I. Development of the Captive Insurance Market in Hong Kong
Captive insurers in Hong Kong are approved by the General Business Division of the Hong Kong Insurance Authority. The Insurance Authority formally replaced the former Office of the Commissioner of Insurance (OCI) with effect from 26 June 2017. It is a statutory body operating independently of the Government of the Hong Kong Special Administrative Region, and its principal functions are to regulate and supervise the insurance industry in order to promote the overall stability of the industry and to protect existing and potential policy holders. It also plays both a captive supervisory role and a market promotion role. The Insurance Authority comprises a Chairman, a Chief Executive Officer and six Executive Directors of the Insurance Authority, all of whom must be appointed by the Chief Executive of Hong Kong.
To date, Hong Kong has a total of 4 captive insurers, namely CNOOC Insurance Limited, which commenced business in 2000; Sinopec Insurance Limited, which commenced business in 2013; CGN Insurance Limited, which commenced business in 2014; and Shanghai Electric Insurance Limited, whose establishment was approved in December 2018. As at the end of 2019, the captive insurers of CNOOC, Sinopec, CGN and Shanghai Electric recorded premium income of HK$634 million, HK$394 million, HK$239 million and HK$87 million respectively, making Hong Kong the third largest captive insurance hub in Asia after Singapore and Malaysia.
As an important captive insurance centre in Asia, Hong Kong has enormous development potential. This includes Hong Kong’s fundamental advantages as an international financial centre, namely a simple tax regime, the rule of law, an ample supply of talent, the free flow of information and capital, and a highly open and competitive operating environment. The main advantages of establishing a captive insurer in Hong Kong are:
1. National policy support
The Central Government has consistently encouraged and supported Mainland enterprises in establishing captive insurers in Hong Kong. In June 2012, the Central Government introduced a series of policy measures to strengthen cooperation between the Mainland and Hong Kong, including expressing support for Mainland institutions to establish captive insurers in Hong Kong and improve risk protection mechanisms, and strengthening cooperation between Guangdong and Hong Kong in insurance product research and development, business operations and operational management, and exploring how the Guangdong and Hong Kong insurance sectors can work together to provide follow-up services such as surveying, rescue and claims handling for clients with cross-border incidents.
On 29 March 2018, the National Development and Reform Commission and the Hong Kong Special Administrative Region signed the Arrangement between the National Development and Reform Commission and the Government of the Hong Kong Special Administrative Region on Supporting Hong Kong’s Full Participation in and Contribution to the Belt and Road Initiative, supporting Hong Kong in providing professional services such as insurance and reinsurance for large-scale infrastructure projects under the Belt and Road Initiative and, as appropriate, promoting the establishment by Mainland enterprises of captive insurers in Hong Kong to arrange insurance for their overseas business and improve their corporate risk management systems.
2. Full use of Hong Kong’s status as an international financial centre
As an international commercial and financial centre, Hong Kong has a well-developed regulatory framework and legal system, advocates and implements a captive regulatory policy of “market-led and government-facilitated”, and its emphasis on business integrity is highly regarded internationally.
As there are no foreign exchange or capital flow controls, Hong Kong offers the convenience of free inflow and outflow of capital, and the Hong Kong dollar can be freely converted on international markets. Financial transactions are convenient, and most of the world’s 100 largest banks have established branches in Hong Kong. Hong Kong is positioned between the European and American time zones and, through its links with the New York and London markets, can conduct foreign exchange trading 24 hours a day. Hong Kong is Asia’s third largest stock market, its bond market is developing rapidly, and it is the regional centre for investment management business.
Hong Kong is an important reinsurance centre in the Asian region and is home to numerous international reinsurers. Most of the world’s major reinsurers have established operations in Hong Kong and can provide reinsurance, risk management and other insurance services at any time.
Establishing a captive insurer in Hong Kong also helps to leverage Hong Kong’s status as an international financial centre to build cooperation in insurance and reinsurance business with developed countries in Europe and North America.
3. A sound regulatory framework
Hong Kong has a well-developed regulatory framework and legal system. Its emphasis on business integrity is highly regarded internationally. The authorities review the relevant legislation regularly to bring it up to international standards.
Government support — the Government of the Hong Kong Special Administrative Region has consistently advocated and implemented a policy of “market-led and government-facilitated”. The Insurance Authority (the regulator of the insurance industry) plays both a supervisory and a promotional role.
