Hong Kong pushing for further captive and ILS growth

The Hong Kong Insurance Authority (HKIA) is stepping up its efforts to firmly establish the territory as a leading centre for captives and Insurance Linked Securities (ILS) in Asia, as part of its wider goal to become a truly global risk management centre of excellence. In its recently published annual report for 2022-23, the HKIA singles out captives and the ILS market as key components of its grand plan, which is also designed to support the ongoing global infrastructure development strategy, the Belt and Road initiative. The HKIA said that it would “open up a pathway” to attract state-owned and private enterprises to set up their captives in Hong Kong to support this huge investment programme. The overall effort really kicked off in 2020 and 2021 with the introduction of tax-friendly rules to attract captive and other alternative risk management and transfer structures such as ILS to the territory. But as far back as 1997, Hong Kong enacted the Insurance Companies (Amendment) Ordinance 1997, which made concessions in the regulatory framework to provide incentives for multinational conglomerates to establish their captives on the island. This was followed by a 50% concession in the profits tax rate on insurance business for offshore risks from 2013-14 onwards. From 2018-19, these profits tax concessions were extended to cover profits of captive insurers arising from onshore risks. Then the Insurance (Amendment) Bill 2020 was introduced to amend the Insurance Ordinance (Cap. 41) to expand the scope of insurable risks for captive insurers set up in Hong Kong and maintain its “competitiveness as an international insurance hub and risk management centre”. The HKIA also introduced a 50% profits tax concession in March 2021 for general reinsurance business of direct insurers, selected general insurance business of direct insurers and selected brokers, specifically for marine and specialty risks. A further element of the plan came in 2018 when a lower capital requirement was applied on mainland insurers that ceded risks to eligible professional reinsurers in Hong Kong. The China Banking and Insurance Regulatory Commission (CBIRC) enshrined this preferential arrangement in the revamped China Risk Oriented Solvency System. This benefitted five reinsurers by the first quarter of 2023, explains the HKIA in its new report. The bespoke regulatory regime for ILS business was introduced in 2021 and followed a grant scheme introduced in 2020 to help foster the market, which was extended for another two years. All of this groundwork came to something of a grinding halt, however, as the Covid-19 pandemic hit mainland China and Hong Kong particularly hard. But now is the time to kick-start the effort in earnest on the back of the government’s roadmap published in 2022, says the HKIA in its report. Clement Cheung, CEO of the authority, says in the latest annual report: “The year 2022 has proved to be no less challenging, marred by the lingering effects of Covid-19 and the aggressive monetary policy rolled out by some central banks. Although confined mobility and remote working may soon fade into our collective memories, there is every reason not to overlook how the pandemic has exposed our vulnerabilities and reshaped social habits.” “Taking pride in being a source of support for companies and individuals amidst uncertainties, the insurance industry should make prompt adjustments to play a meaningful role in accelerating the full-scale recovery of Hong Kong. The Development Roadmap for the Insurance Sector in Hong Kong, published by the government in December 2022, is a powerful statement on our bid to become a global risk management centre and sophisticated insurance hub,” he adds. On the renewed captives push, Stephen Yiu, chairman of the HKIA, says: “With captives, we will set the scene by visiting relevant authorities in Beijing to regain momentum and organise promotional activities targeted at state-owned and private enterprises interested in uplifting readiness to face an expanding footprint and increasingly complex environment.” The report adds: “Captive insurers epitomise a conglomerate’s astuteness regarding the identification, management and mitigation of risk. Geographical proximity and cultural affinity render Hong Kong to be an ideal captive domicile for Mainland enterprises. We will open up a pathway for this to happen.” On alternative risk transfer and the ILS market, Yiu says: “Hong Kong’s profile as a global risk management centre has been significantly lifted by four issuances of catastrophe bonds amounting to HK$4.4bn in around two years. The diverse range of sponsors and underlying perils encapsulate the essence of a sophisticated insurance hub. In the year ahead, we will focus on enriching the mix of ILS product structures and nurturing an ecosystem by addressing data capture, risk modelling and talent recruitment.” Cheung adds: “Given that the market is currently dominated by long-term business, the two most prominent initiatives involve elevating Hong Kong into an attractive captive domicile and a vibrant hub for ILS. On captives, we will set the scene by visiting relevant authorities in Beijing to regain momentum and organise promotional activities targeted at state-owned and private enterprises interested in uplifting readiness to face an expanding footprint and increasingly complex environment. “On ILS, we are identifying new sponsors, enriching product structures, engaging academia to nurture modelling expertise and exploring data exchange with the mainland. Above all, we are conscious of the importance of tapping into pristine frontiers and forging vibrant ecosystems instead of relying on subsidies or concessions to draw business from other jurisdictions. Whenever possible, we will take the opportunity to showcase our commitment to advancing the national agenda.”

Hong Kong pushing for further captive and ILS growth

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