Best’s Special Report: Hong Kong’s New Risk-Based Capital Regulatory Framework To Enhance Companies’ Enterprise Risk Management Practices

Hong Kong’s new risk-based capital 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 includes details and analysis on the risk-based framework that was implemented on 1 July 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.

“For Hong Kong companies rated by AM Best, the Hong Kong risk-based capital (HKRBC) 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 also 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) also 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 also require insurers to submit quarterly disclosures to regulators and provide audited annual disclosures for more detailed aspects.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=346996.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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