HK insurers may need capital boosts due to new rules

The new regime could be costly for insurers.

Insurers in Hong Kong may feel some expenditure pressures from the recently implemented capital regime, aimed at strengthening insurers' governance and risk management frameworks. This move is expected to align local practices with international insurance standards and enhance regulatory oversight.

"The enhanced regulatory framework could gradually strengthen Hong Kong insurers' governance and risk awareness," S&P Global Ratings credit analyst Judy Chen said in a media release. "But such changes do not come without a price tag. In addition to increased compliance costs, some insurers may be required to supplement their regulatory capital."

The regime comprises three pillars: quantitative requirements under pillar 1, qualitative enhancements under pillar 2, and increased disclosure obligations under pillar 3. These changes are designed to reflect insurers' risk profiles more accurately and ensure a more robust solvency mechanism.

"We believe the new regime will better reflect insurers' risk profiles, especially regarding investment risks," said Chen. "Such a risk-sensitive solvency mechanism could lead to updates in investment and product strategies, as insurers seek more efficient capital utilization."

The new capital rules, combined with the adoption of the IFRS-17 reporting standard, are poised to provide a clearer economic picture of insurers' business operations. 

They will necessitate closer monitoring of interest rate risks and investment market volatilities, influencing insurers' capitalisation strategies and product offerings.

In response to the heightened capital requirements, insurers have been proactive in managing their liability costs and investment risks. 

However, ongoing challenges such as high interest rates and capital market fluctuations may impact insurers' financial profiles and prompt industry consolidation.