A new era for Hong Kong’s insurance industry—from a regulatory lens

Hong Kong’s strong financial infrastructure, government support and central geographical location make it an ideal base for the insurance industry. But it now wants to further leverage these strategic advantages to become a premier hub for insurance innovation, risk transfer, and financial protection in the Asia-Pacific region.

That is according to Clement Cheung, the chief executive of Hong Kong’s Insurance Authority (IA), who spoke exclusively to EAIC Today. “Hong Kong has the essential ingredients of a successful insurance and insurance-linked securities (ILS) domicile,” he said.

Cheung highlighted opportunities that are emerging thanks to the development of the Guangdong–Hong Kong–Macao Greater Bay Area (GBA), a megalopolis consisting of nine cities and two special administrative regions in South China.

Cheung pointed to the untapped potential within the GBA, where insurance penetration rates remain significantly lower than in Hong Kong. With an average insurance penetration rate of just 5.14 percent and insurance density of RMB 7,200, compared to Hong Kong’s 17.2 percent and HK$68,400, there is clear room for growth. “There is huge potential for stable and sustained growth of new business derived from these cities,” Cheung said.

To support this growth, the IA, which is an independent financial regulator in Hong Kong, is working on initiatives such as establishing after-sales service centres for Mainland customers who purchase insurance in Hong Kong. Additionally, the IA is exploring innovative insurance products that cater to demographic shifts, particularly in retirement planning, offering access to affordable, high-quality residential care facilities within the GBA, while also addressing the growing needs of the region’s ageing population.

Strengthening ILS

At the other end of the risk transfer spectrum, Hong Kong has made significant progress in developing its ILS market. “We are stepping up efforts in identifying potential sponsors, engaging relevant authorities in the Mainland, widening the range of product structures, enriching the risk types and promoting the awareness of institutional investors in Asia,” Cheung added. 

Hong Kong’s inaugural ILS Conference in April 2024 was a significant milestone in this journey, drawing more than 100 institutional investors and experts from across Asia-Pacific to discuss market trends and Hong Kong’s advantages.

The city has already recorded five successful ILS issuances, led by Mainland reinsurers, local reinsurers, and the World Bank. Cheung indicated that efforts to build a sustainable ILS ecosystem will “continue to intensify” in the coming years, further solidifying Hong Kong’s position as a “sophisticated” global risk management and insurance hub.

Captive insurance

In addition to ILS, Hong Kong has made significant strides in the captive insurance space. Tax concessions introduced in 2013, and the expanded scope of insurable risks in 2020, have put Hong Kong on par with other leading global domiciles. Cheung shared that the IA is now working on a “strategy and action plan” to further enhance the city’s value proposition as a captive insurance hub.

The IA is reaching out to local corporations, including those with captives operating elsewhere, to understand their needs and explore the possibility of setting up captives in Hong Kong. “Some of them are likely to set up captives in Hong Kong,” Cheung noted.

“Captives offer corporations an effective way to manage risks, particularly in light of geopolitical tensions that have created uncertainties in cross-border trade and investment, preventing many developing economies from uplifting the living standards of their people. 

“Captives are effective in encouraging corporations to venture into new markets or expand their footprint,” he explained.

AI is ‘unstoppable’

In line with its aspirations, the IA is prioritising the integration of innovative technologies to deepen financial inclusion and reduce protection gaps. “The application of insurtech can support our mission,” Cheung said, noting the introduction of the Open API Framework, which aims to enhance cross-sector partnerships and improve customer experience. Additionally, he said, a white paper on Federated Learning is expected in early 2025, aiming to advance machine learning without compromising proprietary data.

Cheung emphasised the importance of cybersecurity, stating that the IA is “convinced” of the need for a Cyber Resilience Assessment Framework to help insurers close gaps in their system controls.

He noted that the adoption of artificial intelligence (AI) is “unstoppable” in the industry. “If deployed correctly, it will benefit client acquisition, marketing, and claims settlement and fraud detection,” Cheung said, while acknowledging the need for a robust regulatory framework to ensure ethical use and address concerns about data privacy. 

“The IA is working with industry practitioners to improve data quality.”

“We are contemplating a study to inform the approach that should be taken to promote fair, transparent and ethical use of AI while adequately addressing concerns about algorithmic bias and personal data leakage,” he said.

Climate-related risks are becoming more frequent and severe, and Cheung highlighted the growing challenges for insurers. “The rising frequency and severity of climate-related events are driving up claims and premiums, making insurance coverage less accessible,” he said. To address this, the IA is working with industry practitioners to improve data quality and explore innovative solutions such as parametric products for flood risks.

The IA is collaborating with financial regulators to encourage investments in green projects and transition financing. “Insurers are major institutional investors and can direct funds to transition financing,” Cheung added.

Hong Kong is the hub

Cheung provided updates on the regulatory front. The Risk-based Capital (RBC) regime, which came into effect on July 1, 2024, heralds a new era for the Hong Kong insurance industry, he said.

“Aligning capital requirements with risk profiles, this solvency framework is sensitive to asset and liability matching, product mix, economic valuation and corporate governance that will reinforce general stability of the market,” Cheung said, noting that the IA will review and refine the framework after one year to ensure it remains fit for purpose.

Other regulatory developments include the re-domiciliation regime, which provides a pathway for offshore companies to relocate their headquarters to Hong Kong. “Many insurance groups have already expressed interest, which will inject impetus into the development of the ‘headquarters economy’,” Cheung noted.

The IA is also working on a mechanism to identify Domestic Systemically Important Insurers (D-SIIs) and formulate recovery or resolution plans, with a full package expected by 2025 to meet international standards. Additionally, a unified fee-charging system for insurance intermediaries is to be implemented in September 2024, providing much-needed funding for the IA’s conduct supervision, public education, and disciplinary enforcement efforts.

“Throughout the process of planning and implementation, the insurance industry has been responsive and pragmatic,” Cheung said. With strategic efforts in ILS, captive insurance, and technology adoption, alongside regulatory updates, Hong Kong is on its way to becoming a global risk management centre and sophisticated insurance hub, he concluded. 

For more news from the East Asian Insurance Congress conference (EAIC) click here.

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