Risk based capital requirements for insurers move closer

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Authored by: Scott Carnachan

The Government has introduced legislation that (i) provides the framework for risk based capital requirements for authorized insurers, (ii) amends the existing provisions relating to approval of “controllers” of authorized insurers, and (iii) makes other streamlining changes to the operation of the Insurance Ordinance.

The Insurance (Amendment) Bill 2023 (the Amendment Bill) was gazetted on 6 April 2023 and had its first reading in the Legislative Council on 19 April 2023. The Amendment Bill is available here. The Legislative Council briefing paper summarising the Amendment Bill is available here. No timing has been publicly announced for enactment of the Amendment Bill.

New categories of authorized insurers

The Amendment Bill introduces new definitions of “HK insurer”, “non-HK insurer” and “designated insurer”. A HK insurer is an authorized insurer that is incorporated in Hong Kong. A non-HK insurer is an authorized insurer that is not a HK insurer. A designated insurer is a non-HK insurer that is designated by the Insurance Authority (the IA) as a designated insurer.

The IA will have power to designate a non-HK insurer as a designated insurer where, in the opinion of the IA, the non-HK insurer carries on a majority of its insurance business in or from Hong Kong. A designated insurer will be subject to essentially the same requirements for capital and approval of controllers (including shareholder controllers) as a HK insurer. The appointment of new directors of a designated insurer will also need prior IA approval.

In contrast, the capital requirements for a non-HK insurer that is not a designated insurer will be limited to its Hong Kong business, determination of controllers will be by reference to its Hong Kong business and it will not need to seek prior IA approval to the appointment of new directors. A non-HK insurer that is not a designated insurer will no longer need to apply for prior IA approval of changes in its shareholder controllers. However, it will still need to notify the IA of such changes.

Risk based capital requirements

The introduction of risk based capital requirements for authorized insurers has been a long term project for the IA, first initiated in 2014. The Amendment Bill removes the existing capital requirements for authorized insurers from the Insurance Ordinance and replaces them with a framework to enable the IA to implement risk based capital requirements. Capital requirements, financial reporting requirements and requirements for valuation of assets and liabilities, will be set out in Rules made by the IA under the Insurance Ordinance.

The Amendment Bill also contains provisions requiring authorized insurers that carry on long term business to maintain separate accounts and funds in respect of certain categories of long term business. If an authorized insurer also carries on general business (i.e. is a composite insurer) then the Amendment Bill also imposes an obligation to maintain a separate fund for that part of its business that is general business.

Changes to approvals of “controllers”

The information that will need to be submitted to the IA in connection with appointment, removal or other change in controllers, together with the form and manner of submission, will be as specified by the IA. The forms that are currently set out in Schedules 2, 4, 5 and 6 of the Insurance Ordinance will no longer apply and these Schedules will be repealed.

The Amendment Bill also introduces new definitions of “majority shareholder controller” and “minority shareholder controller”.

A majority shareholder controller of an authorized insurer is a person who, alone or with an associate (as defined in the Insurance Ordinance) or through a nominee, is entitled to exercise or control the exercise of, 50% or more of the voting power at a general meeting of the insurer.

A minority shareholder controller of an authorized insurer is a person who, alone or with an associate (as defined in the Insurance Ordinance) or through a nominee, is entitled to exercise or control the exercise of, 15% or more but less than 50%, of the voting power at a general meeting of the insurer.

A person will require prior IA approval to become a majority shareholder controller of either a HK insurer or a designated insurer (other than a special purpose insurer, as defined in the Insurance Ordinance).

A person will require prior IA approval to become a minority shareholder controller of either a HK insurer or a designated insurer (other than a special purpose insurer, as defined in the Insurance Ordinance) unless, immediately before becoming a minority shareholder, the person was a majority shareholder controller of the relevant insurer.

Where a non-HK insurer is designated by the IA as a designated insurer, its majority shareholder controller (if any) and minority shareholder controllers (if any) at the time of designation will be deemed to have been approved by the IA.

A person will not require prior IA approval to become either a majority shareholder controller or a minority shareholder controller of a non-HK insurer that is not a designated insurer. However, the relevant insurer will be required to notify the IA of changes in its shareholder controllers within one month of the change taking place.

Other changes

The Amendment Bill also contains a number of other changes, including:

• Requiring authorized insurers who carry on general business to appoint an actuary, subject to the approval of the IA, to carry out valuations and submit actuarial reports on a regular basis;

• Empowering the IA to require authorized insurers to disclose certain information about the insurer to the public;

• Modifying the basis of taxation of authorized insurers on an interim basis to mitigate the effect of the changes to the capital requirements for authorized insurers (which may otherwise result in a significant one-off increase in assessable profits for certain insurers).

What should authorized insurers do now?

All authorized insurers should monitor updates from the IA on the detailed risk based capital requirements, including transitional provisions for compliance with such requirements.

All authorized insurers should review the proposed changes to the approvals of controllers and prepare to update their internal systems and controls to reflect the new requirements.

Authorized insurers incorporated outside Hong Kong should assess whether they are likely to be designated as designated insurers, and so subject to the new Hong Kong risk based capital requirements and other relevant Hong Kong regulatory requirements on their whole business.

Key Contacts

Scott Carnachan

Consultant | Financial Services

Email or call +852 2825 9265