Hong Kong and Singapore: Analyzing Two of Asia Pacific’s Major Insurance Markets

Episode Summary

In the latest episode of Skadden’s global series on prudential solvency, host Robert Chaplin is joined by Skadden colleagues Stan Amoah and James Pickstock to examine the regulatory frameworks governing two of Asia Pacific’s most prominent insurance markets, Hong Kong and Singapore. The discussion covers Hong Kong’s transition to a three-pillar risk-based capital regime under the Insurance (Amendment) Ordinance 2023, the Greater Bay Area initiative, Hong Kong’s ILS hub, Singapore’s evolving RBC2 framework, the matching adjustment and market entry routes for foreign insurers, among other in-depth analysis.

Key Points

• Hong Kong's Three-Pillar Risk-Based Capital Framework: Hong Kong implemented a comprehensive transition from a rules-based solvency regime to a three-pillar risk-based capital framework under the Insurance (Amendment) Ordinance 2023, as of July 2024. The framework mirrors Solvency II.
• Capital Requirements and the PCA/MCA Structure: Under Pillar 1, the Prescribed Capital Amount, or PCA, is calibrated to a 99.5% confidence level over a one-year period — roughly equivalent to a one-in-200-year stress event — while the Minimum Capital Amount, or MCA, is set at 50% of the PCA. Capital is tiered into unlimited Tier 1, limited Tier 1 (capped at 10% of the PCA) and Tier 2 (capped at 50% of the PCA), reflecting different levels of loss-absorbing capacity.
• The Greater Bay Area Initiative and ILS Hub: Hong Kong’s Insurance Authority has taken steps to facilitate cross-boundary business under the Guangdong-Hong Kong-Macao Greater Bay Area Initiative, including implementing after-sales service centers in GBA cities. Separately, Hong Kong has established a legal framework for insurance-linked securities, introduced in 2021, with government grant schemes to subsidize ILS issuance costs and position Hong Kong as a leading ILS domicile for the Asia Pacific region.
• Singapore's RBC2 Framework: Singapore’s insurance sector is regulated by the Monetary Authority of Singapore under the Risk Based Capital 2 framework, first introduced in 2004. Insurers must calculate a Capital Adequacy Ratio against a Prescribed Capital Requirement calibrated at 99.5% value at risk over one year — the same methodology as the SCR under Solvency II — and a Minimum Capital Requirement set at 90% VaR and pegged at 50% of the PCR. The framework also allows eligible insurers to apply a matching adjustment when valuing long-term insurance liabilities.

Voiceover (00:01):
From Skadden, the Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner, Rob Chaplin, leads conversations with industry practitioners and explore Solvency II developments that matter to you. Rob Chaplin (00:18):

Welcome back to The Standard Formula podcast. This episode continues our global series on Prudential requirements, forming part of our forthcoming encyclopedia of prudential solvency. Today, we are turning our attention to the Asia Pacific region, and specifically to two of its most prominent insurance markets, Hong Kong and Singapore. Both jurisdictions have established themselves as leading international financial centers and have both undergone significant regulatory evolution in recent years, moving towards risk-based prudential frameworks that will be familiar to those of you who have followed our earlier discussions of Solvency II in the EEA and the U.K.

(00:59):
Hong Kong has, in recent years, completed a fundamental overhaul of its solvency regime, transitioning to a comprehensive three-pillar risk-based capital framework that came fully into effect on the 1st of July 2024. Singapore, meanwhile, has been operating under its own risk-based capital regime for some time with continued refinements. Together, these two jurisdictions offer a fascinating study in how leading Asian markets are aligning with global prudential standards while adapting to the distinctive characteristics of their own insurance sectors. I have my colleagues, Stan Amoah and James Pickstock, joining me today to discuss both regimes.

(01:41):
We’ll begin with Hong Kong, examining its regulatory architecture, the new risk-based capital framework, group supervision, and some of the exciting market developments, such as the Greater Bay Area Initiative and the insurance-linked securities hub. We’ll then move on to Singapore and its RBC2 framework. So, first, let’s turn to Hong Kong, one of the world’s preeminent international financial centers. Hong Kong’s insurance market is characterized by extraordinary depth and sophistication, with insurance penetration and density figures that rank amongst the highest in the world. Total gross premiums amounted to almost 86 billion U.S. dollars in 2024, with a particularly high life insurance penetration of 17.4%, far greater than 7.7% and 2.8% in the U.K. and U.S., respectively.

