The Hong Kong Insurance Agency (“HKIA”) recently announced that the China Banking and Insurance Regulatory Commission (“CBIRC”) has agreed to grant preferential treatment to Hong Kong reinsurers. Shortly thereafter, on July 2, the CBIRC promulgated the “Notice on Issuing the Solvency Regulatory Rules for Insurance Companies” (“Notice 34”). Notice 34 provides that, when a Chinese insurer cedes risk to a qualified Hong Kong reinsurer, the capital requirement of the Chinese insurer will be reduced.

Notice 34 is a significant breakthrough because China’s risk-based solvency regime, the China Risk-Oriented Solvency System (“C-ROSS”), effectively requires that Chinese insurers maintain a higher reserve ratio if they cede risk to offshore reinsurers. This creates a disincentive for Chinese insurers to reinsure offshore. Notice 34 changes this by reducing the capital requirement for Chinese insurers when they cede risk to qualified Hong Kong reinsurers, thereby removing the disincentive.

Notice 34 will doubtless increase the prominence of Hong Kong reinsurers and brokers in China’s reinsurance sector. In particular, it will enable Hong Kong reinsurers to play a major role in reinsuring One Belt One Road projects, which are a major economic and foreign policy priority of the Chinese government. The favorable treatment of Hong Kong reinsurers is not restricted to One Belt One Road projects, however. Indeed, Notice 34 is part of a much broader movement to integrate the insurance markets, and ultimately the entire economies, of Hong Kong and China.

By way of background: on May 16, 2017, the CBIRC’s predecessor, the China Insurance Regulatory Commission, concluded a framework agreement with the HKIA’s predecessor, the Office of the Commissioner of Insurance, to achieve mutual recognition that the solvency regimes of China and Hong Kong are equivalent (“Framework Agreement”). Mutual equivalence recognition is meant to increase cooperation between the two regulators, provide regulatory and supervisory convenience, and prevent administrative overlap. Under the Framework Agreement, the CBIRC and the HKIA will complete an equivalence assessment of their solvency regimes within four years. This assessment will take place in tandem with Hong Kong’s development of its own RBC regime. Notice 34 is the one of the first steps in the transition to mutual recognition.

Notice 34 and the Framework Agreement are best understood in the context of the Greater Bay Area Initiative, a much broader effort to economically integrate the Hong Kong and Macao Special Administrative regions with the surrounding Chinese cities of the Pearl River Delta. The Greater Bay Area encompasses some of China’s largest cities, including Shenzhen and Guangzhou, and has a population of approximately 66 million. This burgeoning mega-city will play a key role in China’s Belt and Road Initiative and in its economy as a whole. Further integration of Hong Kong’s economy into the Greater Bay Area will likely provide additional opportunities for foreign insurers and insurance intermediaries to access China’s insurance market.