Insurance Group-Wide Supervision Framework to Commence on 29 March 2021

The Insurance (Amendment) (No. 2) Ordinance 2020 (“Amendment Ordinance”) amends the Insurance Ordinance to provide for the regulation and supervision of insurance groups by the Insurance Authority (the “IA”) through exercising direct regulatory powers over their Hong Kong-incorporated holding companies. The new group-wide supervision framework in Hong Kong will come into effect on 29 March 2021.   

The existing powers and functions of the IA are limited to the regulation of authorised insurers and the IA is unable to effectively conduct group-wide supervision. To enable the IA to carry out effective and direct group-wide supervision, certain existing powers which the IA has over an authorised insurer will be extended to a Hong Kong-incorporated holding company of an insurance group.

The Hong Kong government has introduced a framework for the designation of insurance holding companies under which the IA will be able to exercise direct regulatory powers over Hong Kong-incorporated insurance holding companies.

The IA may designate a Hong Kong-incorporated insurance holding company of an authorised insurer that belongs to an insurance group as a designated insurance holding company (“DIHC”), provided the IA is the appointed group-wide supervisor of the insurance group, and that the IA considers it appropriate to do so. The holding company, which may not have any insurance business, does not itself need to be an authorised insurance company to be a DIHC. Upon the designation of a DIHC, the IA will also determine which members of an insurance group will be subject to supervision by the IA – the supervised group is primarily made up of the DIHC, all its subsidiaries, and any other entities that are treated as members of the insurance group to which the DIHC belongs.

The key features of the framework include the following:

  • The DIHC will be subject to capital requirements. These include the minimum amount of capital that the supervised group must maintain, the types, tiering and amounts of capital resources of the group that are eligible to be counted and supervisory reporting and public disclosure requirements for a DIHC.
  • A DIHC must not make or allow a major acquisition without obtaining prior approval of the IA, unless the major acquisition is made solely for investment purposes as part of the insurance business carried on by the supervised group or where the acquisition has been assessed as being non-material.
  • Similar to the IA’s existing powers over an authorised insurer, the IA’s prior consent must be obtained before a person may become a shareholder controller of a DIHC, or to be appointed as the chief executive, director, and key person in control functions (“specified officers”) of a DIHC. Pre-existing appointments are generally taken to be approved under the relevant sections on the date of designation of the DIHC.
  • The IA may exercise intervention measures directly in relation to a DIHC. These include the power to obtain information, require production of documents and give direction to appoint a supervisory manager to manage the affairs, business and property of the DIHC.
  • In situations where the supervised group is under financial stress, the IA may impose requirements on the DIHC to restrict the transfer of assets of any member of its supervised group to another group member or a related entity of the DIHC.
  • The IA will have the power to conduct inspection and investigation for ascertaining whether a DIHC is compliant with the regulatory requirements. A DIHC may be required to ensure that a supervised group member concerned in an inspection carries out certain acts as required. The IA may take actions against a DIHC if it is guilty of misconduct or if the IA considers that a shareholder controller or specified officer of a DIHC is not fit and proper. The DIHC may be reprimanded publicly or privately or ordered to pay a penalty.

Implications

Insurance groups should consider the likelihood of its holding and/or group companies being designated by the IA as DIHCs and/or member(s) of a supervised group of DIHC, as well as the implications of such designation. Insurance groups may need to consider enhancing their policies and procedures in light of the upcoming changes.

Special attention should be paid to the wide investigative powers granted to the IA over all members of the supervised group of the DIHC. Information or records of any member of the supervised group will be subject to production to the IA (via the DIHC), no matter whether that particular member entity carries out insurance business, or even if the information or records in question might be self-incriminating. Integrated financial groups may no longer be able to fully ringfence their insurance business, and the associated regulatory exposure, to a specific authorised insurer entity in their group structure.

Jurisdictions