(02:38):
What makes Hong Kong especially compelling from a prudential standpoint is that the jurisdiction recently completed a fundamental transformation of its regulatory architecture, transitioning from a traditional rules-based solvency margin regime to a comprehensive three-pillar risk-based capital framework. This transition was over a decade in the making. Our thanks today to our friends at Timothy Lowe LLP for their generous input and feedback on this section of today’s podcast. James, could you start us off please with an overview of the regulatory architecture?

James Pickstock (03:14):
Of course. Thanks, Rob. Insurance undertakings in Hong Kong are regulated by the Insurance Authority, or IA, with its authority derived from the insurance ordinance. The IA is a relatively new regulator, having replaced the former Officer of the Commissioner for Insurance in 2017. The IA supervises authorized insurers and insurance intermediaries and may undertake responsibility for the supervision of large multijurisdictional insurance groups whose ultimate parent entities are incorporated in Hong Kong. The insurance ordinance framework applies to both life and non-life insurers, as well as other entities such as captives and reinsurers. Historically, Hong Kong had a rules-based solvency regime, which focused on fixed solvency margins.

(03:57):
However, this was replaced by a risk-based regime by way of the Insurance (Amendment) Ordinance 2023, which was fully implemented on the 1st of July 2024. This change aligned Hong Kong with international solvency standards, introduced risk-sensitive capital requirements more akin to those under Solvency II, has encouraged better asset liability matching and risk management by requiring insurers to hold capital proportionate to the specific risks they carry, and reinforced the continuing trend for the IA to engage more closely with global bodies, such as the International Association of Insurance Supervisors, the IAIS.

(04:31):
The IA’s statutory objectives are to promote the general stability of the insurance industry and to protect existing and potential policyholders. All insurers carrying on business in or from Hong Kong must be authorized by the IA, with separate authorizations for long-term business, such as life and annuity and health, and general business, such as accident, fire and property damage. It is worth noting that it is possible to be authorized as a composite, but such entities will be subject to separate prudential calculations for each class. Stan, over to you to discuss the transition to a risk-based capital regime.

Stan Amoah (05:04):
Thanks, James. The implementation of a risk-based prudential regime was instigated in 2014 by the IA’s predecessor. Similar to Solvency II, Hong Kong’s risk-based framework is organized around three pillars. Pillar 1 covers quantitative requirements, including the calculation of technical provisions and capital requirements. Pillar 2 addresses qualitative requirements, including governance systems, risk management framework and forward-looking self-assessment. And Pillar 3, with supervisory reporting and public disclosure, ensuring that the IA and public market have access to the information needed to assess an insurance financial health.

(05:43):
These pillars apply to all authorized insurers with some exceptions such as marine insurers, captive insurers, special purpose insurers and Lloyd’s. This three-pillar structure reflects the global consensus that robust prudential supervision must address not just the quantum of capital, but also the quality of risk management and a transparency of information. Under Pillar 1, an insurer must maintain a capital base which must never be less than the lower of prescribed capital amount, or PCA, the minimum capital amount, or MCA, and 20 million Hong Kong dollars. The PCA and MCA are largely analogous to the SCR and MCR under Solvency II.

(06:27):
The PCA aims to ensure that insurers remain solvent with a 99.5% confidence over a one-year period, which is roughly equal to a one in 200-year stress event. The MCA, meanwhile, is generally calibrated at 50% of the PCA. The composition of Pillar 1 eligible capital is divided into three tiers, reflecting the quality and loss-absorbing capacity of different instruments. Unlimited Tier 1 capital may include ordinary fully paid share capital and retained earnings. Limited Tier 1 capital may include preferred shares and must not exceed 10% of the PCA. Tier 2 capital may include items such as qualifying subordinated debt instruments and must not exceed 50% of the PCA.

(07:12):
Pillar 1 capital requirements apply as an entity to Hong Kong incorporated insurers and non-Hong Kong corporate insurers designated by the IA on the basis that the majority of their business is in Hong Kong. However, they apply only at the Hong Kong branch level to insurers incorporated outside Hong Kong, which have not been designated by the IA. James, how about Pillar 2?

James Pickstock (07:35):
Thanks, Stan. Pillar 2 establishes the qualitative and governance expectations that sit alongside the quantitative requirements. Similar to Solvency II, there is an Own Risk and Solvency Assessment, the ORSA. This is a forward-looking board-approved assessment that each insurer, including on a consolidated basis where applicable, must conduct at least annually and also must also be carried out promptly whenever there is a material change in risk profile. It also requires an insurer to assess its overall solvency needs in light of its specific risk profile, risk appetite and business strategy, and to identify where its actual risk profile diverges from the standard formula assumptions.

