Proposed changes to the way the Hong Kong Insurance Authority (HKIA) assesses capital requirements for non-life insurers, particularly natural disasters, man-made risks and offshore reinsurance business, could strengthen Hong Kong’s position as a global center for reinsurance and risk management, according to a new report from AM Best.
The rating agency said Hong Kong’s direct non-life insurance market remains highly fragmented and highly competitive.
Growth in the segment has been weak, remaining in the low to mid-single digits over the past five years, as economic headwinds and an overall economic slowdown in mainland China continue to impact results.
However, AM Best now takes a more positive view on recent regulatory developments. The agency said changes outlined in Hong Kong International Airport’s newly released consultation paper are credit-positive for Hong Kong’s non-life insurance market.
“Domestic insurers will benefit from improved capital efficiency and the potential to develop offshore operations outside Hong Kong’s competitive local market,” the rating agency added.
As part of the proposed reforms, HKIA is reportedly proposing to scale back certain prescribed natural disaster risk factors, while also allowing for greater diversification benefits in certain markets in Greater China.
In addition, eligible Hong Kong insurance companies or designated insurance companies that are part of non-Hong Kong insurance groups may apply to exclude offshore non-life reinsurance business from their required capital calculations.
James Chan, director of AM Best, explained: “By better aligning capital standards with local market characteristics and maintaining international prudential benchmarks, HKIA is working to balance the sustainable development of the non-life insurance industry with policyholder protection.”
Christie Lee, senior director at AM Best, added: “We therefore view the proposed changes to the solvency framework as a catalyst for insurers, particularly those domestic direct insurers with strong capital, strong underwriting technology or favorable parent support that can pursue growth opportunities outside their local markets.”
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