Professor Joe Zou and 張倩倩

12 November 2025

In this column last week, we analysed the advantages of captive insurance companies in risk management and cost control. However, not all companies are suited to establishing their own captive insurers. What does it take for companies to achieve the intended risk-diversification objectives while avoiding the creation of new sources of risk?

Addressing potential risks and limitations

To reap the benefits of captive insurance, companies must have substantial scale, robust capital strength, all-rounded management capabilities, and detailed loss records to facilitate accurate risk pricing. To this end, they should undertake a thorough assessment of their risk characteristics and capital requirements, integrating actuarial analysis with tax and legal advice, 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 (see Note 1).

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 in damages and, due to insolvency, was placed into mandatory receivership by the Vermont Superior Court. The court also required the termination of all in-force CARE RRG policies and suspended payment of claims for 60 days (see Note 2). This case demonstrates that in high-risk, long-tail lines of business such as medical professional liability insurance, the RRG model is especially vulnerable.

Although relevant academic studies are few and far between, they nonetheless indicate that the theoretical benefits of captive insurance companies are difficult to achieve. As hypothesized by Porat and Powers, the establishment of captive insurers is mainly intended to enhance the status and reputation of corporate risk managers rather than to increase shareholder value, which may reflect management’s agency problem (see Note 3). Scordis and Porat offer empirical evidence in support of this hypothesis―the stronger a company’s free cash flow, the greater its volatility, and the fewer its investment opportunities, the higher the likelihood of forming a single-parent captive insurance company (see Note 4). Cross, Davidson, and Thornton find that if premiums paid by the parent company to its captive insurer are tax deductible, there is a positive reaction to the company’s stock price; otherwise, the reaction is negative (see Note 5). Schmit and Roth reveal that companies using a captive insurer may in fact face higher costs of risks (see Note 6). Adams and Hillier, in a study of 91 American companies announcing the formation of captive insurers, find no significant positive reaction from the stock market (see Note 7).

Striving to catch up by following Singapore’s example

In June 2012, the Central Government encouraged Mainland companies to set up their own captive insurers in Hong Kong. The Hong Kong SAR Government actively promoted the initiative the following year, introducing measures that included: reducing profits tax by half for captive insurers from the fiscal year 2013–14; promoting Hong Kong’s advantages in risk management to Mainland enterprises from 2014; extending the profits tax reduction treatment to onshore risk business from the fiscal year 2018–19, thereby lowering the effective profits tax rate down to 8.25% (below Singapore’s 10%); and broadening the scope of insurable risks for captive insurers through the Insurance (Amendment) Bill 2020 implemented in March 2021.

As of August 2025, while there were only six captive insurers in Hong Kong, i.e. CGN Captive Insurance Limited, Sinopec Insurance Limited, CNOOC Insurance Limited, Shanghai Electric Insurance Limited, SAIC Motor Insurance Limited, and Wayfoong (Asia) Limited, the first multinational captive insurer registered in Hong Kong established by HSBC, this demonstrates that apart from meeting the needs of Chinese enterprises, Hong Kong is also equipped to attract international financial institutions to set up high-level risk financing structures. Since Singapore has already become a captive insurance centre in Asia, with 89 captive insurers by the end of June 2025, Hong Kong must strive to catch up.

Ideal conditions and market potential

In addition to possessing a banking industry and a capital market of international standard and scale, Hong Kong is also one of the leading international insurance centres. As of June 2025, there were 107 commercial insurance companies registered in Hong Kong, providing property and liability insurance, with total gross premiums of HK$100.5 billion in 2024. By comparison, Singapore had 79 such companies in 2024, with total gross premiums of HK$63 billion. This provides Hong Kong with an insurance and actuarial talent pool, as well as reinsurance services, supporting its development into a captive insurance centre. Similar to Singapore, Hong Kong has a sound common law system, free capital flows, and an internationally aligned insurance regulatory framework. The city also draws together a wealth of professional service resources, ensuring strong talent support for captive insurance operations.

