As economic growth in Asia continues and new markets develop, the types and magnitude of risk exposure for enterprises (particularly those involved in aviation, energy and construction) increases. Transnational corporations are, therefore, looking to develop alternative insurance structures to bridge the gaps in and reduce the costs associated with the normal insurance market. Forming a corporation’s own captive insurer is one such solution.

The Hong Kong government hopes that enterprises (particularly large scale Chinese corporations) now considering setting up their own captive insurers will look to Hong Kong as an alternative to the Singapore market.

Over the past decade, Singapore has largely dominated the captive insurance and reinsurance market in Asia by offering tax exemptions for qualifying income derived from insuring and reinsuring offshore risks. In a bid to combat Singapore’s dominance and attract more enterprises (particularly China’s large corporations) to form their captive insurers in Hong Kong, the Financial Secretary of Hong Kong (Financial Secretary), in his 2013/14 budget speech on 27 February 2013, proposed to extend the concessionary profits tax rate for offshore reinsurance currently enjoyed by reinsurers (being 50% of the normal profits tax rate in Hong Kong) to the offshore insurance business of captive insurers.

In addition to the Financial Secretary’s proposal, there are a number of regulatory concessions already available in Hong Kong to captive insurers,

including:

  • lower minimum capital requirements
  • lower solvency requirements
  • an exemption from the requirement to maintain assets in Hong Kong
  • the valuation of assets and liabilities on the basis of Generally Accepted Accounting Principles and not in accordance with the Insurance Companies (General Business) (Valuation) Regulation

Taken together, these radical new, and the more established, concessions are giving considerable food for thought to the more substantial and sophisticated companies currently exploring ways of rationalising their insurance structures and achieving potentially significant costs savings.