The success of Hong Kong’s current cohort of captives is spurring the jurisdiction’s leaders and regulators into action in a bid to encourage local and Chinese companies to follow suit
The first Chinese captive formed in Hong Kong belonged to China National Offshore Oil Corporation (CNOOC). It was set up in 1999, following hot on the heels of the formal handover of the former colony in July 1997. But Hong Kong’s growth as a captive insurance domicile did not continue at this pace. Since that first captive, only three others have been established.
Today, Hong Kong is home to four captives, all set up by conglomerates based in China and engaged in various industries in the energy sector. The captives themselves primarily focus on property damage and goods in transit.
Despite the modest number of captives currently domiciled in Hong Kong, “the strong performance and scale of those in operation speak for themselves”, according to Clement Lau, executive director of policy and legislation at the Hong Kong Insurance Authority (HKIA).
Lau explains: “Globally, the average premium income of captives is about US$15 million each. In comparison, as of 2023, the captives in Hong Kong recorded an average premium income of about US$56 million each.”
Equally impressive are the captives’ owners. Joyce Chua, regional lead for Captives and Insurance Management Solutions in the Asia Pacific at WTW, comments: “The parent companies of these captives tend to be large-scale business enterprises with outstanding business profiles, profitable performance and total assets of no less than 100 billion renminbi.”
The success of these captives is spurring Hong Kong into action. The domicile has been working on its captive infrastructure and regulatory regime “so that it is more attractive primarily to mainland China organisations and Hong Kong companies”, says Lawrence Bird, captive consulting leader for Asia at Marsh.
He adds: “Hong Kong has recently become a more attractive option through pragmatic, yet robust, application of its captive regime.”
Hong Kong is among the few jurisdictions to offer a dedicated regulatory regime for captive insurers and has a “suite of facilitative measures in place”, says Lau.
Captive insurers in the domicile benefit from a more streamlined authorisation process than general insurers. They are also subject to much lower capital requirements (HK$2 million or about US$260,000) and entitled to a 50 per cent deduction in the tax rate on profits, meaning they enjoy an effective rate of 8.25 per cent.
Chua says: “Hong Kong offers a dedicated regulatory regime for captive insurers in the form of lower capital requirements and tax concessions.
“Flexibility in regulatory approach can also help support different captive business models regardless of whether the captive is managed in-house or outsourced to an external service provider. Hong Kong may be deemed as a preferred captive domicile for mainland enterprises as there is an increase in opportunities arising from risk management needs for overseas operations of mainland enterprises.”
Given the low number of captives domiciled in Hong Kong, there is a recognition at the HKIA that it can go further.
Lau says: “While our regime is competitive in the region, taking into account the different risk management approach and solutions in this part of the world, we will continue to calibrate our captive regime.
“Leveraging past experience, we see now an appropriate juncture to instil greater flexibility into our regulatory approach to accommodate different captive business models, be it self-managed or outsourcing, for the benefits of the captive owners and the operational needs of the captives. We are actively communicating with market stakeholders on this front.
“[The] captive is still a novel concept to a lot of enterprises in mainland China and Asia as a whole, and we see tremendous potential for Hong Kong as a captive domicile. As highlighted in our Chief Executive’s latest Policy Address, we will continue to attract large enterprises to establish captive insurers in Hong Kong.”
Speaking on 16 October, Hong Kong Chief Executive John Lee promised to “continue to invite mainland and overseas enterprises, including large state-owned enterprises in the mainland, to establish captive insurers”, along with several other initiatives, prompting the Hong Kong Federation of Insurers (HKFI) to release a positive statement in response.
The HKFI welcomed Lee’s commitment to enriching insurance companies' asset allocation for risk diversification, the plans for captives, and the introduction of a re-domiciliation mechanism for companies to relocate their headquarters to or set up corporate divisions in Hong Kong.
Lau says: “Facilitative measures aside, the uniqueness of Hong Kong — as an international financial centre and a global risk management centre — to aspiring captives is [in] synergy with the variety of financial arrangements here.
For example, enterprises would be interested to explore how a Hong Kong captive may resonate with their corporate treasury or asset management functions in the city.”
In particular, the HKIA believes Hong Kong is a “natural springboard” for mainland China-based companies to go global, able to serve as their preferred captive domicile in their efforts to expand their geographical footprints.
Lau continues: “For the HKIA, growing Hong Kong’s captive market is an integral part of our mission, which is to facilitate the sustainable development of our insurance industry.”
On top of forming a dedicated market development team to strengthen stakeholder engagement and to build awareness of captives, the HKIA is actively reaching out to companies with potential, to better understand their needs and circumstances.
“In parallel, we are seeing like-minded professional services providers,” Lau says. “Good momentum in creating a thriving ecosystem is here.”
Indicative of this outreach to better understand the needs and circumstances of companies with potential in the captive insurance space was the HKIA’s panel at the Belt and Road Summit in September.
The panel promoted captive insurance as a means to support Belt and Road projects, particularly those focused on less coal intensive energy. The Belt and Road is a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in more than 150 countries and international organisations.
Moderated by MM Lee, executive director of the General Business Division at the HKIA, the panel featured senior executives from a global broker, a leading captive insurer in Hong Kong and a reinsurer.
They spoke about using captive insurance to manage risks derived from overseas energy projects, the emerging opportunities and challenges brought about by energy transition, and risk management related to other fast-growing sectors such as electric vehicles that would benefit from sustainable development along the Belt and Road.
The panellists also explored the role of Hong Kong as an international risk management hub in developing the captive market. Lee said: “The use of captives by mainland enterprises to holistically monitor their overseas project risks and scale up their intra-group risk management capacity is gaining prominence.
“Being a global risk management centre, Hong Kong is well-positioned to provide comprehensive professional services to facilitate the operations of captive insurers. We stand ready to be the preferred captive domicile for state-owned and private corporations in the mainland which are expanding their global footprint or shepherding projects in the Belt and Road countries.”
Other topics covered in the panel discussion included how to nurture a more vibrant risk management ecosystem in Hong Kong, values that a Hong Kong-based captive insurer could bring to its parent company, and how the local insurance sector could support the demand for reinsurance capacity from captives and capture the evolving risk management needs amid the low-carbon energy transition.
The HKIA is also engaging with insurtech providers and investors to keep them informed about Hong Kong’s insurance ecosystem and its most pressing issues. In a keynote speech at the InsurTech Forum, which the regulator co-hosted with Invest Hong Kong during Hong Kong FinTech Week at the end of October, Clement Cheung, CEO of the HKIA, highlighted the dire consequences of ignoring climate change and cybersecurity threats.
He also touched on efforts to foster an ecosystem for insurance-linked securities, the introduction of the Cyber Resilience Assessment Framework under the Guideline on Cybersecurity to bolster operational resilience, and plans to commission a survey on AI adoption in the insurance sector.
Bird believes that this kind of outreach and education, along with the promotion of Hong Kong as a captive insurance domicile and a pragmatic regulatory regime for captives, are key to achieving growth.
He continues: “In addition, Hong Kong is to establish a re-domiciliation regime allowing existing captives to re-domicile to Hong Kong. This would primarily be for Hong Kong corporations which have captives elsewhere. Hong Kong could consider protected cell company legislation as well.”
