On 16 May 2017 the CIRC and the Hong Kong Office of the Commissioner of Insurance (“OCI“) entered into a framework agreement aimed at mutual recognition of solvency regimes between Mainland China and Hong Kong.

China adopted a risk-based capital regime, C-ROSS, with effect from 1 January 2016. In Hong Kong, the consultation on a risk-based capital regime is ongoing (with a first quantitative exercise expected to occur later this year), and it is likely that such a regime will be introduced in a few years’ time.

China’s C-ROSS currently accords unfavourable capital treatment to reinsurance with reinsurers which are not authorised by the CIRC, i.e. reinsurers conducting business in Mainland China on a non-admitted basis subject to the registration system established by the CIRC. Insurers and reinsurers authorised in Hong Kong are not currently treated differently from other overseas reinsurers for those purposes. Hong Kong authorised reinsurers would therefore be likely to benefit from recognition of Hong Kong’s solvency regime as equivalent under C-ROSS.

Hong Kong’s risk-based capital regime will contain provisions on group supervision, and it is likely that lighter group solvency requirements will apply to insurance groups supervised by a regulator in a jurisdiction whose solvency regime is equivalent to Hong Kong’s new regime. The equivalence issue may also be relevant to the capital treatment of reinsurance with overseas reinsurers under the Hong Kong risk-based regime. Chinese insurance groups and reinsurers would therefore be likely to benefit from mutual recognition of solvency regimes between Mainland China and Hong Kong.

The next step is for the CIRC and the Hong Kong regulator (which will be the independent Insurance Authority from 26 June 2017) to assess the current situation and work out a more detailed proposal for the equivalence regime. According to a news briefing on the OCI website, the goal is for the equivalence assessment to be completed within four years.

Before completion of the assessment, a transitional arrangement will apply under which the two solvency regimes will be recognised as equivalent (or similar) on a provisional basis. The effects of the transitional arrangement are not clear. Both regulators have certain powers or discretions in relation to solvency requirements, which could be used in favour of insurers (or insurance groups) subject to the respective other regime. From the CIRC’s perspective, it may be somewhat inconsistent to do so based on the current state of affairs since C-ROSS is significantly more sophisticated than the current Hong Kong regime in terms of assessing the various risks to which insurers are subject.

The CIRC has been very protective of China’s domestic insurance and reinsurance industry, so the mutual recognition initiative is a promising step. To what extent the CIRC will be willing to grant preferential treatment to Hong Kong authorised insurers, and what the immediate benefits for Mainland insurers will be under the Hong Kong regime, will only become clear once more details of the mutual recognition regime emerge.