A new guidance note on reinsurance for Hong Kong insurers (“GN17“) came into effect on 1 January 2017.
GN17 contains a number of general requirements with regard to the management and monitoring of reinsurance arrangements. The most significant changes in regulation are new approval requirements for certain alternative risk transfer and financial reinsurance transactions. The approval requirements are an important regulatory development since the Hong Kong regulator will now analyse those potentially complex transactions.
Alternative risk transfer: Alternative risk transfer arrangements (“ART“) under which risk is transferred to the capital markets using a special purpose vehicle (“SPV“) must now be approved in advance by the regulator, except for those entered into by pure reinsurers. SPVs are expected to be “fully-funded” and bankruptcy remote, and the Insurance Authority will take into account factors such as the ownership structure of the SPV, ranking and priority of payments, stress testing of cashflows in the SPV structure, the use of derivatives, and investment strategies as part of its assessment.
ART transactions are well-established in developed markets such as the US and Europe (where Hogan Lovells has advised on many significant transactions), but have so far been less common in Asia.
Arrangements with Insignificant Risk Transfer: Except for pure reinsurers, insurers must also seek approval from the regulator before entering into new arrangements with insignificant risk transfer (“IRT“) or varying such arrangements to a material extent. Insurers will be required to disclose detailed information in relation to such IRT to the regulator for assessment.
Certain types of financial reinsurance arrangements will be required to be assessed under the new IRT regime. This will be relevant to a number of Hong Kong insurers/reinsurers who enter into such arrangements.