Hong Kong could become a captives hotspot for Belt and Road companies

08-06-2020

Hong Kong could become a captives hotspot for Belt and Road companies

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Hong Kong’s new insurance regime could make the territory a hotspot for captives for Chinese companies, and any companies involved in infrastructure projects related to China’s Belt and Road Initiative.

Hong Kong’s new insurance regime could make the territory a hotspot for captives for Chinese companies, and any companies involved in infrastructure projects related to China’s Belt and Road Initiative (BRI), according to Joyce Chan, insurance partner at Clyde & Co in Hong Kong.

Hong Kong has until now been something of an afterthought when it comes to Asian captives, with Singapore establishing itself as the leading captive insurance domicile in the region. But it has taken steps to invigorate itself as a captive domicile, having drafted a Bill that would make a number of reforms designed to make it easier to launch captives and insurance-linked securities (ILS). 

The Bill was due to be debated by Hong Kong’s parliament in March, but that was delayed due to the COVID-19 shutdown. It is not known when the Bill will be debated, but it is expected to proceed without too much difficulty. 

“Reform to the captive insurance regime, and introduction of an ILS regime, had been planned as part of the Insurance (Amendment) Bill 2020, which was due to be read in the legislature on March 25,” said Gillian Morrissey, senior associate at Clyde & Co in Hong Kong.

Both policy initiatives had been announced in the chief executive’s 2018 Policy Address and the financial secretary’s 2019–20 Budget Speech.

Chan said the proposed changes will allow large conglomerates investing in infrastructure projects to manage the risk of overseas companies which have no Hong Kong nexus via their Hong Kong-based captives.

“Companies will be able to insure the proportional share of risk of companies minority owned or controlled by the group, or even unrelated body corporates provided that the captive or a group company has assumed management responsibility for the risks of that organisation,” she said. 

This will make it much easier for companies working on BRI projects to use captives as part of their risk management strategy, Chan added. “Captives are an important risk management tool that will help BRI.”

“Under the proposals, Hong Kong will continue to limit captives to providing non-statutory, general insurance business, as the policy objectives are focused on business facilitation and captives as a corporate risk management tool for their group, rather than consumer-facing or retail insuring needs,” Morrissey noted. This means it doesn’t extend to employees’ compensation or third party motor risks, for example.

“General insurance allows captives to insure the kinds of risks companies will have, particularly in relation to international business, such as trade credit, surety, cross-border trade and infrastructure financing,” she added. 

Hong Kong created its captive regime in 1997 but it never quite took off: its first captive was created in 1999, but it was subsequently deauthorised, and it currently has only four authorised captives. These are principally subsidiaries of Chinese companies in the power and electrical equipment industries. 

Hong Kong advantages

The changes being envisaged for Hong Kong are relatively modest in scope, but it is hoped they will have a significant impact on its attractiveness as a captive insurance domicile.

Hong Kong-authorised captives can already avail themselves of an attractive tax rate of 8.25 percent on their onshore and offshore business.

Hong Kong captives will continue to have a minimum capital requirement of HK$2 million, and a minimum solvency requirement of whichever is the greatest of 5 percent of the net premium income, 5 percent of the net claims outstanding, or HK$2 million.

Other existing regulatory concessions include reduced authorisation and annual fees, exemption for captives from the requirement that general insurers maintain assets in Hong Kong to match local liabilities. They are also exempt from the requirement for valuing assets and liabilities in accordance with the statutory basis under the Insurance (General Business) Valuation Rules, and captive policies are exempt from the premium levy.

While these details have yet to be ratified by Hong Kong authorities, Chan does not expect to see many significant amendments to the Bill when it is debated by the legislature.

“There could be some minor amendments, but the broader objectives have been discussed for several years and there is broad consensus that these changes will be a good thing for the development of the Hong Kong insurance industry,” she said.

Chan argues that Hong Kong is a natural home for captives in Asia, and that formations will follow as long as the appropriate regime is put in place. 

"Hong Kong is one of the leading financial services centres in the world, part of the Greater Bay Area, and the global centre for renminbi liquidity, asset management and financing,” she said.

“As such it is the obvious choice for multinational corporations active in Asia, as well as large Chinese companies.” 

She expects growth to remain relatively modest to start with, before increasing over time.

“Once the new regime is in place, in the early days I would expect to see up to five new captives per year, gradually rising over time to perhaps up to 10 per year,” said Chan.  

ILS moves

Meanwhile, Hong Kong has taken steps to develop an ILS regime, which it currently does not have. The Insurance (Amendment) Bill 2020 includes an ILS law, amending the Insurance Ordinance and providing for a streamlined regulatory framework to support the issuance of ILS, such as catastrophe bonds, in Hong Kong, through licensed special purpose vehicles. 

“The Bill is designed to allow insurers to increase risk capacity through the issuance of ILS, and to attract more diverse investments into the insurance industry,” said Chan.

The ILS regime takes its inspiration from existing ILS regimes such as Singapore and Bermuda. The proposed framework would include the licensing of special purpose insurers (SPIs) and the introduction of a new class of special purpose business (SPB). The Insurance Authority will issue rules on the financial, solvency and investor sophistication requirements as well as fees.

SPIs will need to appoint an administrator to manage the SPI, including its assets, and outsourced operations. The administrator will be responsible for reporting non-compliance to the Insurance Authority and will need to be fit and proper. It would require a minimum of two fit and proper directors to be appointed. 

Hong Kong, China, Belt and Road, Insurance linked securities, Joyce Chan, Gillian Morrissey, Clyde & Co

Captive International