Hong Kong's Risk-Based Capital Framework Aims To Improve ERM Practices

Hong Kong's new risk-based capital regulatory framework, effective July 1, 2024, is set to enhance enterprise risk management (ERM) practices for (re)insurers, according to a new report by AM Best. The framework replaces the previous ordinance-based system and introduces a comprehensive structure to strengthen the financial stability of the industry.

The new regulatory regime comprises three pillars focusing on quantitative requirements, qualitative assessments, and disclosure standards. Under the updated framework, the solvency ratio for insurers rated by AM Best is approximately half of what it was under the old ordinance-based approach, said Christie Lee, senior director and head of analytics at AM Best.

(Re)insurers in Hong Kong are adapting their business strategies to align with the new capital efficiency demands. Enhanced disclosure requirements under the new framework are also expected to increase transparency and comparability among insurers, though smaller insurers may face higher management costs as a result.

The Hong Kong Insurance Authority (HKIA) has also implemented a group-wide supervision (GWS) approach to regulating designated insurance holding companies (DIHCs). This initiative, aligned with international standards, outlines key principles for capital requirements, ERM, and public disclosure, among others.

"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 at AM Best.

The legacy system did not account for risks such as asset, counterparty, or underwriting, which are now factored into the new approach. Insurers will also be required to submit quarterly and annual audited disclosures for increased oversight.

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