Hong Kong Insurance Regulator Developing ‘Stringent’ Risk-Based Capital Model

Hong Kong's regulator is working on a risk-based capital model for the insurance industry, and is seeking the best model for Hong Kong's system, according to Ros Lam, assistant commissioner of insurance.

The risk-based capital standard is likely to be "more stringent" than the Solvency II model, said Lam at the 5th Asian CFO Insurance Summit in Hong Kong. Solvency II is a regulatory regime designed as a uniform capital adequacy structure for insurance and reinsurance in the 27-nation European Union and is set to take effect at the end of 2012.

In Hong Kong, Lam said major insurance companies and multinational insurers should be ready to move into the risk-based capital framework. Small to medium-sized companies, which may be unable to come up with a comprehensive enterprise risk management system, may face some difficulty, he said. Lam noted they may not be technically ready with the resources to cope with a risk-based system.

Hong Kong has four regulatory bodies for financial services. There is no plan to go forward as a "super-regulator" such as the Financial Services Authority in the United Kingdom, said Lam, who is with the Office of Commissioner of Insurance, Hong Kong's prudential insurance regulator. However, he said "we need to better align and coordinate" among the four financial regulators in Hong Kong.

There have been more international and China-based insurance groups listed on Hong Kong's stock exchange during the past few years. As a member of the International Association of Insurance Supervisors, Hong Kong adheres to the standards and principles of IAIS. Lam said Hong Kong has an adequate solvency supervisory system and the prudential framework is able to react to uncertainty in various situations. Regarding the Hong Kong authority's relationship with the China Insurance Regulatory Commission on the mainland, Lam said it is the same as with other regulatory bodies.

For risk and capital management, Hong Kong currently uses a Solvency I-style regime. For solvency supervision, Hong Kong employs a risk-based supervisory framework. Many European insurers in Hong Kong will be directly impacted by Solvency II under group supervision rules. Hong Kong has already adopted the International Financial Reporting Standard.

The Hong Kong government is planning to set up an independent insurance regulatory authority in a bid to enhance the regulation of insurance companies and intermediaries to better protect policyholders. It will also bring the regulator in line with international practices. The new authority would replace the OCI, which is a government department (BestWire, July 14, 2010).

Hong Kong has 168 authorized insurers, of which 103 are nonlife insurers, 46 are life insurers and 19 insurers carry both life and nonlife business. Hong Kong's insurance industry reported a 11.6% rise in gross premiums to HK$207.2 billion (US$26.6 billion) in 2010, according to the OCI.

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)