Hong Kong’s new risk-based capital regime came into play quietly this year, bringing significant change for insurers. There is also proposed regulation for re-domiciliation in which many insurers have already expressed interest in. Asia Insurance Review caught up with Insurance Authority’s Mr Clement Cheung.
The most recent regulatory change to Hong Kong’s insurance industry over the past year was the implementation of the risk-based capital (RBC) regime in July 2024.
While Insurance Authority (IA) CEO Clement Cheung called the regime coming into effect uneventful, he also said that it “[heralded] a new era for the Hong Kong insurance industry”.
“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”, he said.
Implications of new RBC regime
Throughout the process of planning and implementation of the RBC regime, the insurance industry remained “responsive and pragmatic”, Mr Cheung said.
“All three iterative quantitative impact studies (QIS) took place during a period of unprecedented interest rate gyrations and high market volatility, which means that the risk parameters have been subject to vigorous stress testing,” he said.
According to the Consultation paper on draft insurance (valuation and capital) rules and draft insurance (submission of statements, reports and information) rules, IA “started to develop detailed requirements for the RBC regime and conducted three rounds of QIS in consultation with the industry” upon the conclusion of the consultation in 2015.
“Nonetheless, there are suggestions that the framework should be reviewed and refined after it has been in place for about one year”, Mr Cheung said.
Other activities
In May 2024, IA issued a circular regarding the “engagement of referrers without the requisite licence to carry on regulated activities on behalf of the broker company, to source clients usually from mainland China to buy long-term insurance policies with savings and investment elements”.
In June 2024, the regulator issued a new guideline on the establishment and maintenance of fund(s) in respect of participating business.
Digital-only insurers
Four virtual insurers have been authorised via the Fast Track so far, which according to Mr Cheung, have “evolved along different directions over the past year”.
“Some [insurers] are specialising in indemnity coverage for specific segments and integrated online and offline offerings, others are pursuing greenfield ventures in digital currency, virtual asset and decentralised finance,” he said.
He also said that there is “no demand at present for new authorisations of virtual insurers”.
New technology
The application of innovative technologies could support IA’s mission of “deepening financial inclusion and narrowing protection gaps by reducing administrative costs, broadening access, modernising product design, improving customer experience and reaching out to underserved segments”, according to Mr Cheung.
In 2023, IA introduced the Open Application Programming Interface Framework for the Insurance Sector in Hong Kong, as well as a central register to “foster cross-sector partnership in harnessing information technology to provide more convenience for [policyholders]” he said.
“Other initiatives in the pipeline include a white paper on federated learning expected to be ready in early-2025 which aims at spurring machine learning without the need to share proprietary data,” he said.
Cyber security
In 2022, a survey was conducted to “update the industry landscape and assess the justification for enhancements” to IA’s guideline on cyber security (GL20), due to escalating threats, according to Mr Cheung.
“The survey findings and insights gleaned from other regulators convinced us that the Cyber Resilience Assessment Framework should be put in place so that insurers with gaps in control maturity can eliminate system weaknesses,” he said.
AI
Mr Cheung believes that if deployed correctly, AI can confer benefits in client acquisition, marketing, customer service and fraud detection.
“The immediate task in hand is to ensure that our regulatory framework remains robust enough to safeguard the interest of vulnerable groups but flexible and proportionate enough to fulfil industry aspirations.
“For this reason, 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.
As supervisory technology modules, also known as suptech modules, were embedded into the revamped insurance system that is being progressively rolled out as well as surveillance tools sourced by IA’s enforcement division, and likely contain elements of AI, Mr Cheung said that the regulator will “draw up rules and protocols in anticipation of such a trend”.
HKFRS17
The production of financial statements under IFRS17 by insurers in Hong Kong – locally known as HKFRS17 – was implemented in January 2023.
Mr Cheung said that while the transition was largely smooth, the
regulator would be keeping “a watchful
eye on potential strains borne by the relatively smaller players”.
New regulations
According to Mr Cheung, IA has “assumed responsibility for the licensing and regulation of licensed insurance intermediaries since 2019”. However, it is subject to a five-year waiver of licensing and related fees granted by the Hong Kong government.
“After extensive discussion, a unified fee charging system will be applied from September 2024. The incremental income so generated should help to intensify our activities spanning across conduct supervision, public education, professional training and disciplinary enforcement,” he said.
He also said that industry consultation has commenced “on a mechanism to identify domestic systemically important insurers in Hong Kong and the formulation of recovery or resolution plans”.
IA is looking to publish proposals in 2025, which would also enable the regulator to fully comply with requirements set by the International Association of Insurance Supervisors, he said.
In July 2024, the Hong Kong Financial Services and the Treasury Bureau released the Proposed Company Re-domiciliation Regime in Hong Kong,
containing the consultation conclusions and legislative proposals on a pathway for offshore companies with significant local presence to move their headquarters back to the region.
“Many insurance groups have already expressed interest in re-domiciliation, which will inject impetus into development of the ‘headquarters economy’. IA is collaborating with relevant stakeholders and the government to ensure its timely introduction,” he said. A