Hong Kong’s risk-based capital framework will bolster insurers’ ERM

Hong Kong’s new risk-based capital (RBC) regulatory framework is expected to strengthen enterprise risk management (ERM) practices among the re/insurers doing business there, according to a new AM Best report.

The Best’s Special Report, published September 24 and titled “Hong Kong’s New Risk-Based Capital Regulatory Framework to Enhance Companies’ Enterprise Risk Management Practices” includes details and analysis on the risk-based framework that was implemented on July 1, 2024, replacing the legacy Hong Kong insurance ordinance-based regime. 

The new regulatory framework comprises three individual pillars that address quantitative requirements, qualitative requirements and disclosure requirements.

“The disclosure requirements are expected to improve industry-wide transparency.”

“For Hong Kong companies rated by AM Best, the Hong Kong RBC solvency ratio is about half of the prior ordinance-based regime,” said Christie Lee, senior director-analytics, AM Best.

The report notes that as a result of the new regulatory scheme, re/insurers are gradually adjusting their business and investment strategies to optimise capital efficiency. The disclosure requirements are expected to improve industry-wide transparency and comparability among insurers in Hong Kong; however, the new approach has added management expense pressure to small insurers.

In addition to the three pillars, the Hong Kong Insurance Authority (HKIA) has established an approach toward group-wide supervision (GWS) to regulate designated insurance holding companies (DIHCs).

Aligning with international standards, the GWS spells out principles and standards for DIHCs on a wide range of areas, including ERM, corporate governance, capital requirements and public disclosure.

“Under the GWS framework, the HKIA has direct regulatory powers over the designated insurance holding groups, such as requiring DIHCs to comply with group capital requirements and mandating disciplinary actions, and even assessing the suitability of key persons,” said Lucie Huang, senior financial analyst, AM Best.

The legacy system did not consider asset, counterparty or underwriting risk, which are now contemplated and factored in under the new risk-based framework. The new approach will require insurers to submit quarterly disclosures to regulators and provide audited annual disclosures for more detailed aspects. 

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