(08:11):
The Pillar 2 framework also requires insurers to maintain effective systems of governance for risk management proportional to the nature, scale and complexity of its operations. Pillar 2 operates in conjunction with the statutory controls over key control functions, including risk management, compliance, internal audit and the actuarial function. Each individual function must have appointed leaders who satisfy the IA’s fit and proper requirements. The IA also conducts its own risk-based supervisory assessments alongside an insurer’s internal processes, marking a significant evolution from the previous compliance-focus model. Finally, Stan, could you take us through Pillar 3?

Stan Amoah (08:46):
Of course, James. Last, but certainly not least, Pillar 3 introduces enhanced transparency obligations, which fall into one of two headings: confidential regulatory reporting to the IA and public disclosure to the market. Authorized insurers must submit detailed returns to the IA covering their financial position, solvency calculations, risk exposures, and also findings annually.

(09:10):
The IA completed consultations in respect of new public disclosures and it’s expected that these rules will come into operation in 2026. Based on the consultation, the new rules are broadly comparable to the SFCR under Solvency II in the EEA and U.K. and are intended to provide policyholders, counterparties and other market participants with meaningful information about an insurer’s financial position, investment, insurance liabilities, capital adequacy, governance and risk profile, amongst other things.

Rob Chaplin (09:42):
My thanks to both of you. That’s a helpful overview and I agree that since the recent reforms, the Hong Kong regime is broadly similar to solvency II. Now, nobody likes to think about things going wrong, but if they do, what does supervisory intervention look like under the Hong Kong regime? James?

James Pickstock (10:02):
Rob, the IA has a graduated ladder of supervisory intervention tools. At the outset, an insurer must notify the IA immediately if any of its directors or key control personnel reach a view that the insurer is at risk of contravening its capital requirements. Failure to do so is an offense. Where the IA comes to understand that there is or may be a failure to meet the PCA or MCA requirements, it will typically exercise its statutory powers to require a plan or scheme to restore capital to the PCA or MCA level or to increase capital to preempt and anticipated breach of such PCA or MCA level.

(10:37):
Failure to comply with the plan or scheme within the prescribed timelines is also an offense and can ultimately lead to the revocation of authorization or, in the most serious cases, commencing of winding up proceedings. The IA may, in addition, impose conditions on authorization, restrict writing of new business, or require the reduction of risk exposure. The IA also has powers to impose financial penalties for breaches of the ordinance and associated legislation. Proportionality is a key principle, and supervisory intensity is calibrated to the size, complexity, and risk profile of each insurer.

Rob Chaplin (11:09):
Thanks, James. Stan, please would you take us through group supervision under the new regime?

Stan Amoah (11:15):
Of course, Rob. Group supervision is an important dimension of the Prudential framework and operates alongside, and in addition to, the solo supervision of each individual authorized insurer. The IA may designate entities incorporated in Hong Kong, which are themselves authorized insurers or which hold an authorized insurer or are another body that carries on insurance business in place outside Hong Kong, as an insurance holding company, plus subjecting those entities and their subsidiary as part of the supervisory group regulated by the IA.

(11:47):
Designation will depend on the number of jurisdictions outside Hong Kong in which the group carries on the insurance business as well as the size of the insurance and other businesses of the group. At group level, the IA requires designated insurance holding companies to maintain capital based on the sum of the local requirements applicable to each supervised group member to complete a group ORSA to submit to the IA reports and plans, including an annual group capital adequacy report to disclose and manage intergroup transactions and to ensure appropriate group governance, risk management and internal controls.

(12:23):
For those Hong Kong insurance groups with material operations in mainland China, this may involve close engagement between the IA and China’s National Financial Regulatory Administration, the NFRA, which regulates the insurance sector on the mainland. The interaction between the Hong Kong and mainland prudential frameworks is an evolving area, particularly in the context of the Greater Bay Area Initiative.

Rob Chaplin (12:45):
Indeed, it does seem that the Greater Bay Area is a significant development for Hong Kong’s insurance sector. The Greater Bay Area, officially known as the Guangdong-Hong Kong-Macao Greater Bay Area, or GBA, is a national-level strategic initiative creating an integrated economic zone across Hong Kong, Macau and the nine Guangdong Province cities.

