Hong Kong's government plans to offer a tax cut on captive insurers' profit in a bid to attract more offshore funds, particularly in what it sees as untapped captive insurance business from China's big corporations, according to the financial secretary's proposed budget for 2013-14.
The new policy aims to strengthen Hong Kong's position as an international asset management center, said Financial Secretary John Tsang in his proposed budget presentation. The government will reduce the profit tax on captive insurers' offshore insurance business so that they will enjoy the same tax concessions as those currently applied to reinsurance companies.
The 50% profit tax reduction for captive insurance companies is a favorable move for insurance industry in Hong Kong, given the city's proximity to China, where many big corporations are seeking alternative risk management options such as captive insurance, said Peter Tam, chief executive of the Hong Kong Federation of Insurers.
Singapore has been attracting captive insurance and reinsurance business over the past decade. Tam said Hong Kong has lagged behind Singapore in attracting such potential insurance business. He sees the tax incentive as a breakthrough for Hong Kong's effort to develop into a more comprehensive insurance sector.
Singapore is the largest captive insurance market in Asia with more than 60 captive insurers. Malaysia's offshore financial services center, Labuan International Business and Financial Center, has more than 30 captive insurers. Hong Kong only had two captive insurers with total premiums of HK$704.8 million (US$90.9 million) in 2010, according to the Office of the Commissioner of Insurance.
The minimum capital requirement for a captive insurer in Hong Kong is HK$2 million, compared with HK$10 million for a general insurance company. Hong Kong "is strategically positioned to serve the insurance needs" of China's huge and fast-growing market, said the OCI.
The China Insurance Regulatory Commission recently cleared the country's largest petroleum company, China National Petroleum Corp., to set up a property captive insurer as the first locally incorporated captive. Beijing-based CNPC and its subsidiary Petro China Co. Ltd. will jointly set up the captive insurer in western China's Karamay City in Xinjiang Uyghur Autonomous Region, with registered capital of 5 billion yuan (US$795 million).
Captives are an emerging insurance market in Asia, as the region's aviation, energy and construction businesses boom, according to insurance broker Willis Group. This is particularly true in China, where major oil companies are ready to set up captive insurers. The risk management needs of companies are becoming more sophisticated and they are starting to seek alternative insurance mechanisms, said Willis.
In China, captive insurance is a new market and some large companies can set up self-insurance funds, said Wenli Yuan, senior analyst at consultancy Celent. The oil and gas industry has its own special risks and normal commercial insurance products currently cannot cover all related risks, leaving an opening for captive insures, noted Yuan. The growth prospect of China's captive insurance business will be tied to Chinese enterprises' expansion and their decision to retain more risks due to improved risk management.