The Hong Kong Government and other bodies of authority have been proposing to implement a number of key measures to enhance the attractiveness of the insurance industry in Hong Kong.
We have highlighted the key measures which will affect various stakeholders in the insurance industry:
- Insurance linked securities ("ILS") and captive insurance;
- Group-wide supervision;
- Tax relief; and
- Extended temporary facilitative measures
Insurance linked securities ("ILS") and captive insurance
ILS is an alternative risk management method by which an insurer can raise capital by sharing insured risks with the capital market through securitization, such as catastrophe bonds. To issue ILS, an insurer needs to establish a special purpose vehicle ("SPV") that will provide re-insurance for the insurance company and issue securities to investors.
On 20 March 2020, the Hong Kong Government introduced the Insurance (Amendment) Bill 2020 (the "Bill") to provide for a streamlined regulatory framework for the issuance of ILS through an SPV. The Bill is designed to allow insurers to increase risk capacity and attract more diverse investments into the insurance industry. This Bill sets a scene for insurers to share risks with investors through Hong Kong's well-developed capital markets.
The Bill also proposes to widen the scope of risks insurable by captive insurers. The proposed changes will remove many restrictions under the current regime, and provide more flexibility in multinational companies' use of their captive insurers. For example, the Bill would allow Hong Kong-registered captive insurer to underwrite risks for their non-Hong Kong-based group companies.
The Hong Kong Government gazetted the Insurance (Amendment) (No.2) Bill 2020 (the "Second Bill"). Under the current regime, the Insurance Authority is responsible for overseeing the regional operations of some insurance groups through direct and indirect supervisory powers. When the Second Bill comes into effect, the Insurance Authority will have powers to supervise insurance groups where the holding company of an insurance group is incorporated in Hong Kong. This proposed change will align Hong Kong's regulatory system with the new international standards adopted by the International Association of Insurance Supervisors.
Temporary facilitative measures
In light of the COVID-19 outbreak, the Insurance Authority has extended its temporary measures until 30 June 2020 to facilitate sales of insurance products in Hong Kong. The temporary measures allow insurers and intermediaries to sell certain insurance products by non-face-to-face methods from online to telemarketing. These measures indicate the Insurance Authority's willingness to help tackle challenges in the current situation, and potentially provide an example as to how the industry could over time move towards greater digitalization of the insurance sales process in ordinary times.
The Financial Services Development Council (the "FSDC") published its proposal to offer additional tax incentives to the insurance industry. The proposal aims to benefit a wide range of stakeholders across the insurance sector, such as insurers, brokers and policyholders.
The FSDC's recommendations include the following items, inter alia:
- To apply preferential tax rates to additional classes of general insurance business;
- To extend the reinsurance tax reliefs to direct insurers for their reinsurance business;
- To provide preferential tax rates to Hong Kong insurance and reinsurance brokers;
- To provide a tax exemption on interest income derived from all fixed income / bond investments of insurance funds; and
- To provide personal tax deductions on voluntary contributions to qualifying retirement products.
This proposal lends more support to the Government's initiatives launched last December, which aim to promote the development of the insurance industry in Hong Kong. Indeed, the tax incentives (if the government implements the suggestions of the FDRC) would be a step in the right direction toward positioning Hong Kong as an insurance hub in the context of the Greater Bay Area development and the Belt and Road Initiative.
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