The Insurance Ordinance (Amendment) Bill (the Bill) was published by the Hong Kong Government (Government) in the Gazette on 6 April 2023. The Bill seeks to amend the Insurance Ordinance (Cap.41) (the IO) and other relevant legislation to provide the legal framework for the implementation of a risk-based capital (RBC) regime for the Hong Kong insurance industry. The aim of the Bill is to further align Hong Kong’s insurance regulatory regime with international standards. The Bill will be introduced into the Legislative Council for first reading on 19 April 2023.

The main purposes of the Bill are to:

(a) amend the IO to:

• enable the implementation of a new RBC regime for authorized insurers, which requires insurers to maintain capital that is commensurate with the risks they bear, further details of which are outlined below;
• provide for the designation of an authorized insurer incorporated outside HK that carries on a majority of its insurance business in HK (non-HK insurer), so that requirements imposed on such insurer would be aligned with those on an authorized insurer incorporated in HK (HK insurer);
• adjust the requirements and restrictions in relation to managing directors, chief executive, directors, key persons in control functions, shareholder controllers and actuaries of authorized insurers, in particular:
  • approval of the Insurance Authority (the IA) will be required for the appointment of shareholder controllers, chief executive, managing directors and directors of a non-HK insurer (currently, this requirement applies to a HK-insurer only);
  • there will be 2 categories of shareholder controllers, a minority shareholder controller and a majority shareholder controller;
  • approval will be required for a person to become a minority shareholder controller or a majority shareholder controller of an authorized insurer;

• adjust the requirements and restrictions in relation to shareholder controllers of designated insurance holding companies; and

(b) make related amendments to the Inland Revenue Ordinance (Cap.112) in relation to the computation of assessable profits of an authorized insurer’s life or non-life insurance business to tie in with the implementation of the RBC regime.

The new RBC regime (which will replace the existing rule-based capital adequacy regime) is intended to render the capital requirements imposed on insurance companies more sensitive to their asset and liability matching, risk profile and mix of products. The IA has based the new regime on three overarching principles, namely:

• compliance with the relevant Insurance Core Principles issued by the International Association of Insurance Supervisors;
• meeting needs and ensuring the competitiveness of the insurance industry; and
• strengthening resilience of the insurance industry for the protection of policy holders.

The regime also comprises three pillars: Pillar 1 on quantitative assessment, Pillar 2 on governance and risk management and Pillar 3 on disclosure requirements. Whilst the Pillar 2 requirements have already been implemented pursuant to the Guideline on Enterprise Risk Management (GL21), which took effect on 1 January 2020, the Bill will provide the legal basis for the implementation of Pillars 1 and 3. It will also update, remove and amend obsolete provisions and empower the IA to set out more detailed requirements by way of subsidiary legislation.

Next steps

To prepare for the implementation of the new regime, the Government and the Insurance Authority have maintained close contact with the industry and conducted multiple rounds of quantitative studies and consultation. In light of this, insurers should: (1) consider how the proposed amendments will impact their compliance with regulatory capital requirements, valuation of assets and liabilities and submission and disclosure of information, etc. under the RBC regime; and (2) undertake the necessary preparation work to adopt the RBC regime at an early stage.

Anna Sykes has also co-authored the article.