BEST’S COMMENTARYOur Insight, Your Advantage. September 3, 2020 New Group Capital Rule to Boost Hong Kong Insurance Market Hong Kong’s Insurance Authority (IA) launched an industry-wide consultation on a proposed New proposed Group Capital Rule (GCR) on 19 August 2020. This proposed regulation, which will enhance the IA’s supervision of insurance holding companies, is expected to be credit positive for insurance rule to groups in the Hong Kong insurance industry. AM Best considers the introduction of the GCR – which will augment the current regulatory framework to allow the IA to monitor multinational empower insurance groups on a group basis – to be beneficial to the group-wide risk and capital the regulator management culture of insurance entities. The closer collaboration between the regulators across jurisdictions will also help to reduce compliance costs for the industry. with greater supervisory The IA acts as the group supervisor to several multinational insurance organisations, including AIA Group Limited (AIA), Prudential plc (Prudential), and FWD Group. Among authority over these, AIA and Prudential have been identified as internationally active insurance groups insurance according to Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) criteria set out by the International Association of Insurance Supervisors holding (IAIS). As the regulator of a group’s main insurance operations domiciled in Hong Kong, companies the IA currently takes an indirect approach that mainly involves the continual fit and proper assessments of the insurance holding companies’ ability to manage their subsidiaries, as well as liaison and cooperation with other regulators of a group’s member operations.

Proposed legislative amendments will seek to align the Insurance Ordinance and related rules with the IAIS’ supervisory principles for more effective group-wide supervision. The three-pillar GCR, which is similar to the Solvency II regime, and congruent with Hong Kong’s new risk-based capital framework, will extend powers to the IA in regulating international insurance groups, while granting it additional authority applicable at the holding company level. The first pillar specifies two levels of group capital requirements (group minimum and group prescribed capital requirements respectively), and includes eligibility and tiering requisites for group capital resources; the second pillar sets out group-based risk management and governance conditions including a group internal economic capital assessment and an own risk solvency assessment, while the third pillar details regulatory and public disclosures.

Apart from the proposed GCR, supervisory cooperation and coordination remain essential to facilitate supervision on a group-wide and cross-border basis. As such, the preferential treatment Analytical Contacts: to capital solvency regimes between the China Banking and Insurance Regulatory Commission Ken Lau, Hong Kong +852 2827 3426 and the IA will foster greater mutual understanding between the two insurance supervisors. [email protected] AM Best notes that the GCR will complement recent insurance regulatory headway in Hong Christie Lee, Hong Kong +852 2827 3413 Kong – such as the implementation of risk-based capital and enterprise risk management [email protected] requirements – and serve in the development of a more holistic and robust insurance supervision framework. This will also promote the healthy growth of the insurance market Editorial Manager: given stronger risk governance, and boost the confidence of both policyholders and investors, Dawn Sit, Singapore +65 6303 5015 while proposed tax benefits for reinsurance and designated insurance lines of business are [email protected] expected to add greater incentive to companies, as well as raise Hong Kong’s competitive edge. As such, AM Best considers the recent and anticipated regulatory changes to be credit 2020-164 positive for insurance companies in Hong Kong over the intermediate to long term.

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