Hong Kong Risk-Based Capital (“HKRBC”) Pulse Update - Participating Fund Management proposals

In the Participating (“Par”) Fund Management meeting held on 6th September, the Insurance Authority (“IA”) tabled a set of proposals on Par Fund Management. The proposals will take effect from the commencement date of the Insurance (Amendment) Ordinance 2023, which is the effective date of the HKRBC regime, aimed to be 1 July 2024. This date has been mentioned in the HKRBC Townhall IA held on 25 August 2023. The proposals cover:

1. Par fund set up, surplus transfer as well as expense/charge attribution to Par fund,
2. Physical segregation details, and
3. Enhanced governance including mandatory independent review for the initial implementation of fund requirements on Par funds.

The proposals impact all Hong Kong authorised insurers holding Par Funds in their portfolio, regardless of size. The physical segregation proposed requirement, however, will be exempted for insurers with less than HKD 1bn of Par liabilities.

Principles-based approach

IA has proposed a principles-based approach to cater for the diverse industry practices currently observed in Hong Kong on Par fund management. As such, there is a need for enhanced governance and disclosures to drive firms’ behaviour and the proposals include:

• Mandatory independent review for the initial implementation of fund with the report submitted to the IA within 6 months after commencement date of the Insurance (Amendment) Ordinance 2023;
• Setting up a Par Business Committee, and
• Enhancing Par Business corporate policy in areas of surplus distributions and expenses and charges attributions, with a goal to align interests between participating policyholders and shareholders. 

There will be further elaboration on the governance topic, details around public disclosure, and details around Par Business Committee which IA plans to share later in 2023.
 

Our thoughts and next steps

Industry was asked to provide feedback on the proposals by 22 September 2023. Deloitte welcomes the direction of travel as these proposals can improve fairness between policyholders and shareholders and enable insurers to meet policyholders’ reasonable expectations. However, there are various aspects of the proposals we believe would benefit from further consideration and clarity to ensure the proposals meet the intended purpose. We have provided input with our suggestions through the Actuarial Society of Hong Kong (“ASHK”) which formally responded to IA’s proposals on 22 September 2023. Post feedback on the proposals, IA aims to publish a Par Fund Management Guideline in December 2023. The guideline will be effective at the commencement of the Insurance (Amendment) Ordinance 2023, targeted to be 1 July 2024.

How insurers can prepare

As the proposals will likely involve significant effort for many insurers managing Par funds, we suggest insurers start their preparation as soon as possible and ahead of the final guideline being published. Deloitte suggests the following approach:

1. Identify gaps against the key areas of the Par Fund Management proposals. For example, for insurers not using asset share methodology, a change to asset share or to present value (PV) of expected future cash flows allowing for the latest illustrative dividend scale and future shareholder transfers, would be an expected gap.
2. Develop a robust approach to address gaps. Insurers may need to address data, methodology, modelling, system, operational and governance gaps including performing impact assessments, considering any knock-on impacts on other internally and/or externally reported metrics, potential impacts on Strategic Asset Allocation and Asset-Liability Management.
3. Develop and execute a phased implementation plan considering resources required, key milestones, dependencies, deliverables and costs.

If you have any questions or require support, please contact our professionals:

Dhiran Dookhi
Partner, Actuarial
+852 9500 9681
ddookhi@deloitte.com.hk

Francesco Nagari
Partner, Hong Kong FSI Leader
+852 2852 1977
frnagari@deloitte.com.hk

Ronald Chan
Partner, Strategic Accounting Solutions
+852 2852 6717
ronchan@deloitte.com.hk