Hong Kong flexes its regulatory muscles to compete internationally

Channels: SAA/ALM, Risk, Governance, Regulation, Asia

Companies: International Monetary Fund, the Insurance Authority, Swiss Re

People: David Alexander

The pearl of the Orient has been implementing the International Monetary Fund’s recommendations for stronger regulation at a fast pace. In the first part of this two-part series, Vincent Huck looks at the progress made and what remains to be achieved.


Hong Kong is moving, and in a truly Asian style it is moving fast, in implementing a set of regulations to strengthen its insurance market.

Beyond the local considerations, of having a strong and stable sector providing protection to policyholders, the Hong Kong authorities’ motivations are geopolitical.

The pearl of the Orient is at a momentous stage in its history. For a century it was the West’s port of entry to mainland China; now it is gearing up to be China’s launchpad to the rest of the world.

And perhaps most importantly, Hong Kong doesn’t want to fall behind regional peers, especially its rival Singapore.

When speaking with professionals in Hong Kong about the current regulatory changes, Singapore is the elephant in the room.

Although no one would comment on the record, there is a clear sense the regulator, the Insurance Authority (IA), is monitoring closely Singapore’s progress in updating its risk-based capital (RBC) regime. And practitioners seem prone to use Singapore as their trump card in their lobbying efforts to the IA.

Since the International Monetary Fund (IMF) published, in 2014, a set of recommendations as parts of its Financial Sector Assessment Program to strengthen the regulatory environment in Hong Kong, the authorities have been busy in implementing them.

Of the five IMF’s recommendations specifically targeted at the insurance sector, Hong Kong has already implemented two, a third one will come into effect in September this year, and the last two recommendations are on track for a 2021 implementation, according to an IMF Country Report from January 2019.

Already implemented

The recommendations already implemented are the establishment of the Insurance Authority and strengthening the legal and regulatory framework.

The Authority, a statutory body established by the Insurance Ordinance, is independent of the government. It replaced the Office of the Commissioner of Insurance to regulate insurance companies, effective 26 June 2017.

At the same date a number of regulatory enhancements came into force, these include:

  • The requirement to seek IA’s approval for appointments being extended beyond controllers, to include directors, key persons in control functions, and appointed actuaries by authorised insurers;
  • the provision of the definitions of control functions, such as risk management, financial control, compliance, internal audit, actuarial, and intermediary management functions, in the Insurance Ordinance; and
  • the power of the IA to revoke the appointment of senior management and key persons on fit and proper grounds. Shareholder controllers of authorised insurers, on the other hand, are required under the Insurance Ordinance to report their disposals of shareholding interests in the insurers to the IA as well.

In addition, insurers are now required under the Guideline on the Corporate Governance of Authorized Insurers to have, among others, business continuity planning which covers detailed actions and procedures, including contingency plans, identification of critical business activities, roles and responsibilities of different parties.

Implemented this year

A third IMF recommendation will be implemented this year and has to do with the supervision of insurance intermediaries.

The Government of Hong Kong has scheduled 23 September 2019 as the date for the IA to become the independent regulator for insurance intermediaries.

The Authority will take over from the three self-regulatory organisations (SROs) - the Hong Kong Federation of Insurers (HKFI), the Hong Kong Confederation of Insurance Brokers (HKCIB) and the Professional Insurance Brokers Association (PIBA).

The Authority’s responsibilities will include granting licences, conducting inspections and investigations, and imposing disciplinary sanctions where applicable.

The regulator has already published two sets of rules which will take effect on 23 September 2019:the maximum number of authorised insurers; and financial and other requirements for licensed insurance broker companies.

A suite of codes and guidelines for licensed insurance intermediaries will be published later this year.

But while SROs would like to see the principles-based approach of their codes remain, Insurance Asset Risk understands the direction of travel at the IA is towards a rules-based approach.

On track for implementation

Still to be implemented are the establishment of a regulatory regime for insurance groups and implementation of an RBC regime.

The IA is in the process of legislating a regulatory regime for insurance groups and sub-groups. Depending on the structure and size of insurance groups, a three-tier approach for supervisory measures for group-wide supervision has been proposed.

As for RBC, the first consultation on the proposed framework was conducted in Q3 2015. IA then started the second phase of development, concerning the rules for quantitative requirements (pillar 1).

The first quantitative impact study (QIS) was competed in December 2017 followed by the second QIS in August 2018. One more QIS is expected in mid-2019 before detailed rules are drafted and a consultation on those rules is conducted.

The implementation of the RBC regime will be rolled out in phases. Subject to further consultation with stakeholders, legislative amendments will be introduced. The whole process is expected to take about two to three years.

Regarding the qualitative requirements (pillar 2), IA launched the consultation on draft guidelines on enterprise risk management and own risk and solvency assessment in May 2018, with a view to finalising the guideline by end of 2018 or early 2019.

For disclosure requirements (pillar 3), IA will soon kick-start the study and plans to consult the industry by early 2020.

“Regardless of the dates, firms need to start thinking not only how they implement the administrative aspect of the reform but also their strategic response to it,” says David Alexander, head of P&C reinsurance Hong Kong & Taiwan at Swiss Re.

Alexander, who is also chairman of the Hong Kong Federation of Insurers’ (HKFI) taskforce on RBC and as such has been directly involved in liaison with the Authority, says the new regime could bring significant change to businesses.

For example, they may need to reconsider their investment strategies, or alter their products or pricing. With capital requirements likely to change, the use reinsurance may need to increase or decrease.


In Part II of this article, Insurance Asset Risk looks at how Hong Kong’s insurers are getting ready for RBC implementation, available here.