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Supervision > Regulation of Insurers and Lloyd’s > An Overview of the Risk-based Capital Regime

An Overview of the Risk-based Capital Regime

The Insurance Authority (“IA”) introduced the Risk-based Capital (“RBC”) regime for the Hong Kong insurance industry on 1 July 2024, following the commencement of the Insurance (Amendment) Ordinance 2023 and relevant subsidiary legislation and guidelines.

The RBC regime adopts a three-pillar framework and an assessment approach which is sensitive to an insurer’s asset and liability matching, risk appetite and mix of products. To align capital requirements with individual insurers’ risk profiles under the RBC regime, insurers with solid risk management measures will shoulder lower capital requirements, cultivating insurers to deploy capital more efficiently and nurture a prudent risk culture.

Pillar 1

Pillar 1 refers to quantitative requirements including valuation basis, capital quality and capital requirements.

Valuation basis

Insurers are required to value their assets and liabilities, including insurance liabilities, in accordance with Part 4 of the Insurance (Valuation and Capital) Rules (Cap. 41R) (“Valuation and Capital Rules”). In essence, the valuation basis is on market consistent basis.

Capital Quality

Different forms of capital are classified into different tiers based on quality, with limits set for each tier to ensure the quality of capital resources in meeting capital requirements. The capital base is the sum of Unlimited Tier 1 capital, Limited Tier 1 capital and Tier 2 capital.

Capital Tier Capital Base Composition Limit

Unlimited Tier 1 capital

No limit

Limited Tier 1 capital

Limited to 10% of the prescribed capital amount (“PCA”)

Tier 2 capital

Limited to 50% of the PCA

Capital Requirements

According to section 13AA of the Insurance Ordinance (Cap. 41) and the Valuation and Capital Rules, an insurer (except marine insurers, captive insurers, special purpose insurers and Lloyd's) must ensure that its capital base is not less than each of its PCA, its minimum capital amount (“MCA”) and HK$20 million.

PCA is determined by aggregating the risk capital amounts for each risk module and sub-risk module with respect to market risk, life insurance risk, general insurance risk, counterparty default and other risk, and operational risk, taking account of diversification benefits. The diagram below illustrates the list of all risk modules and the corresponding sub-risk modules.

PCA

Insurance (Marine Insurers and Captive Insurers) Rules (Cap. 41U) and Insurance (Lloyd's) Rules (Cap. 41V)  prescribe dedicated capital requirements for marine insurers and captive insurers, as well as Lloyd's accordingly.

Pillar 2

To implement Pillar 2 on qualitative requirements, the IA has issued the Guideline on Enterprise Risk Management (GL21) to set out the objectives and requirements on enterprise risk management for authorized insurers and the requirement to conduct an own risk and solvency assessment (“ORSA”).

Insurers are required to establish effective tools to identify, monitor, manage and mitigate risks exposed to them. Also, an ORSA Report should be submitted by an insurer to the IA at least annually.

Pillar 3

Pillar 3 refers to regulatory reporting to the IA and public disclosure requirements.

Insurance (Submission of Statements, Reports and Information) Rules (Cap. 41S) prescribe the information that insurers must submit to the IA, and the deadlines, frequency and methods of submission. The Rules also specify the requirements for submitting financial statements (prepared under generally accepted accounting principles), regulatory returns (prepared under the basis required under the Insurance Ordinance), auditor’s reports on the regulatory returns and reports on actuarial investigations or reviews.

The details of the regulatory returns can be found here. The IA will develop the details of public disclosure requirements for consultation in due course.

Reference Materials

Specified Risk-free Yield Curves

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