(13:11):
For Hong Kong’s insurance sector, the GBA presents a substantial opportunity, a large and growing middle class, which is generating demand for the sophisticated protection, savings and retirement products that Hong Kong insurers are well-positioned to provide. The IA has taken significant steps to facilitate cross-boundary business, for example, by working with the mainland government to implement after-sales service centers in GBA cities that will provide ongoing servicing to mainland residents holding Hong Kong-issued policies. This addresses a real practical barrier within the GBA.

James Pickstock (13:46):
Rob, that’s certainly a unique and interesting aspect of the Hong Kong market. Before we look ahead to the future, Stan, can you give us an overview of the ILS hub initiative also? This seems to be an area where Hong Kong is genuinely differentiating itself from other regional centers.

Stan Amoah (13:59):
Certainly, James. Insurance-linked securities, or ILS, represent one of the most dynamic areas of the global reinsurance market, and Hong Kong has made a deliberate and well-resourced effort to establish itself as a leading ILS domicile for the Asia-Pacific region. The legal framework for ILS issuance was introduced in 2021 and created the concept of approved special purpose insurers, or SPIs.

(14:23):
An SPI is a dedicated ring-fence bankruptcy remote vehicle that issues ILS instruments to capital market investors and uses the proceeds to collateralize reinsurance protection for a ceded insurer. The Hong Kong government has established a grant scheme to subsidize the issuance cost of ILS transactions arranged through Hong Kong-based SPIs, allowing the domicile to be more cost-competitive relative to established offshore senders.

Rob Chaplin (14:49):
Thanks, Dan. There will be more information about the ILS hub initiative in our upcoming book chapter accompanying this podcast. Let’s wrap up on Hong Kong by looking to the future. James, what could be on the horizon for prudential regulation in Hong Kong?

James Pickstock (15:04):
Rob, looking ahead, there are several significant developments and training. First, the potential for internal model approval. The framework is currently built around the standard formula, but larger and more sophisticated insurers may in time apply to use internal models, whether full or partial, to achieve a more risk-sensitive assessment of their capital requirements.

(15:22):
Second, new and alternative asset classes. The IA is exploring ways in which it can allow insurers to invest in new asset classes, including digital assets, whilst imposing appropriate capital charges. And finally, the ILS market will continue to grow, supported by a well-designed legal framework, a supportive regulatory environment and the government committed to financial incentives for market development.

Rob Chaplin (15:42):
Great. Thanks, team. Well, let’s move on now to the solvency regime in Singapore. Before we dive in, thanks to our friends at Rajah & Tann for their input and feedback on this section of the podcast. So, Stan, before we delve into the details, could you provide our listeners with an overview of Singapore’s insurance sector?

Stan Amoah (16:03):
Absolutely, Rob. Singapore’s insurance market is on a strong growth trajectory, projected to expand at an annual rate of 6.3% between 2026 and 2030, with gross written premiums expected to reach about 6.5 billion U.S. dollars by 2030. The market is dominated by personal accident and health, motor, property and liability insurance. These lines make up over 80% of total gross written premiums.

Rob Chaplin (16:30):
That’s impressive. Can you walk us through the prudential regime that insurers in Singapore operate under?

Stan Amoah (16:37):
Certainly, Rob. Singapore’s insurance industry is regulated by the Monetary Authority of Singapore, or MAS, under the Risk Based Capital 2, or RBC, framework. This framework was first introduced in 2004 and has since evolved to keep pace with international standards and the changing risk landscape. The RBC2 regime is all about ensuring that insurers hold capital that’s commensurate with the risk they actually face rather than just imposing a blunt one-size-fits-all capital requirement.

Rob Chaplin (17:07):
Thanks, Stan. It sounds like a pragmatic approach on behalf of MAS. With that in mind, James, what does the RBC2 framework look like in practice? What are the key prudential requirements insurers in Singapore need to meet?

James Pickstock (17:21):
So the core requirements are set out in MAS Notice 133, which is the main rulebook for valuation and capital standards. Insurers are required to maintain a minimum level of financial resources of at least 5 million Singapore dollars and calculate their Capital Adequacy Ratio, or CAR. The CAR is simply the ratio of an insurer’s financial resources to its total risk requirement, or TRR.

(17:42):
If an issuer operates multiple funds, it must also calculate a fund solvency ratio, FSR, for each fund. There are two key solvency intervention levels under RBC2. The higher level is the prescribed capital requirement of PCR, which is calibrated at 99.5% value at risk over a one-year period. The lower level is the minimal capital requirement, the MCR, set at 90% value at risk and is pegged at 50% of the PCR. Rob, in your view, how do you think this compares to the capital requirements insurers face under Solvency II?

