Strategic Layout and Opportunities for Developing Captive Insurers in Hong Kong
Last week, this column analysed the advantages of captive insurers in risk management and cost control. However, not every enterprise is suited to establishing a captive insurer. What conditions must be met in order to achieve the intended risk diversification, while avoiding the creation of new sources of risk for the enterprise?
Facing Up to Potential Risks and Limitations
To realise the benefits of captive insurance, an enterprise must be large in scale, have solid capital strength, possess comprehensive management capabilities, and maintain adequate loss records, so that risks can be priced accurately. Enterprises should therefore conduct actuarial analysis, together with tax and legal advice, to assess their risk profiles and funding needs in advance, to ensure that their captive insurers can help to control costs while enhancing the company’s overall financial resilience.
Since captive insurers retain most of their risks within the company, insufficient reserves or investment losses may lead to insolvency. Given that companies owning captive insurers are by nature non-insurance entities, in the absence of professionals such as actuaries or underwriting managers, accurate risk evaluation and pricing are out of the question, making it difficult to safeguard financial security.
Take the Spirit Commercial Auto Risk Retention Group in the US, for example. Formed by a coalition of trucking companies to provide commercial vehicle liability insurance, the group was declared insolvent and placed into receivership by the Eighth Judicial District Court of Nevada in February 2019. The collapse of Spirit highlights the structural vulnerability of the risk retention group (RRG) model: insufficient capital and reserves can heighten operational risks, and the board’s lack of insurance experience means that risk management and financial oversight are little more than mere window dressing. As RRGs are not protected by state guaranty funds, once they go bankrupt, policyholders must seek replacement coverage themselves and bear any potential unpaid claims.
In the realm of medical professional liability insurance, in April 2025, CARE RRG—an entity owned by CARE Professional Liability Association—having failed to reach a timely settlement in a medical malpractice arbitration case, was ordered to pay US$35.4 million. Declared insolvent, it was placed into mandatory receivership by the Vermont Superior Court; the court also ordered the cancellation of all CARE RRG policies in force and a 60-day suspension of claim payments. This case shows that the RRG model is particularly unstable in high-risk, long-tail lines such as medical professional liability.
Although academic research on this topic remains limited, it is sufficient to show that the theoretical benefits of captive insurers are not easily realised. According to Porat and Powers, firms establish captive insurers mainly to enhance the status and prestige of corporate risk managers, rather than to create shareholder value, which may reflect managerial agency problems. Scordis and Porat provide supporting empirical evidence for this hypothesis, finding that firms are more likely to establish single-parent captive insurers when they have abundant free cash flow, higher volatility in free cash flow, and fewer investment opportunities. Cross, Davidson and Thornton find that when premiums paid by a parent company to its captive insurer are tax-deductible, the stock market reacts positively; otherwise, the reaction is negative. Schmit and Roth find that firms using captive insurers actually face higher risk costs. Adams and Hillier examine 91 US firms announcing the establishment of captive insurers and find no significant positive stock market reaction.
Learning from Singapore and Catching Up
In June 2012, the central government encouraged mainland enterprises to establish captive insurers in Hong Kong. The SAR Government actively promoted this initiative the following year, with key measures including: halving profits tax on offshore risk business of captive insurers from 2013–14; promoting Hong Kong’s advantages in risk management to mainland enterprises from 2014; extending the 50% profits tax concession to onshore risk business in 2018–19, reducing the effective profits tax rate for captive insurers to 8.25% (lower than Singapore’s 10%); and implementing the Insurance (Amendment) Ordinance 2020 in March 2021, which broadened the scope of insurable risks for captive insurers.
As of August 2025, although there were only six captive insurers in Hong Kong—CGN Insurance Company Limited, Sinopec Insurance Company Limited, CNOOC Insurance Limited, Shanghai Electric Insurance Company Limited, SAIC Insurance Company Limited, and Wayfoong (Asia) Limited, established by HSBC in May 2025 as the first multinational enterprise captive registered in Hong Kong—the market has demonstrated that, in addition to meeting the needs of Chinese-funded enterprises, Hong Kong also possesses the capacity to attract international financial institutions to establish sophisticated risk financing structures. Given that Singapore has become Asia’s captive insurance hub, with 89 captive insurers as at end-June 2025, Hong Kong needs to intensify its efforts to catch up.
Favourable Conditions and Market Potential
Hong Kong not only has a banking sector and capital market of international scale and standard, but is also one of the world’s international insurance centres. As at June 2025, Hong Kong had 107 registered commercial insurers offering property and liability insurance, with total gross premiums of HK$100.5 billion in 2024. By contrast, Singapore had 79 such insurers in 2024, with total gross premiums of HK$63 billion. This provides Hong Kong with a pool of insurance and actuarial talent, as well as reinsurance services, to support the development of a captive insurance hub. Like Singapore, Hong Kong has a well-established common law system, free capital flows, and an insurance regulatory framework aligned with international standards. Hong Kong also boasts abundant professional service resources, providing talent support for captive operations.
In addition to offering profits tax concessions, Hong Kong’s approval requirements for captive insurers are relatively lenient, with a minimum capital requirement of HK$2 million, slightly lower than Singapore’s S$400,000. Moreover, Hong Kong’s unique advantage lies in its role as a gateway for foreign investment into the Chinese mainland and as a springboard for many mainland enterprises going global. The mainland has leading enterprises in shipping, new energy and nuclear power, which have strong demand for new risk management tools. This creates a rare opportunity to attract mainland enterprises to establish captive insurers in Hong Kong. Indeed, five of Hong Kong’s current six captive insurers were established by mainland enterprises. HSBC’s decision to locate its captive in Hong Kong reflects the city’s gateway status to the mainland, as well as its close links with international financial centres and the global reinsurance market.
Government-Led and Comprehensive Planning
Singapore has become Asia’s leading captive hub thanks to its first-mover advantage, accumulated industry experience and a well-developed captive ecosystem. Since the early 1980s, Australian parent companies began establishing captive insurers in Singapore, followed by Japanese multinationals. From 2000, the Singapore Government actively pursued a strategy to build a captive hub, gradually forming a mature and internationalised captive ecosystem covering captive management, legal, accounting, banking and investment services.
By contrast, Hong Kong started later, and one current obstacle is the absence of a complete service ecosystem to support captive insurers. Captive institutions typically apply statutory accounting principles, which prioritise solvency through conservative asset recognition and liability provisioning, differing from general accounting principles that focus on investor decision-making. Although Hong Kong is a financial centre with sound basic services, it will take time to build a comprehensive captive insurance ecosystem. It is recommended that the SAR Government continue to develop supporting professional services, including talent cultivation in captive management, accounting and law.
Another challenge facing Hong Kong is that executives of mainland enterprises generally lack understanding of using captive insurers for risk management, resulting in insufficient demand. The government should take proactive steps by setting up dedicated task forces to strengthen promotion and outreach to mainland enterprises and risk managers, while continuing to optimise policies and regulatory measures to attract captive insurers. This would allow enterprises to benefit from tax concessions while conducting risk management more efficiently. Such efforts should help accelerate the enhancement of Hong Kong’s competitiveness in the regional captive insurance market.
Source:Professor Hong Zou, Professor of Finance, HKU Business School; Qianqian Zhang, PhD Candidate in Finance, HKU Business School
