Hong Kong Regulatory Insurance Update July 2023

In this July 2023 edition of Regulatory Insurance Update, the Hong Kong Corporate and Commercial Team provide the latest updates relating to the law and regulations, developments, and news in the insurance industry in Hong Kong.

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Updates on insurance law and regulations

Date: 6 July 2023

The HKSAR Government and the Insurance Authority ("IA") welcomed the passage on 6 July 2023 of the Insurance (Amendment) Bill 2023 ("Amendment Bill").

Key Changes Introduced by the Amendment Bill

The major changes introduced by the Amendment Bill are set out in our April 2023 update.

To recap, we set these out again below with further details now provided by the IA:

  • Implementation of the new Risk-based Capital (“RBC”) regime

The current rule-based capital adequacy regime assesses an insurer’s financial soundness based on its solvency margin in terms of its excess of assets over liability. The new RBC regime will take into account the level of risk posed by the nature of the insurer’s products. Shorter term offerings and simple claims demand less capital, while longer term policies with guaranteed payments now require higher capital backup. This will impose more onerous conditions on insurers, but will also enhance their ability to cope with uncertainties by ensuring they have sufficient capital to pay their customers regardless of market conditions.

The new RBC regime will require large-scale changes to how organisations operate their risk management functions. Ms. Ruby Yang, CEO of asset management firm Conning Asia-Pacific, said that insurers will need new quantitative processes and tools to undertake sophisticated calculations and forecasts in order to manage their portfolio in unpredictable capital markets.

The IA will start preparatory work on drafting detailed requirements for the RBC regime. This will be followed by public consultation on subsidiary legislation. The RBC regime is targeted for implementation in 2024.

  • New regulatory and intervention powers of the IA

The IA will be empowered to engage skilled persons to investigate and compile reports on specific matters relating to an insurer. It will be able to require general business insurers to submit periodic actuarial reviews and to vary insurer’s capital requirements.

  • Designated foreign-incorporated insurers

The IA may align the requirements imposed on designated foreign-incorporated insurers (which carry on a majority of their insurance business in or from Hong Kong) with those imposed on insurers incorporated in Hong Kong.

  • Approval requirement of shareholder controllers

The Amendment Bill introduces a distinction between majority (>50%) and minority (15% up to 50%) shareholder controllers of an insurer and requires a minority controller to obtain the IA’s approval before becoming a majority controller. The IA will have the right to object to existing controller(s).

  • Public disclosure and actuarial matters

New insurer disclosure requirements are being introduced, details of which are yet to be published by the IA. The IA will consult the industry on the requirements in relation to disclosure of information relating to financial conditions, capital adequacy and risks. General business insurers will have to appoint an actuary approved by the IA to submit actuarial reports on a regular basis.

  • Separation of funds for participating business and for onshore and offshore business

For participating business, separate accounts will now need to be kept for excess assets for profit sharing and for other general funds. The Amendment Bill also requires funds for 'onshore' and 'offshore' business to be separated (although insurers will be able to opt out).

  • Amendment to the Inland Revenue Ordinance ("IRO")

Upon adopting the RBC regime, the liabilities of many insurers, after considering their specific risk profiles, are expected to be reduced. Such one-off adjustment will be taxable or deductible in full for the transitional year. The Amendment Bill allows insurers to elect to evenly spread such one-off adjustments over 5 years to relieve their cash-flow burden.

Separately, the basis of taxation for non-life long term insurance business[1] will be changed from the “formulaic method”[2] to an “adjusted surplus method”[3].

[1] "Non-life long term business" is defined under the new law to mean any of the following classes of insurance business specified in Part 2 of Schedule 1 to the Insurance Ordinance (Cap. 41): (a) Class D (permanent health); (b) Class F (capital redemption); and (c) Class I (retirement scheme management category III).

[2] Currently the non-life long term insurance business is taxed under section 23A of the IRO which prescribes a formula for ascertaining its assessable profits with the net gross premiums, the movement of the reserve for unexpired risks and other necessary tax adjustments.

[3] Under the new law, the non-life long term insurance business will be taxed based on the “adjusted surplus method” under section 23 of the IRO which is currently adopted for life insurance business to ascertain its assessable profits by reference to the movement of the balance of the surplus of the life insurance fund together with other necessary tax adjustments.

Link to the Insurance (Amendment) Bill 2023

Link to the HKSAR Government’s press release

Link to Insurance Authority press release

Link to Insurance Asia article

Link to Insurance Business article

Insurance industry news and developments

Date: 4 July 2023

The Insurance Complaints Bureau (ICB) of Hong Kong confirms a yearly increase in complaints driven by policies relating to hospitalization, medical, and life and critical illness.

The ICB dealt with total of 695 cases in 2022, 607 of which were new cases. This represents a rise of 18.6% over 512 cases in 2021.

For claim-related disputes (relating to the application of policy terms, non-disclosure, excluded items, the amount of indemnity and breaches of policy conditions) the two most common types of policies involved were hospitalisation or medical policies and life or critical illness policies.

For non-claim related complaints (relating to contractual matters, operational issues, company policies, misrepresentation, and policy returns) the largest category of policies involved was life or critical illness policies.

Link to Insurance Business article

Link to Insurance Asia article

Date: 6 July 2023

Mainland Chinese investors have doubled their holdings in Hong Kong and Macau wealth products since the end of 2022 to RMB 814 million. New premiums collected for Hong Kong insurance policies leapt 2,686% to HKD 9.6 billion in the first quarter of 2023. AIA Group, Prudential and Manulife all reported a jump in business, citing contributions from mainland investors. The surge in interest also coincided with China's borders re-opening (the applicant must be in Hong Kong when they apply for a policy).

Mr. Sami Abouzahr, Head of Investments and Wealth Solutions of HSBC in Hong Kong, explained that mainland Chinese investors remain interested in investment opportunities but are also paying greater attention to their health and legacy needs through medical and legacy planning insurance solutions.

Link to Reuters article

Date: 25 July 2023

Mr. Evan Greenberg, Chubb’s CEO and chairman, commented in an interview with South China Morning Post that Hong Kong can bolster its claim of being the premier international insurance hub by "limiting bureaucracy" and providing a stable environment.

Mr. Greenburg’s view is that if Hong Kong can offer more of an environment of certainty, predictability and transparency, companies will have more confidence and increase their presence accordingly. He further pointed out that the market potential of the Greater Bay Area ("GBA") will attract insurers and that Hong Kong will need Beijing and local Guangdong regulators’ support to limit bureaucracy and to take down the financial regulatory borders between Hong Kong and Guangdong in order to speed up the achievement of the vision for the GBA.

Link to Insurance Business article

We are committed to reinforcing Hong Kong's status as an international financial centre and risk management centre. Enhancing the regulatory regime for the Hong Kong insurance industry on an ongoing basis is integral to promoting stable industry development. The implementation of the Risk-Based Capital regime will strengthen the financial soundness of the insurance industry, and align Hong Kong's insurance regulatory regime with international standards.

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