Rob Chaplin (18:13):
Great question, James. I think the approach taken by MAS is very similar to what we have under Solvency II. For example, the methodology used to calculate the PCR is identical to the approach applied for determining the SCR under Solvency II. There’s a slight divergence in the methodology used to calculate the MCR under the Singapore regime and Solvency II. Under Solvency II, the MCR is calibrated to a confidence level of 85% over a one-year period. So, Stan, coming back to the RBC2 framework, what’s the composition of capital? How does Singapore define regulatory capital?

Stan Amoah (18:53):
Thank you, Rob. Singapore’s RBC2 framework uses a tiered approach to regulatory capital, much like Solvency II. Tier 1 capital is the core capital and includes paid-up ordinary share capital, retained earnings, surplus from overseas branches, and any additional Tier 1 instruments for Singapore incorporated insurers. It also includes a surplus of assets over liabilities in all insurance funds other than participating funds. And for each participating fund, the balance in its corresponding surplus account.

(19:22):
Tier 2 capital consists of qualifying subordinated instruments, but there’s no Tier 3 capital under the Singapore regime, so insurers have less flexibility in the types of capital they can use. MAS has set out detailed eligibility criteria for both Tier 1 and Tier 2 capital instruments. For example, Tier 2 instruments must be fully paid up, have a minimum original maturity of five years, and must not contain incentives to redeem early. There are also strict requirements around subordination, loss absorption, and investor eligibility. Retail invested in Singapore generally cannot purchase these instruments.

Rob Chaplin (19:58):
James, are there any other requirements that our listeners might want to know about or points about Singaporean Prudential regulation that stand out?

James Pickstock (20:06):
Yes, Rob. The RBC2 framework also allows for insurers to use a matching adjustment, or MA, to value long-term insurance liabilities. It allows insurers to adjust the discount rate used to value long-term insurance liabilities provided that they can demonstrate that the assets backing those liabilities are closely matched in terms of cash flows and credit quality. MAS has denoted that only certain assets will be eligible to be included in an MA portfolio. These include Singapore government securities in Singapore dollars or USD investment-grade corporate bonds, including those issued by Singapore statutory boards, U.S. Treasury securities and cash, again, whether in Singapore dollars or U.S. dollars.

(20:42):
Unrated bonds can also be included if the insurer has a MAS-approved internal credit rating model. To use the MA, insurers must obtain regulatory approval and put in place robust governance processes. They must also submit detailed documentation, including asset and liability cashflow projections and undergo regular independent reviews. The MA can only be applied to certain types of life insurance products, primarily non-investment link policies denominated in Singapore dollars or U.S. dollars.

Rob Chaplin (21:09):
That’s very interesting, James. Are there any other features of the Singapore regime that stand out?

Stan Amoah (21:15):
Yes, Rob. A few things that are worth highlighting. First, the RBC2 framework is designed to be dynamic. Insurers must update their risk and capital calculations regularly and MAS can require higher capital buffers if it deems an insurer’s risk profile warrants it. There are also detailed requirements around asset concentration, reinsurance and the use of internal models for credit risk.

(21:37):
MAS maintains a list of recognized external credit assessment institutions and they are strict rules for the use of internal ratings for unrated debt. Operational risk is also explicitly addressed with formula-based capital charge that takes into account both premium income and policy liabilities. And as you’d expect, there are robust requirements for the valuation of both assets and liabilities, with clear guidance on the use of best estimate assumptions and provisions for adverse deviation.

Rob Chaplin (22:08):
That’s a comprehensive overview. For foreign insurers or investors looking at Singapore, what should they keep in mind, James?

James Pickstock (22:16):
Well, the good news is that the RBC2 framework is broadly aligned with international best practice, so it should be familiar to insurers operating in other major markets. There are generally two ways foreign insurers can enter the Singaporean market. The first is to apply for an insurance company licensed by MAS, and the other way is through the Lloyd’s Asia platform.

(22:33):
Lloyd’s Asia is currently Lloyd’s largest underwriting center outside of London with more than 200 underwriters representing 15 syndicates. So there is certainly a lot of ongoing activity in the region. The regulatory environment is stable, transparent, and supportive of innovation, but it is also demanding. Insurers need to be prepared for rigorous supervision and ongoing compliance obligations.

Rob Chaplin (22:53):
Well, that’s been great. Thank you, James and Stan, for those fascinating insights. That brings us to the end of today’s episode. Until next time.

Stan Amoah (23:02):
Thanks, all.

James Pickstock (23:03):
Thanks, all.

Voiceover (23:04):
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(23:21):
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