Hong Kong’s new capital framework to strengthen enterprise risk management: AM Best

A new report from AM Best, a credit rating agency, suggests that Hong Kong’s upcoming risk-based capital regulatory framework will enhance enterprise risk management (ERM) practices for (re)insurers operating in the region.

The Best’s Special Report provides detailed analysis on the risk-based framework implemented on July 1, 2024, replacing the previous Hong Kong insurance ordinance-based system.

This new regulatory framework is built around three pillars, addressing quantitative requirements, qualitative requirements, and disclosure obligations.

“For Hong Kong companies rated by AM Best, the Hong Kong risk-based capital (HKRBC) solvency ratio is about half of the prior ordinance-based regime,” added Christie Lee, Senior Director-Analytics, AM Best.

The report highlights that, under the new regulatory framework, (re)insurers are gradually adjusting their business and investment strategies to optimise capital efficiency.

Additionally, the disclosure requirements are expected to enhance transparency and comparability across the industry in Hong Kong. However, smaller insurers are facing increased management expenses due to the new approach.

Beyond the three pillars, the Hong Kong Insurance Authority (HKIA) has also introduced a group-wide supervision (GWS) framework to regulate designated insurance holding companies (DIHCs).

In alignment with international standards, the GWS outlines principles and standards for DIHCs in key areas such as enterprise risk management (ERM), corporate governance, capital requirements, and public disclosure.

“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, AM Best.

The legacy system did not account for asset, counterparty, or underwriting risks, all of which are now addressed under the new risk-based framework.

This updated approach also mandates insurers to submit quarterly disclosures to regulators and provide audited annual reports that cover more detailed aspects of their operations.

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