Not only does Hong Kong offer profits tax concessions to captive insurers, it also has more lenient approval conditions, with minimum capital requirement set at HK$2 million―slightly lower than the S$400,000 required in Singapore. Moreover, Hong Kong’s unique advantage lies in its dual role as a window for foreign investment into the Chinese Mainland and a bridgehead for Mainland companies expanding overseas. Mainland China has no shortage of outstanding enterprises in the shipping, new energy, and nuclear sectors, all with a strong demand for state-of-the-art risk management tools. This has created invaluable opportunities for Mainland enterprises to set up captive insurers in Hong Kong. As a matter of fact, five out of the six existing captive insurers in Hong Kong are founded by Mainland enterprises. The decision of HSBC to locate its captive insurer in Hong Kong precisely hinges on the city’s role as a gateway to the Mainland and its close ties with other international financial centres and the global reinsurance market.

Government to take the lead in meticulous planning

The fact that Singapore has become a main insurance centre in Asia can be put down to its first-mover advantage, long-standing industry experience, and sophisticated captive-insurance ecosystem. Since the early 1980s, Australian parent companies began forming captive insurers in Singapore, followed by Japanese multinationals. From 2000 onwards, the Singaporean government actively pursued a strategy to build a captive-insurance hub, and the country gradually perfected a mature and international ecosystem encompassing a full range of captive management, legal, accounting, banking, and investment services.

In comparison, Hong Kong was a relatively late starter, with one of the hurdles being the absence of comprehensive services and an ecosystem to support captive insurers. Unlike general-purpose accounting principles which focus on investor decision-making, statutory accounting principles prioritize safeguarding an insurer’s solvency through conservative recognition of assets and liability provisions. While Hong Kong is a financial centre with sound foundational services, it will still take time to perfect its captive insurance ecosystem. We suggest that the SAR Government continue to develop complementary professional services, including nurturing talent in captive insurance management, accounting, and law.

Another challenge facing Hong Kong is the general lack of understanding among senior management of Mainland enterprises about establishing captive insurers for risk management, which has resulted in insufficient demand for such a solution. The SAR Government should take the initiative to set up dedicated task forces to strengthen publicity and promotion to Mainland enterprises and risk management professionals. At the same time, the Administration should keep refining policies and regulatory measures to attract captive insurers to Hong Kong, enabling companies to not only enjoy tax concessions but also manage risks more effectively. This, in turn, is likely to expedite the enhancement of Hong Kong’s competitiveness in the regional captive insurance market.

Note 1: “3 Lessons from the Spirit Commercial Auto RRG Failure.” Captive.com, International Risk Management Institute, Inc., 27 March 2019, www.captive.com/news/3-lessons-from-the-spirit-commercial-auto-rrg-failure.

Note 2: Simpson, Andrew G. “Vermont Takes Over Medical Liability Insurer CARE RRG Facing $35.4M Judgment.” Insurance Journal, 28 April 2025, www.insurancejournal.com/news/east/2025/04/28/821485.htm.

Note 3: Porat, M. Moshe, and Michael R. Powers. “Captive insurance tax policy: Resolving a global problem.” The Geneva Papers on Risk and Insurance-Issues and Practice 20.2 (1995): 197–229.

Note 4: Scordis, Nicos A., and M. Moshe Porat. “Captive insurance companies and manager-owner conflicts.” Journal of Risk and Insurance (1998): 289–302.

Note 5: Cross, Mark L., Wallace N. Davidson, and John H. Thornton. “Taxes, stock returns and captive insurance subsidiaries.” The Journal of Risk and Insurance 55.2 (1988): 331–338.

Note 6: Schmit, Joan T., and Kendall Roth. “Cost effectiveness of risk management practices.” Journal of Risk and Insurance (1990): 455–470.

Note 7: Adams, Mike, and David Hillier. “Do Insurance Captives Enhance Shareholders’ Value?.” Risk Management 4.1 (2002): 29–39.