Marching Forward to Reinforce Hong Kong’s Role as an International Insurance and Fund Management Centre
It is undeniable that Hong Kong is facing the most difficult time since 1997. As an open economy, Hong Kong faces the challenge of the novel coronavirus disease and increasingly tense international relations; Hong Kong is affected by US-China trade disputes as well as conflict among major oil-producing countries. Indeed, global stock markets have been turbulent recently, and Hong Kong’s market has not been spared. Although the central banks of many countries have introduced measures to support the economy, it seems that global growth looks set for a downward spiral, and many countries are even facing economic recession.
At such a challenging time, we see all the more a need to step up efforts to promote the development of Hong Kong's financial markets and increase Hong Kong's competitiveness. Even in adversity, we should not stand still, and we must begin our preparation now so that Hong Kong can thrive again swiftly when the current difficulties subside. In fact, the Government has never spared any effort in promoting Hong Kong as an international financial centre, and we gazetted three bills on 20 March to demonstrate the Government's ongoing endeavor to reinforce Hong Kong as an international financial centre.
Two of these bills are related to the insurance industry. First, the Insurance (Amendment) Bill 2020 primarily aims to provide for a new regulatory regime for insurance-linked securities business and to expand the scope of insurable risks for captive insurers set up in Hong Kong. Hong Kong has mature capital markets and a sound judicial system. With a large pool of talent in law, insurance, securities and credit rating, Hong Kong is well positioned to develop an insurance-linked securities market and become a preferred location for multinational corporations to set up captive insurers.
Insurance-linked securities are risk management tools that allow insurers or reinsurers to offload insured risks to the capital markets through securitization. This can be described as another form of reinsurance. In addition to improving the capacity of the insurance industry, it also provides institutional investors with an alternative investment that is less correlated to the economic cycle and other types of financial assets, thereby allowing them to diversify their risk. It is worth noting that a common type of insurance-linked securities is catastrophe bonds. Among the measures announced by the Central Government after the Guangdong-Hong Kong-Macao Greater Bay Area Leading Group meeting in November last year, one measure was to support Mainland insurers to issue catastrophe bonds in Hong Kong's capital markets.
According to the Artemis Catastrophe Bond & Insurance-Linked Securities Deal Directory, the global issuance of insurance-linked securities in 2019 was approximately US$ 11 billion, but Asia currently does not have a comprehensive insurance-linked securities centre. We propose to amend the Insurance Ordinance to allow for the formation of special purpose vehicle specifically for issuing insurance-linked securities in Hong Kong, thereby enriching the risk management tools available in the Hong Kong market. The proposed legal framework takes a light-handed approach and will allow Hong Kong to seize the business opportunities that are likely to emerge in Asia.
As for captive insurers, they are set up by their parent companies with the primary purpose of insuring and reinsuring the risks of the companies in the group to which the captive insurer belongs. Captive insurance provides multinational companies with the ability to deploy a more holistic risk management strategy across their international business, while saving the insurance premium spent on an external insurance provider. It is worth mentioning that with the participation of Mainland enterprises in large scale infrastructure and investment projects related to the “Belt and Road Initiative”, many companies will consider setting up captive insurers to handle the group's overseas risks and improve their risk management capabilities.
There are currently only four captive insurers in Hong Kong, and the industry generally considers that the existing scope of insurable risks by captive insurers is too restrictive. Therefore, we propose to amend the Insurance Ordinance to facilitate a more effective global risk management strategy for multinational companies that are further expanding their global operations. For example, we recommend that captive insurers set up in Hong Kong can insure or re-insure the risks of the group’s body corporate that is incorporated outside Hong Kong and does not have a place of business in Hong Kong, and the risks of a body corporate which the group controls less than 20% of voting rights, subject to certain conditions.
The second bill is the Insurance Industry (Amendment) (No. 2) Bill 2020, which aims to enhance the regulatory framework for insurance groups whose holding company is incorporated in Hong Kong. The risk management and control functions as well as significant policy decisions of insurance companies are often carried out at the group level. However, the current functions and powers of the Insurance Authority focus on “solo” regulation, meaning that it can only use its regulatory power over insurance companies to influence the holding companies of the insurance groups. Therefore, the Insurance Authority currently can only rely on an indirect approach to act as the group supervisor of three international insurance groups.
The International Monetary Fund (IMF) recommended in the 2013-2014 Financial Sector Assessment Program that Hong Kong should formulate and implement a clear and comprehensive regime for insurance groups under the Insurance Ordinance. The United Kingdom, Australia, Bermuda, and Singapore have also put in place group-wide supervisory regimes. The amendments we propose this time will enable the Insurance Authority to exercise direct regulatory powers over Hong Kong-incorporated holding companies of insurance groups, aligning Hong Kong's regulatory system with international standards and practices of insurance regulation and making Hong Kong an ideal base for large insurance companies in Asia.
I am delighted to note that industry organisations and major insurance groups welcome the Government’s publication of the bills in the Gazette and consider them to be conducive to the sustainable development of the insurance industry of Hong Kong.
The final bill is the Limited Partnership Fund Bill, which aims to establish a registration regime for limited partnership funds, attracting private funds such as private equity funds to set up and operate in Hong Kong and developing Hong Kong into a full-fledged fund service centre. Fund registration is an important part of the process of setting up and operating a private equity fund and will bring substantial economic activity to Hong Kong through the use of Hong Kong’s professional services. Furthermore, many offshore funds are currently searching for a suitable jurisdiction for registration in order to meet the requirements of the Organisation for Economic Co-operation and Development (OECD) to align their structures with business activities. The establishment of a limited partnership fund regime will allow us to seize this opportunity. In addition, as I pointed out in my previous blog post, the 2020-2021 Budget proposes to provide tax concession for carried interest issued by private equity funds operating in Hong Kong, subject to the fulfillment of certain conditions. Like the establishment of a limited partnership fund regime, this will help promote Hong Kong as an onshore centre for private equity and further strengthen Hong Kong's position as an international asset management centre.
In conclusion, although difficult times are expected to continue for some time, we will continue to promote the development of Hong Kong's insurance industry as well as other sectors of the financial services industry in a proactive manner, exerting our greatest efforts to safeguard Hong Kong's position as an international financial centre.
29 March 2020