3. A simple tax regime and low tax rates
Hong Kong has a simple tax regime and is one of the world’s low-tax jurisdictions. Unlike many other places, Hong Kong does not impose a consumption tax or a capital gains tax. Corporate income tax is only 16.5%, and the maximum rate of personal income tax is only 15%. To attract more local and overseas enterprises to establish captive insurers in Hong Kong, since 2013 Hong Kong has enacted legislation granting a 50% deduction on the profits tax of captive insurers’ offshore risk insurance business.
Hong Kong adopts the territorial source principle of taxation, that is, only profits arising from the carrying on of any trade, profession or business in Hong Kong are taxable. Income from overseas and profits from investments made outside Hong Kong are not taxable. In addition, unlike many other jurisdictions, Hong Kong does not impose a consumption tax or a capital gains tax. Dividends and interest on deposits with financial institutions are also exempt from tax. Furthermore, Hong Kong provides generous capital allowances for capital expenditure incurred in producing assessable profits.
4. Free flow of capital
Hong Kong has no foreign exchange or capital flow controls. The Hong Kong dollar can also be freely converted on international markets.
Multinational banks provide quality banking services — Hong Kong, as one of the top international financial centres, is home to branches of most of the world’s 100 largest banks.
Investment services — Hong Kong is ranked as one of the most open and transparent financial markets. Because Hong Kong is in a favourable time zone, its market can conduct foreign exchange trading 24 hours a day through links with the New York and London markets. By market capitalisation, Hong Kong is Asia’s third largest stock market. With the rapid growth of its debt market, Hong Kong has become the regional centre for portfolio management business.
5.Close proximity to the reinsurance market
Hong Kong is home to numerous international reinsurers. Most of the world’s major reinsurers already operate in Hong Kong. They can provide reinsurance services at any time, together with professional advice on risk management and related matters.
6. A well-developed insurance intermediary services market that facilitates access to captive management services
Hong Kong has high-quality accounting and legal services — almost all internationally renowned accounting firms and law firms have established offices in Hong Kong.
Hong Kong has an adequate supply of first-class captive management professionals who can provide high-quality captive management services.
7. Simple captive insurer approval procedures
The Hong Kong Insurance Authority also encourages Mainland enterprises to establish captive insurers in Hong Kong. The process of establishing a captive insurer is open, transparent and time-controllable, and generally it takes only about 2 months from the submission of the application to the commencement of business.
II. Regulatory requirements and approval procedures for applying to establish a captive insurer in Hong Kong
Captive insurers in Hong Kong are supervised as general insurance business (property insurance), but are granted a considerable degree of relaxation of supervisory conditions.
1. Requirements for establishing a captive insurer
Hong Kong requires that the establishing entity of a captive insurer be a group company and its holding company, an affiliate in which the group company holds a 20-50% equity interest, and its subsidiaries.
Captive insurers are exempt from the insurance authorisation fee and the annual fee.
A captive insurer established in Hong Kong requires a minimum of 4 personnel, including the Chief Executive, the officer responsible for underwriting, the officer responsible for claims and the officer responsible for finance.
Hong Kong has no specific requirements in respect of systems development, product actuarial work and similar matters.
2. Registered capital
The registered capital of a captive insurer established in Hong Kong shall be not less than the aggregate of HK$2 million and the company’s liabilities.
3. Solvency margin
Hong Kong’s solvency requirements for captive insurers are lower than those in the Mainland. Hong Kong captive insurers are subject to the regulatory requirements applicable to general property insurers; the general solvency margin is 5% of the greater of the three, namely HK$2 million, net premium income and net outstanding claims.
The minimum assets must be not less than the aggregate of 80% of liabilities and the solvency margin.
4. Scope of business of captive insurers
The Hong Kong Insurance Authority has no explicit requirements regarding the source of business of captive insurers, but if the principal business originates from the Mainland, approval should in principle be sought from the China Insurance Regulatory Commission; there is no regulatory restriction on the overseas business of captive insurers.
The scope of business of a Hong Kong captive insurer is the same as that of a general property insurer, including property insurance, motor insurance, liability insurance and short-term accident and health insurance.
5. Approval procedures of the Hong Kong Insurance Authority
The approval cycle for establishing a captive insurer in Hong Kong is generally 2 months. The approval procedures include pre-communication between the applicant and the Insurance Authority, discussion with the Insurance Authority of an outline of the scale of business operations, submission of an informal application, submission of a formal application, in-principle approval by the Insurance Authority, formal establishment of the company, on-site inspection and verification by the Insurance Authority, and approval upon review.
