The Insurance Authority (IA) of Hong Kong has rolled out a framework to identify and supervise Domestic Systemically Important Insurers (D-SIIs), a move designed to bolster the resilience of the city’s financial system.
The initiative reflects a broader trend among global regulators to address potential vulnerabilities posed by large, interconnected insurance companies.
Under the new regime, the IA will conduct a two-stage assessment to determine which insurers are considered systemically important within Hong Kong.
The first stage relies on quantitative indicators, including total assets, market share, financial interconnectedness, and liquidity position.
Each factor is assigned a specific weight, with size accounting for 40% of the assessment, followed by substitutability and interconnectedness at 25% each, and liquidity at 10%.
The size metric is based on the insurer’s total assets, while substitutability examines the insurer’s market share and the difficulty of replacing its services, especially in specialized segments such as mortgage or credit insurance.
Interconnectedness is evaluated through the insurer’s exposure to derivatives and borrowings, which can signal broader links to the financial system.
Liquidity is measured by the insurer’s ability to meet short-term obligations without causing market disruption.
After the quantitative review, the IA applies a qualitative overlay to capture factors not reflected in the numerical analysis. This may include the existence of contingency arrangements, government support mechanisms, or other mitigating elements that could reduce systemic risk.
The IA also considers feedback from the insurers under review.
Following the first application of the framework, AIA Group Limited and Prudential Corporation Asia Limited have been designated as D-SIIs.
Both companies operate as Internationally Active Insurance Groups and are already subject to group-wide supervision.
The IA will revisit these designations annually to ensure ongoing relevance and alignment with market developments.
D-SIIs will face enhanced supervisory expectations, including more stringent capital and risk management requirements.
The IA intends to recommend that all D-SIIs be brought under the Financial Institutions (Resolution) Ordinance (Cap. 628), which provides authorities with expanded tools for resolution planning and crisis management.
“An annual assessment is deemed to be appropriate to allow the IA to closely monitor developments over time and to identify in a timely manner which insurers might need to be added, or rather be removed, from the list of insurers deemed systemically relevant,” the IA said in a statement.
The IA added: “The annual assessment also allows the IA to closely monitor insurers that come close to becoming systemically important in Hong Kong and establish a range of policy measures to reduce their probability of, as well as the extent or impact of their failure.”
The IA’s approach is informed by the Holistic Framework established by the International Association of Insurance Supervisors (IAIS), which emphasises sector-wide monitoring and crisis preparedness.
The IAIS framework, adopted in 2019, shifted the focus from identifying global systemically important insurers to a more comprehensive, jurisdiction-specific assessment of systemic risk.
Hong Kong’s D-SII framework is designed to remain flexible, with the IA committed to reviewing its methodology in light of international developments and evolving industry practices.
Data for the assessment will be drawn from existing regulatory submissions, with additional information requested as needed.
Insurance professionals are encouraged to stay informed about the D-SII framework and its implications for compliance, risk management, and supervisory engagement.
The IA will continue to provide updates as the regime evolves and as new assessments are conducted.
