Market participants that have entered into derivatives or repurchase arrangements with insurers subject to the Insurance Ordinance (Cap. 41) (the “IO”) in Hong Kong may find the forthcoming updates to the IO of interest.
Insurance (Amendment) Ordinance 2023
The Insurance (Amendment) Ordinance 2023 (the “Insurance Amendment Ordinance”) was passed by the Hong Kong Legislative Council on 14 July 2023 and is expected to come into operation on 1 July 2024. The Insurance Amendment Ordinance will provide some key updates and amendments to the IO to bring the IO in line with international standards, most notably the introduction of a risk based capital regime. From the perspective of derivative counterparties, the key changes are as follows:
Definitions of various ‘insurers’
The Insurance Amendment Ordinance introduces new definitions for HK insurer, non-HK insurer and designated insurer:
- a HK insurer is an authorized insurer that is incorporated in Hong Kong;
- a non-HK insurer is an authorized insurer that is not a HK insurer; and
- a designated insurer is a non-HK insurer that is designated by the Insurance Authority (the “IA”) as a designated insurer.
For non-HK insurers that are not designated insurers, the below requirements still apply, but generally only in respect for the insurer’s long term business carried on in or from Hong Kong, with specific carve-outs and conditions.
The IA will have power to designate a non-HK insurer as a designated insurer where, in the opinion of the IA, the non-HK insurer carries on a majority of its insurance business in or from Hong Kong. The requirements imposed on designated insurers regarding valuation, capital and funds requirements, and approval of certain personnel are aligned with the requirements imposed on HK insurers. It is not yet known which insurers will be designated.
Change in requirements to maintain separate accounts and funds in respect of long term businesses
The current IO requires insurers that carry out long term business to maintain a separate fund for each class of its long term business and segregate assets and liabilities attributable to each class of its long term business. In practice this means that a counterparty to derivative transactions with an insurer currently needs to ensure that separate ISDAs are maintained for each class of long term business carried on by that insurer. The Insurance Amendment Ordinance amends this so that a HK insurer and a designated insurer that carries on long term business would only be required to maintain an account and separate fund in respect of Class C (linked long term), Class G (retirement scheme management category I), Class H (Linked long term) long term insurance businesses and specified business (i.e. Classes A, B, D, E, F or I long term business).
Participating business
A participating business is any long term business in relation to which a policy holder has a right to receive (at the insurer’s discretion) a financial benefit determined based on a profit sharing mechanism as a share of the insurer’s profits in respect of the insurer’s business or a part of the insurer’s business. The Insurance Amendment Ordinance introduces a new requirement for a HK insurer and a designated insurer that carries on long term business, that maintains a fund that is a specified business (i.e. Classes A, B, D, E, F or I long term business), and that also maintains a participating business, to maintain at least 1 separate account and 1 separate sub-fund within the specified business fund for the part of the specified business that is a participating business.
These changes may have an impact on derivative (ISDA) or repurchase (GMRA) arrangements with insurance companies, as the requirement for separate accounts and funds in respect of long term businesses will impact the assets to which recourse is available in the event of the winding-up of an insurer and how netting should be effected under those derivative or repurchase arrangements. A counterparty will want to review their existing ISDA and GMRA arrangements to make sure that recourse is to the right fund of business and that their documentation does not purport to net across funds.
For further information, please contact:
I-Ping Soong, Partner, Linklaters
i-ping.soong@linklaters.com
