Insurance Authority consults on the proposed capital rules for insurance groups

The Hong Kong Insurance Authority (IA) has published a consultation paper on the proposed Insurance (Group Capital) Rules (Group Capital Rules), marking the launch of a six-week public consultation which will end on 30 September 2020. The consultation ties in with the implementation of the new supervisory framework for multinational insurance groups, which is due to be introduced in the first quarter of 2021 (GWS Framework).

The Group Capital Rules are intended to complement the legislative amendments introduced in July 2020 relating to the GWS Framework and to set out the capital, regulatory reporting and public disclosure requirements which will apply to Hong Kong incorporated holding companies of insurance groups which are designated by the IA as being subject to the GWS Framework (i.e. a designated insurance holding company (DIHC)).

GWS Framework

At present, the IA takes an indirect approach to supervising insurance groups^[1] by using its “solo” regulatory powers – the IA does this by exercising its powers over insurance subsidiaries which it directly regulates (i.e. authorized insurers) to influence the holding companies of insurance groups. For example, the IA will assess the continued fitness and properness of the holding company of the insurance group in its position as a “controller” of the authorized insurer.

To bring Hong Kong in line with international standards, a new supervisory framework was introduced in July 2020, by way of the Insurance (Amendment) (No.2) Ordinance 2020^[2], to empower the IA to directly regulate DIHCs and conduct more effective group-wide supervision.

The GWS Framework will be based on three pillars:

Pillar 1 will establish capital requirements which a DIHC would be required to ensure its insurance group meets. The capital requirements will consist of two levels comprising a Group Minimum Capital Requirement (GMCR) and a Group Prescribed Capital Requirement (GPCR). The GMCR and GPCR will be calculated as the sum of the regulatory minimum capital requirements and prescribed capital requirements which apply to each of the legal entities in the insurance group in the jurisdictions in which they carry on business. The eligible group capital resources of an insurance group will be calculated as the sum of the eligible capital resources of each legal entity in the insurance group. Adjustments will be made to the GMCR, GPCR and capital resources, as appropriate, to eliminate any double-counting of capital.
Pillar 2 will set out risk management and governance requirements that a DIHC is expected to apply across the group, which include a requirement to carry out a Group Internal Economic Capital Assessment (GIECA), and an Own Risk and Solvency Assessment (ORSA) to assess present and future financial and risk conditions of its insurance group.
Pillar 3 will set out disclosure requirements for a DIHC that cover risk and governance disclosures in relation to its insurance group consistent with general financial reporting requirements and public reporting of GMCR, and complemented by private reporting to the IA on GIECA and ORSA.

An overview of the GWS Framework is included in Annex A to the consultation paper.

Group Capital Rules

The IA invites members of the public to provide comments on the following areas of the Group Capital Rules:

the scope of the proposed definition of “regulated entity” – the IA proposes that the capital requirements and eligible capital resources of all “regulated entities” of an insurance group be included as part of the group capital requirements and eligible group capital resources under the GWS Framework;
whether the reference to “IFRS shareholder equity less goodwill and any other intangible assets” in the rules (or related guidelines) should be defined (with appropriate carve-outs);
whether there are any other arrangements or holding structures which should be accounted for under the rules, to eliminate double-counting in relation to group capital and/or eligible group capital resources;
the appropriateness of the proposed tiering approach for non-regulated entities of an insurance group specified under the rules; and
the criteria for defining a “material supervised group member” under the rules – the IA proposes that a DIHC is required to prepare a group capital adequacy report as at 30 June and 31 December containing specified information for submission to the IA within five months after the relevant date. Such report must include a breakdown for each material supervised group member in the insurance group.

The IA also seeks feedback from the public on the draft Group Capital Rules contained in Annex B to the consultation paper.

The consultation is open until 30 September 2020. A copy of the paper can be found here.

^[1] The IA is currently the group-wide supervisor for three multinational insurance groups: AIA Group, FWD Group and the Prudential plc Group.

^[2] The Insurance (Amendment) (No.2) Ordinance 2020 was gazetted on 24 July 2020, and whilst it is not yet in operation (expected to commence in early 2021), it seeks to amend the IO to bring into effect the GWS Framework. To read further on the GWS Framework when the related bill was first introduced, please click here.

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