The new risk-based capital regulatory framework of Hong Kong is expected to help in strengthening the practices of enterprise risk management (ERM) among other (re)insurers in the area, a new report from AM Best found.
According to the “Best’s Special Report,” the new framework is a replacement of the country’s ordinance-based rule. The framework consists of three individual pillars that address quantitative requirements, qualitative requirements, and disclosure requirements.
AM Best senior director of analytics Christie Lee said that the Hong Kong risk-based capital (HKRBC) solvency ratio was half of the previous ordinance-based regime for companies that were rated by AM Best.
Because of the new framework, (re)insurers were slowly adjusting their business and investment strategies in order to optimize capital efficiency, with the disclosure requirements expected to improve the transparency and comparability among insurers. However, this has caused small insurers to feel an added pressure on management expense.
The framework also led to the establishment of Hong Kong Insurance Authority’s (HKIA) approach towards group-wide supervision (GWS) in order to regulate designated insurance holding companies (DIHCs).
“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 AM Best senior financial analyst Lucie Huang.
Notably, the asset, counterparty or underwriting risk are all contemplated and factored in under the new framework, which was not considered in the legacy system. It also required insurers to submit quarterly disclosures to regulators as well as provide audited annual disclosures in order to have more detailed aspects.
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