Hong Kong, officially the Hong Kong Special Administrative Region of the People’s Republic of China (HKSAR), is a metropolitan area and special administrative region of China in the eastern Pearl River Delta by the South China Sea. With a population of over seven million people, Hong Kong is among the most densely populated areas of the world. It is also a major international financial centre and its currency, the Hong Kong dollar, is the eighth most traded in the world. Hong Kong’s captive insurance market is still making slow and steady progress.
In 2019, total gross written premiums for its four domiciled captives was HK$1,355 million and total underwriting profit was HK$396 million.
The four captives include CGN Captive; CNOOC Insurance, Shanghai Electric Insurance; and Sinopec Insurance. Although there is slow progress, work is being done to try and accelerate the speed of growth within the Hong Kong captive market.
James Rayner, global relationship leader at Crawford & Company, says: “Hong Kong has ambitions to be the domicile of choice for Chinese captives, with the Hong Kong Financial Services Department Council targeting 50 licensed captives by 2025.”
Rayner explains that Hong Kong has recently expanded its captive law to make itself more accessible to infrastructure companies in its ‘China’s Belt and Road Initiative’ (BRI). However, he notes that Hong Kong is still at the stage of building its reputation as a captive domicile and growing awareness of the captive insurance concept among Chinese corporations.
China’s special region
China has been pushing for Hong Kong to become a viable captive domicile for the region. The BRI, which was adopted by the Chinese government in 2013, is a multibillion-dollar initiative that involves infrastructure development and investments in 71 countries and international organisations.
Edward Wu, head of captive and mutual practice in China at Willis Towers Watson, explains that the initiative aims to improve transnational connections along the old silk road and the maritime trade route connecting China and Europe.
Wu adds: “This boosts the insurance sector and generates the demand of centrally managing the large enterprise’s global insurance programme using captive.”
As China’s state-owned enterprises expand overseas, Wu explains that they are showing interest in achieving the best risk management practice, including consolidated insurance buying through captive insurance programmes.
“However, in mainland China, high market admission thresholds and regulatory standards that are similar with general commercial insurance companies limit the candidate of captive applicants to super-large central enterprises, state-owned enterprises and very few private enterprises,” Wu states.
Hong Kong has relatively lower capital requirements, which encourages some enterprises that are not large, to set up their captives in Hong Kong.
Wu highlights: “To actively respond to the country’s ‘going-out’ strategy, many Chinese enterprises are using Hong Kong as a platform for global market expansion.”
“Hong Kong’s insurance regulator is trying to build a risk management centre under BRI and a popular captive domicile to help mainland companies better manage their offshore business and risks,” he adds.
Time to compete
Like all captives domiciles around the world, competition is a key challenge for them all and as Rayner highlights this is no different for Hong Kong. Rayner notes that Hong Kong faces stiff regional competition for captive business, as well as from very established captive domiciles like Bermuda and Guernsey.
Wu also highlights that Hong Kong is facing fierce competition among other Asia captive domiciles, such as Singapore, which is the top Asian domicile with the biggest number of captives licensed by the end of 2019, while Labuan is also taking a very proactive approach to promoting itself as a favourable captive domicile in Asia.
Rayner notes: “Each has a more developed captive service ecosystem than Hong Kong’s, and they continue to dedicate resources to building relationships and recognition in the Chinese market.”
He states that in uncertain times, these domiciles’ deeper experience may be attractive to companies forming their first captives. Hong Kong’s political and economic ties to the mainland should, in theory, stand it in good stead to capitalise from an uptick in Chinese captive formations.
Henry To, chairman Hong Kong, China Guy Carpenter, explains that at the beginning in mid-2017, captive development in Hong Kong slowed when the chairman of the China Insurance Regulatory Commission (CIRC) stepped down.
Applications to establish captives in Hong Kong from China enterprises have “practically come to a halt”. However, discussions regarding captives were re-activated beginning in mid-2018 when the China Banking-Insurance Regulatory Commission (CBIRC) was established following the merger of the CIRC and the China Banking Regulatory Commission, according to To.
Relations between people in Hong Kong and mainland China have been relatively tense since the early 2000s. Hong Kong made world headlines for months across 2019 as many Hongkongers took to the streets and protested.
Rayner highlights that these upticks remain to be seen whether these anti-mainland protests will reignite and if this will dent Hong Kong’s standing with Chinese firms.
Also weighing in, Wu explains that the recent unstable political environment in Hong Kong society also raises Mainland enterprises’ concern about workplace safety and business continuity.
