CHINA: An Introduction to Insurance: Non-contentious (International Firms)

Introduction

The insurance sector in Mainland China and Hong Kong has witnessed significant changes over the last decade. Insurance regulators in both jurisdictions have been updating their regulatory frameworks, strengthening their capital and risk management regimes, and expanding cooperation across the Greater Bay Area to keep pace with the evolving industry. Technological advancements and changing consumer preferences continue to drive innovation as the sector is expected to see further growth in the coming years. 

Hong Kong

The Hong Kong government and the Insurance Authority (the “IA”) continue to play a key role in developing the insurance sector.

The Insurance Ordinance and related regulations were amended with effect from 1 July 2024 in order to apply a new risk-based capital regime to Hong Kong authorised insurers and make a few other changes to the regulatory regime:

• RBC framework: The new capital regime represents an important move for Hong Kong insurers from a formula-based capital system to a risk-based capital system similar to Europe’s Solvency II regime. Insurers are now required to determine a “prescribed capital amount” based on the prescribed assessments of various risks, including market risk, counterparty risk and insurance risks.
• Designated insurers: A new category of “designated insurers” has been introduced, allowing the IA to designate overseas incorporated insurers that carry on a majority of their business in or from Hong Kong within this category. These insurers will be subject to the same regulatory regime as Hong Kong-incorporated insurers with respect to certain matters such as capital adequacy and the approval of key personnel. In this context, the Hong Kong government is currently also working on legislative amendments to permit the re-domiciliation of overseas incorporated companies to Hong Kong. It is expected that a number of Bermuda-domiciled insurers operating in Hong Kong will consider using the new re-domiciliation regime to re-domicile to Hong Kong.
• Expanded scope of “controllers”: The amended Insurance Ordinance enhances the current approval regime by providing for two types of shareholder controllers – i.e., minority controllers who hold or control 15% to less than 50%, and majority controllers who hold or control 50% or more of the voting power of the insurer. Any person seeking to become a majority shareholder controller will require the prior approval of the IA irrespective of whether they were already approved as a minority shareholder controller. The new requirements apply to controllers of Hong Kong-incorporated insurers, designated insurers and the designated holding company of insurance groups.
• Other changes: Other key changes include revised requirements for reporting to the IA based on the new risk-based capital regime; requirements for the appointment of actuaries and the filing of actuarial reports with regard to general insurers; and new requirements with regard to participating business, including asset segregation and governance matters set out in a new guideline.

In recent years, the government has been promoting insurance-linked securities in an effort to establish Hong Kong as a global risk management centre. A small number of catastrophe bonds have already been issued under the new regime. The government is also working with Mainland China to encourage overseas entities to establish captive insurers in Hong Kong. In recent years, the government has introduced regulatory relaxations and tax concessions to attract more captive insurers in Hong Kong.

On the transactions front, there is a growing trend of Hong Kong life insurers exploring options to reinsure parts of their legacy business to offshore reinsurers. The trend is expected to continue as Hong Kong’s insurers consider optimising their capital requirements.

Insurers in Hong Kong have also been placing increasing importance on environmental, social and governance (“ESG”) issues. Although Hong Kong does not have a mandatory ESG disclosure regime for insurers, several insurers have already started adopting internal ESG policies which include emission reduction targets and climate transition plans. In February 2024, the Hong Kong Federation of Insurers released its self-regulatory climate charter with approximately 80% of Hong Kong’s insurers joining as initial signatories. 

In an effort to monitor the evolving insurance market, the IA has been increasing its focus on enforcement over recent years, with an emphasis on anti-money laundering compliance, claims handling, mis-selling, referral arrangements in relation to Mainland Chinese visitors and sales practices of agents. The IA has also been working with other regulatory bodies, such as the Hong Kong Monetary Authority and the Independent Commission Against Corruption, in order to strengthen its proactive enforcement measures.

Mainland China

The insurance regulatory regime has recently undergone a structural overhaul in Mainland China. The National Financial Regulatory Administration (the “NFRA”) was established in May 2023 as the new unified financial regulator, replacing the erstwhile China Banking and Insurance Regulatory Commission. The NFRA’s expansive mandate covers the regulation of banking and insurance institutions as well as the protection of financial consumers and investors. The establishment of the NFRA formed part of a series of changes to implement the institutional reform plan approved at the annual session of the 14th National People’s Congress in March 2023.

A recurring theme at the annual sessions of the National People’s Congress in 2023 and 2024 has been the promotion of foreign investment in Mainland China in order to counter the effects of economic volatility and international trade challenges. The government has introduced several measures to boost foreign investment, including through the 24-point action plan issued by the State Council in March 2024. These measures include encouraging investment in technological innovation, reducing the negative list for foreign investors and encouraging investments by qualified foreign insurance institutions. Foreign investment caps for insurers have been removed since early 2020, when the regulators allowed up to 100% foreign investment in Chinese life insurance companies. However foreign-invested insurers are still required to comply with other regulatory conditions in order to ensure that insurers have relevant expertise and are able to meet solvency requirements.    

Mainland China has continued to improve and strengthen the regulation of its solvency regime in recent years. Phase II of the China Risk-Orientated Solvency System (C-ROSS II), which introduced stricter capital requirements on insurers, has been implemented since 2022. Shortly after the implementation, the regulator permitted insurers to issue perpetual bonds, which is becoming an increasingly popular choice for large insurers to meet the enhanced minimum capital requirements. Periodic steps have also been taken over the last two years to update and optimise solvency supervision standards, such as the NFRA’s notice issued in September 2023 to reduce capital requirements for small and medium-sized insurers.

In terms of products, commercial pension has become the focus of regulatory developments in recent years. In 2022, the regulator rolled out a new private pension scheme to cater to the growing number of pensioners in the country. The first set of rules governing the establishment, operation and governance of specialised pension insurance companies in Mainland China were issued in 2023.

The NFRA has also been taking a closer look at insurers’ practices relating to product distribution through banks. In 2023, the NFRA issued notices to life insurers introducing limitations on bancassurance expenses and commission rates. The changes, reflecting an effort to maintain market stability and combat misreporting, are expected to result in insurers modifying their bancassurance remuneration structures and sales incentive models.

Similar to Hong Kong, the insurance industry in Mainland China is also developing an increased focus on ESG issues. The regulator issued guidelines for green finance in June 2022, prescribing governance and risk-management obligations for insurers. More recently, the Insurance Association of China released Mainland China’s first self-regulating document for ESG disclosures in the insurance sector in December 2023. 

Outlook

Increased customer flow following the re-opening of borders and enhanced digital and product innovation are spurring economic recovery and growth across Mainland China and Hong Kong. The NFRA reported a 9.1% year on year increase in premium income at the end of 2023 for insurers in Mainland China. Many life insurers in Hong Kong have also recently seen significant growth in the value of new business, indicating further growth potential.

Recent years have also seen continued efforts by insurance regulators to strengthen connectivity across the Guangdong-Hong Kong-Macao Greater Bay Area (the “GBA”), based on the development blueprint published by the State Council in Mainland China in 2019. In 2023, the regulators implemented the unilateral recognition policy for cross-boundary motor insurance, and are currently working on rules for after-sales service centres. The GBA development is expected to create more opportunities for collaboration in the insurance sector across the region, including potential for future cross-border sales of certain products.