Global firms eye Hong Kong captives to manage risk

Self-insurance could lower premiums over time and improve liquidity.

A quicker licensing process and lower capital requirements for captive insurers are expected to spur multinational companies based in Hong Kong to set up their own insurance units, analysts said.

This would cut or eliminate profit margins charged by third-party insurers, lower premiums over time and improve liquidity, they added.

“If you're a large company with significant premium volume or insurance needs, establishing a captive can offer a cost-efficient and effective insurance solution,” Patrick O’Sullivan, head of International Insurance Solutions at global investment management firm Barings LLC, told Insurance Asia.

Using captive insurance also lets business groups consolidate global insurance programs into one structure and ring-fence risks by region or type, he said via Zoom.

The Insurance Authority has updated its rules to boost Hong Kong’s allure as a domicile for captive insurance, including an expedited licensing process, reduced capital requirements, streamlined reporting, and more flexible outsourcing operations.

Captive insurers in Hong Kong also get a 50% cut in their profit tax rate on insurance business related to onshore and offshore risks.

“We will continue to make sure eligibility for [the tax concession] is subject to fulfilment of relevant conditions,”  Clement Lau, executive director of the Policy and Legislation Division at the Insurance Authority, told Insurance Asia in an emailed reply to questions.

“Captive insurers can improve cash flow by giving the parent company control over the timing of claim payments and premiums,” O’Sullivan said.

In May, HSBC Holdings Plc unit Wayfoong (Asia) Ltd. was given a captive licence in Hong Kong, the fifth captive insurance provider and the first multinational enterprise to get  a licence under the updated rules.

There were more than 6,000 licensed captives globally as of May, according to Business Insurance’s captive domicile rankings. In the Asia-Pacific region, Singapore was the leading captive domicile, hosting 89 licensed captives, based on data from the Monetary Authority of Singapore.

Hong Kong’s is seeking to compete in the captive insurance market that is dominated by Bermuda.

“Hong Kong shares many of the same qualities [as Bermuda],” O’Sullivan said. “It’s home to a large number of international companies, advisory firms, investment managers, and legal firms.”

“With the recent introduction of the Hong Kong risk-based capital regime, it also has a strong and flexible regulatory framework,” he added.

The Insurance Authority is reaching out to target companies with tailored proposals and working closely with legal and advisory firms to provide end-to-end support, Lau said.

O’Sullivan expects more applications, especially with the support infrastructure—legal, audit, investment, and regulatory—is already in place.

“Looking forward over the next five years, it’s going to be the bedding down of that ecosystem,” he said. “I don’t necessarily see too many challenges, given that the foundations are already laid.”

The Insurance Authority would continue promoting awareness of captive insurance benefits, enhance competitiveness through regulatory reviews, and develop local talent to support the sector, Lau said.