Creating the legal tools
As one of Asia’s growing captive domiciles, Hong Kong provides favourable regulations to captives, such as lower minimum capital requirements, lower solvency requirements, the permission of outsourcing, tax concession and other policies differentiated with general commercial insurance companies.
Wu says: “It lowers the total cost of running a captive. The friendly captive regime and incentive policies are considerable attractions for mainland enterprises.”
Addressing any planned legislation for Hong Kong, Mike Campbell-Pitt, chief technical officer, Asia, Crawford & Company, said: “In March, the Hong Kong Insurance Authority (IA) amended its captive laws through the Insurance (Amendment) Bill 2020, which expands the scope of coverage which can be written by captives in Hong Kong.
The bill aims to provide a new regulatory regime for the ILS business and expand the scope of insurable risks of captive insurers set up in Hong Kong. According to the current Insurance Ordinance (Chapter 41), a captive is restricted to write the insurance and reinsurance of risks of below companies:
a company (first company) which belongs to the relevant company’s group of companies
a company (second company) in respect of which the relevant company or the first company holds, or is entitled to control the exercise of, not less than 20 percent but not more than 50 percent of the voting power at any general meeting of the second company
a company (third company) where the third company is a subsidiary of the second company
“The key objective was to ensure Hong Kong is positioned to capitalise on captive business that may flow from China’s huge BRI. Large companies that are expanding globally will need to find a home for a range of speciality risks that may be difficult to insure in China, such as credit, surety and political risks,” Campbell-Pitt divulges.
Simon Lam, executive director (general business) at Hong Kong IA, outlines the steps they are taking “to promote the ecosystem that is congenial to the setting up and operation of captive insurers.”
He explains that the reduced corporate tax rate of 8.25 percent has recently been extended to onshore risks underwritten by captive insurers since 2018/19.
An amendment bill seeking to expand the scope of insurable risks for captive insurers to cover, for example, the underwriting of risks of bodies corporate within the group, and the underwriting of risks in proportion to the controls over the relevant body corporate by the group, is also awaiting scrutiny by Legislative Council of Hong Kong, according to Lam.
He suggests by expanding the scope of insurable risks by captive insurers, multinationals will be able to implement their global risk management strategy more effectively to cover their projects.
The IA has also put forward an amendment bill to cut by half the profits tax rate for insurers underwriting marine and speciality (e.g. catastrophe, political, terrorism, war and credit) risks. The tax concession is also applicable to insurance broker companies placing such risks to (re)insurers in Hong Kong.
The IA will be seeking to build up the insurance-linked securities (ILS) market in Hong Kong to enable the transfer of catastrophic risks to the capital market.
“In this respect, an amendment bill was gazetted in March 2020 for the authorisation of special purpose insurers (SPI) as a platform for the issuance of ILS that caters specifically for underlying risks in BRI and the Greater Bay Area,” Lam adds.
Will the captive dream remain in isolation?
Campbell-Pitt reflects that over the next 12 months the hardening market that the insurance sector is currently experiencing “should sharpen Chinese companies’ attention on captives as an alternative form of risk transfer, which may lead to formations in Hong Kong”.
He continues: “Large corporate clients were already seeing a hardening of the market, in terms of premiums and reduced capacity for certain risks, business types or geographical regions with higher loss exposures. This should bring increased activity in the captive sector.”
But with a lot of the world currently in lockdown due to the COVID-19 pandemic, will this put on hold the work being done to boost the captive market in Hong Kong?
Lam suggests that COVID-19 highlights the importance of risk management, sufficient capacity and ability to absorb the potentially massive losses that a pandemic can threaten. “This will instil stronger belief in risk management solutions to cope with the change in the risk landscape for multinationals,” he adds.
Campbell-Pitt suggests COVID-19 losses are likely to cause capacity to dry up and prices to rise in affected lines, presenting opportunities for the captive industry to prove its value. He explains: “It is unlikely, however, a company would form a captive specifically to insure pandemic risks due to the difficulty modelling these risks and the potentially very high cost of claims.”
Finally, To states that the commitment to promote Hong Kong as a captive centre will likely not be affected by the COVID-19 pandemic.
To says: “However, the pandemic will likely cause delays in captive development and establishment in the next 12 months. We expect new captives to be established in Hong Kong, but again, COVID-19 will delay the process.”
At this moment, there is an emphasis on maintaining a healthy and stable insurance market in Hong Kong, To concludes.
