Hong Kong’s implementation of a group-wide supervision (GWS) framework, which began last month, will improve the capital adequacy of insurance groups based in the market, according to Fitch Ratings.
However, the ratings agency added that the framework will have implications on the regulatory classification and treatment of capital instruments under Fitch’s Insurance Rating Criteria, which will complicate the assessment of leverage, coverage and notching.
According to Fitch, the GWS’ first pillar of capital requirements will be credit positive for the insurers’ capitalisation. The GWS will enable the Insurance Authority (IA) to align its supervisory practices more closely with international standards. This will allow the IA to better coordinate with regulators in other markets the designated insurance groups operate.
Three groups are expected to be designated by the IA by mid-2021: AIA, FWD and Prudential plc.
A consequence of the GWS on Fitch’s regulatory classification is that if a designated insurance group has more than 30% of earnings or capital from jurisdictions that it expects to be ring-fenced, Fitch will typically continue to apply ring-fencing-based notching.
“The use of additionally compressed notching for the Issuer Default Rating (IDR) of a ring-fenced insurance holding company will be further determined by the degree of financial leverage, fixed-charge coverage, holding-company cash and ultimately on a judgmental basis by a rating committee,” the report said.
The IA is expected to announce the final group capital rules in the coming months. These rules will introduce the tiering of capital instruments for the designated insurance holding groups under the GWS, which can affect how these groups stack up to Fitch’s insurance rating criteria and their capital adequacy ratios under the Fitch Prism Model.
