI).
 
According to Mr Cheung, the IA aims to leverage such national strategies to put in place a ‘dual circulation’ approach that supports domestic demand as well as international trade.
 
“In May 2020, four financial regulators in the mainland jointly promulgated the ‘Opinion on Providing Financial Support for the Development of GBA’ (the opinion), heralding the setting up of after-sales service centres. This initiative will help accelerate ‘domestic circulation’, facilitating the flow of service and information, opening up exciting frontiers for the local insurance industry,” he said.
 
To pursue this initiative, the IA is participating in discussions with its counterparts in Guangdong, Shenzhen and Macao on operational and regulatory coordination, while liaising with the Hong Kong Federation of Insurers to examine options to ensure timely execution.
Mr Cheung also pointed out that as connectivity gathers impetus, it is imperative to ensure unfettered movement of factors of production within the GBA.
 
“The opinion addressed such emerging needs by focusing on innovative cross-boundary insurance products, citing medical and motor vehicle coverages as a modest starting point,” he said.
 
“In this regard, the IA is working on a ‘unilateral recognition’ policy that seeks to enable third-party insurance policies issued in Hong Kong to be considered as equivalent to compulsory traffic accident liability insurance for motor vehicles required in the mainland, and is mobilising the industry to come up with similar products catering for those who travel frequently across cities in the GBA.“
 
A captive domicile
Besides efforts to enhance insurance regulation on the home front, the IA is also working to make Hong Kong a more attractive hub to international trade.
 
According to Mr Cheung, captive insurance plays a big part in this ‘international circulation’ as it “gels well with the role assigned by the mainland authorities to Hong Kong as risk management centre for BRI”.
 
“The IA has been collaborating with the State-owned Assets Supervision and Administration Commission to identify state-owned enterprises (SoEs) that are keen to access the professional services and expertise available in Hong Kong to manage a burgeoning portfolio of overseas investment projects,” he said.
 
“Riding on rapid economic growth experienced by the mainland economy, the IA has also reached out to private sector conglomerates to apprise them of the benefits of setting up a captive in Hong Kong.”
 
Furthermore, legislative changes were introduced in March 2021, expanding the scope of risks insurable by captives in a bid to harness the growing demand for intra-group risk assessment and mitigation among SoEs, private sector conglomerates in the Mainland, multinational conglomerates and local corporates.
 
“Coupled with a 50% concession on the profit tax rate, Hong Kong is catching up as an attractive domicile,” he added.
 
ILS, reinsurance and specialty insurance
Other initiatives to enhance Hong Kong’s position within international trade revolve around insurance-linked securities (ILS), reinsurance and specialty insurance.
 
With its ability to transfer insurance risks to the capital markets, thus increasing the capacity of insurers and providing institutional investors with a means of diversification, ILS has been gaining popularity.
 
To capitalise on this global trend, a bespoke regulatory framework for the issuance of ILS in Hong Kong came into effect earlier in March, said Mr Cheung.
 
“The IA is ironing out operational details by drawing reference from overseas experience while taking into account local circumstances, while the government gave approval to the pilot ILS grant scheme that provides subsidy of up to HK$12m ($1.55m) for each issuance,” he said.
 
Reinsurance and specialty insurance are also crucial on this front, particularly with the preferential treatment accorded by the China Banking and Insurance Regulatory Commission where mainland insurers ceding business to qualified local reinsurers can enjoy lower capital requirements and profit tax concessions for onshore and offshore risks written by reinsurers in Hong Kong.
 
“Faced with a volatile external environment, SoEs must grapple with a plethora of physical and non-physical risks,” said Mr Cheung. “To enhance our appeal as a centre to manage such risks, tax concessions for general reinsurance business of direct insurers, selected general insurance business of direct insurers and selected insurance brokerage business have recently been rolled out.”
 
InsurTech to the rescue
While Hong Kong might have one of the highest rates of insurance penetration and density in the world, Mr Cheung said the market still harbours some structural imbalances:
  • The dominance of traditional distribution channels relying on intermediaries
  • A proliferation of products with heavy savings/investment elements; and
  • Attention being diverted away from long-term societal needs
 
He believes that InsurTech could help solve some of these issues.
 
“InsurTech could inject a wave of positive disruption by penetrating underserved segments and meeting hidden demands as well as revamping the product mix to cope with rapid demographic changes,” he said.
 
On top of that, digital distribution channels have also played a major role in overcoming limitations on physical interactions brought about by COVID-19.
 
The IA introduced a set of temporary facilitative measures so that designated products which are protective in nature could be sold without physical interactions subject to enhanced upfront disclosure requirements and an augmented cooling-off period.
 
“Close to 33,000 policies accounting for annualised premiums of about HK$460m have been sold through these measures up to the end of March 2021, and resources are pouring into digital distribution channels,” said Mr Cheung.
 
Meanwhile, the InsurTech sandbox continues to remain active, with 12 trial projects having secured approval to extend remote on-boarding via video conferences to a broader range of long-term insurance products. A 
 

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