How can regulatory tweaks unlock capital for Hong Kong insurers?

Most plan to boost their risk exposure using tech over the next two years.

Hong Kong’s planned revisions to non-life capital rules could give insurers more flexibility to expand beyond the domestic market, even as firms take on higher investment risk in search of returns.

The proposed changes, outlined in a consultation paper by the Hong Kong Insurance Authority, come less than a year after the rollout of the city’s risk-based capital regime in July 2024.

Regulators are now considering refinements, including lowering certain prescribed risk charges for natural catastrophes and allowing greater diversification benefits across select greater China exposures.

Another key proposal would permit eligible Hong Kong insurers, including units of international groups, to exclude offshore nonlife reinsurance business from capital calculations—potentially freeing up capital for growth initiatives, according to New Jersey-based credit rater A.M. Best Company, Inc.

James Chan, director at AM Best, said the adjustments are meant to better reflect local market conditions without compromising global prudential standards.

The direction is toward aligning regulatory requirements with actual risk exposure whilst maintaining strong policyholder protection, he said in a March report.

Hong Kong’s nonlife insurance market remains highly fragmented, with dozens of pure nonlife players competing in a segment that has posted only modest growth in recent years amidst economic headwinds and weaker Mainland China activity.

At the same time, insurers are preparing to take on more investment risk. A separate study by Clearwater Analytics Holdings, Inc. found that most Hong Kong insurers plan to increase their risk exposure over the next two years, supported by greater use of technology and data tools.

More than half of respondents said their risk levels have risen in recent years, reflecting a shift toward higher-yielding assets, particularly in private markets such as private equity and venture capital.

Shane Akeroyd, chief strategy officer for the Asia-Pacific region at Clearwater Analytics, said the move reflects a calculated effort to boost returns in a low-growth environment.

Insurers are becoming more comfortable with complex asset classes as technology improves their ability to monitor and manage risk, he said.

Automation and integrated data platforms are playing a key role in that transition. Insurers cited regulatory demands, including stricter stress testing, solvency reporting, and disclosure requirements, as key drivers of increased investment in asset-liability management systems.

Still, challenges remain. Some firms reported weaker risk visibility due to more complex portfolios, broader asset exposure, and data integration issues. Many also pointed to the need to reduce reliance on manual processes and legacy systems.

Clearwater Analytics said insurers that address these operational gaps early will be better positioned to manage more sophisticated portfolios whilst meeting evolving regulatory expectations.

Questions to ponder:

• How exposed are Hong Kong insurers to valuation and liquidity risks as allocations to private markets expand?
• How can regulators ensure capital relief does not encourage excessive risk‑taking amidst a shift toward higher‑yield assets?