Hong Kong Insurance Regulator Issues Guidance for Reinsurance

Hong Kong's insurance regulator has issued a new guidance note covering reinsurance activities to streamline local regulations with international standards. The note makes reference to insurance principles and standards set out by the International Association of Insurance Supervisors ("IAIS"), of which Hong Kong's Office of the Commissioner of Insurance ("OCI") is a member. 

The guidance "sets out prudent practices pertinent to reinsurance management and the general guiding principles of the Insurance Authority in assessing the adequacy of the reinsurance arrangements of an insurer", the OCI said in the note. 

The OCI, a small government department overseeing a large self-regulated insurance industry in Hong Kong, is commonly referred to as the Insurance Authority. The OCI will also be replaced by 2018 with a new, independent insurance regulator, which is in the process of being set up. 

The regulator said the guidance note would apply to reinsurance, alternative risk transfer arrangements and arrangements with insignificant risk transfer, from 1 January 2017. 

Under s. 8(3)(c) of the Insurance Ordinance, an insurer is required to have adequate reinsurance arrangements in respect of its insurance business unless it can justify otherwise. 

"It is incumbent upon an insurer to adopt a prudent approach in arranging reinsurance cover for its insurance business," the OCI said. "Inadequacy in the arrangement of reinsurance may jeopardize the financial position of an insurer and affect its ability to meet the obligations to policyholders." 

The regulator said it may provide further guidance to insurers on prudent reinsurance practices through the issue of more guidance notes and circular letters, noting that authorized insurers are obliged to follow any applicable guidance provided.