Council meeting-III. Gov. Bills-2nd Read-Insurance (Amend.) Bill 2023



President, the insurance industry plays a pivotal role in modern society, providing a wide range of insurance products to help individuals and businesses manage their risks.  Life insurance, property insurance, health insurance and commercial insurance all provide financial compensation and security to policy holders in the event of accidents or disasters, protecting their property and financial interests.  Capital is essential for insurers to maintain stability and sustainability of their business operations, and adequate capital also enables them to assume their risk-sharing function in the event of a large number of claims arising from catastrophic events.

The regulator has long imposed a series of capital requirements on the insurance industry with the aim of ensuring that insurers have sufficient capital to fulfil their obligations to provide ongoing coverage for insurance contracts.  Capital adequacy is an important criterion for the regulator to assess and monitor the stability and risk management capability of insurers.

Although the current guidelines issued under the local Insurance Ordinance already provide for a rule-based capital adequacy regime for insurers operating in Hong Kong, the current solvency regime does not take into account the potential risks associated with the products offered and investments made by individual insurers.  Therefore, the Government’s introduction of a risk-based capital (“RBC”) regime for the insurance industry can bring us in line with international regulatory requirements as well as regulatory requirements on other financial sectors, such as the banking sector.

The proposed Insurance (Amendment) Bill 2023 (“the Bill”) includes implementing the requirements under Pillar 1 and Pillar 3 of the RBC regime, adjusting the requirements for the appointment of actuaries by insurers, adjusting the requirements in relation to shareholder controllers of insurers, and empowering the Insurance Authority (“IA”) to designate insurers incorporated outside Hong Kong but carrying on all or a majority of business in Hong Kong, and align their valuation, capital and fund requirements with those on insurers incorporated in Hong Kong.

As a member of the Bills Committee on the Bill, I have particularly raised my concern during the scrutiny that with the implementation of the new regime, insurers with solid risk management measures as well as better asset and liability management will enjoy lower capital requirements, which will incentivize insurers to strengthen their risk management culture.

In comparison, for the banking sector to which I belong, one of the major determinants of capital requirements is whether the bank is a systemically important financial institution; the greater the importance, the higher the capital requirement.  While this approach is reasonable given the potential impacts of banks on society, it fails to provide incentives for banks to strengthen their risk management to reduce their capital requirements, as introduced by the Bill.  Such directional incentives should never be overlooked.  The recent bank failures in Silicon Valley in the United States, including the acquisition of Credit Suisse at a low price, result from banks’ neglect of risk management.

Besides, I have enquired why the requirements under Pillar 2 of the RBC regime, i.e. corporate governance and risk management, will not be implemented in this legislative exercise for regulatory purposes.  The Administration has explained that while Pillar 1 and Pillar 3 concern statutory minimum requirements with which all insurers must comply, Pillar 2 relates to enterprises’ own risk assessment and corporate governance.  As the relevant requirements would vary according to the business nature, complexity, size, and strategies of enterprises, it would be more appropriate to implement them through guidelines issued by IA.

Considering the two features mentioned above, I believe that the Bill has struck a balance between various relevant factors and can address the actual situation of the insurance industry.  Therefore, President, I support the passage of the Insurance (Amendment) Bill 2023.

I so submit.