China is a land of many very large companies, and few captives. As the benefits of these structures become better understood, in the longer term Hong Kong can emerge as a thriving captives domicile to rival Singapore. First, it must finish fine-tuning its regulatory regime, says Edward Wu from Willis Towers Watson.
Although the insurance legislation was amended in May 1997 to encourage the establishment of captives, only four captives are currently authorised in Hong Kong, all of which are owned by mainland state-owned companies (Table 1).
There is great potential for captive insurance in China. The country’s currency volatility, the credit risk of its enterprises, and the political and operational risks arising from the Belt and Road Initiative (BRI) all heighten risk, which could be mitigated by captives.
The BRI aims to improve transnational connections along the old Silk Road and the maritime trade route connecting China and Europe. This boosts the insurance sector and generates demand among large enterprises for centrally managed global insurance programmes using captives.
As China’s state-owned enterprises expand overseas, they are increasingly looking to achieve best risk management practices, including consolidated insurance-buying through captive insurance programmes. However, in mainland China high market admission thresholds and regulatory standards that are similar to those that apply to general commercial insurance companies are inhibiting their growth. Only super-large central enterprises, state-owned enterprises and a few private enterprises can realistically comply with the necessary requirements.
“The captives-friendly regime and incentive policies are considerable attractions for mainland enterprises.”
Hong Kong has relatively lower capital requirements, which encourages some enterprises outside of this elite group to set up captives there. In order to actively respond to the country’s Going Out strategy, which encourages foreign investment, 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 as part of the BRI, and wants to become a popular captive insurance domicile to help mainland companies better manage their offshore business and risks.
Other than offering minimal requirements, there are other reasons for mainland entities to choose Hong Kong as a captive insurance domicile.
- Mainland China and Hong Kong adopt “one country, two systems”. Beside the inherent advantages, such as language and culture, there has been deep cooperation between governments in the financial sector. For example, in 2017, the insurance regulators of Hong Kong and mainland China signed an equivalence assessment framework agreement on the insurance solvency regulatory regime. Although this agreement does not have a significant impact on captives, it is a positive signal.
- The Hong Kong Insurance Authority (HKIA) is making great efforts to reinforce Hong Kong’s role as a global risk management centre and insurance hub under the two national development strategies (BRI and the policies of the Greater Bay Area).
- As one of the key captive insurance domiciles in Asia, Hong Kong provides favourable regulations to captives, such as lower minimum capital requirements, lower solvency requirements, permission for outsourcing, tax concessions and other policies differentiated with general commercial insurance companies. It lowers the total cost of running a captive. The captives-friendly regime and incentive policies are considerable attractions for mainland enterprises.
Compared with captives in mainland China, Hong Kong captives are operationally efficient. However, compared with domiciles such as Singapore, Hong Kong’s captives market is still at an early stage. There is room for improvement in areas such as third party service.
The HKIA currently suggests that a captive establish its own management team consisting of at least 4 key persons, including a CEO and other key persons overseeing underwriting, claim and finance functions. But if the regulator is more supportive to outsourcing, that will encourage the growth of potential local captive service providers. Currently there are few captive management companies in Hong Kong, which to some degree may deter some potential applicants who are not insurance professionals and are not that confident in managing an insurance company.
Another reason for the limited number of applications for captives is decentralised management structures and the slow development of risk management awareness in mainland China.
The Hong Kong insurance regulator has continuously launched new incentive policies to promote the development of captives, which bodes well for the industry. In 2018, the 50 percent tax discount treatment was expanded from offshore insurance business to all insurance business; in March 2020, the Hong Kong government published the Insurance (Amendment) Bill 2020. The bill aims to provide for a new regulatory regime for the insurance-linked securities business and to expand the scope of insurable risks of captive insurers set up in Hong Kong.
The new bill will allow captives to write such risk in proportion with the group’s share/voting power. In addition, the captive is further allowed to write certain third parties’ risks (under the parent group’s control, supervision or administration, or with which the parent group has sufficient connection). The bill was introduced into the Legislative Council for second reading on June 12.
Hong Kong is facing fierce competition among other Asian captive insurance domiciles. Singapore is the top Asian domicile with the biggest number of captives licensed by the end of 2019, and Labuan is taking a very proactive approach to promote itself as a favourable captive domicile in Asia. Furthermore, the recent unstable political environment in Hong Kong society raises mainland China enterprises’ concerns about workplace safety and business continuity.
The biggest opportunity is the huge market in mainland China. In 2019, about 25 percent of the Fortune 500 were Chinese enterprises (129 enterprises). Yet China has only a handful of captives, creating a vast ocean of opportunity, and the risk management awareness of domestic enterprises is being awakened by the Going Out national strategy and BRI.
The concept of captive insurance should be promoted more to enterprises in mainland China as well as Hong Kong. This involves work from the insurance regulators as well as the broader insurance community.
From the regulators’ perspective, HKIA can deepen cooperation with both central government and some local governments to release more positive signals to central and local state-owned enterprises. Other mature captive domiciles can also be used as a benchmark to upgrade the captive insurance regime, creating more incentives to create captives.
Edward Wu is Head of managing director of Willis Towers Watson’s captive and mutual practice in China. He can be contacted at: firstname.lastname@example.org
Edward Wu, Willis Towers Watson, Hong Kong, China