ASHK Risk Management Regional Conference · Regulatory powers on insurance companies Necessary to...

ASHK Risk Management Regional ASHK Risk Management Regional

ConferenceConference

Mr Allan Yu

Governing Committee Member

The Hong Kong Federation of Insurers

7 May 2013

2

Overview of the Hong Kong Overview of the Hong Kong

Insurance MarketInsurance Market

� Total gross premiums in 2012 :

HK$255.2 billion (12.5% of Hong Kong’s GDP)

◦ life premium: HK$215.9 billion

◦ general insurance premium: HK$39.3 billion

� 154 authorized insurers (91 general insurance insurers, 44 life insurers & 19 composite insurers)

� 604 authorized insurance brokers with 8,798registered persons

� 65,438 registered insurance agents/technical representatives

Total work force > 85,000

3

Current Regulatory Regime Current Regulatory Regime

� The current regulator is the Office of Commissioner of Insurance (OCI), a government department under the Financial Services and the Treasury Bureau

� Direct supervision of insurers by OCI:

◦ capital requirement

◦ solvency requirement

◦ fitness & properness of management and shareholders

◦ adequacy of reinsurance arrangements, etc

� Self-regulation for insurance intermediaries through Self-Regulatory Organizations (SROs) as authorized by OCI:

◦ business conduct

◦ licencing and administration of registered persons

The 3 SelfThe 3 Self--regulatory Organizationsregulatory Organizations

HK Confederation of Insurance

Brokers

Insurance Agents Registration Board

Professional Insurance Brokers

Association

Insurance Companies OrdinanceInsurance Companies Ordinance

Impending Regulatory Changes in Impending Regulatory Changes in

Hong Kong Hong Kong

1. Establishment of an Independent Insurance Authority (IIA)

2. Risk-Based Capital Framework

(RBC)

3. Policyholders’ Protection Fund

(PPF)

1) Establishment of an 1) Establishment of an

Independent Insurance Independent Insurance

Authority (IIA)Authority (IIA)

Supervise insurers

(prudential

supervision)

Maintain general

stability of the

insurance market

Protect policyholders’

interests

Proposed Additional Functions

Thematic researches

& studies

Existing Principal Functions

Functions of an Independent Functions of an Independent

Insurance AuthorityInsurance Authority

From From selfself--regulation to regulation to

directdirect regulationregulation

Supervise

intermediaries

(conduct supervision)

Consumer education

Independence of the Insurance Independence of the Insurance

Authority (IIA) Authority (IIA) -- Aims:Aims:

� For regulatory, operational and financial

independence from the Government

� To replace the Office of the Commission of

Insurance (OCI) & regulate the entire insurance

industry in Hong Kong

� Withdrawal of Self-regulation System in HK

� For better regulation of insurers and

intermediaries

� To enhance policyholder’s protection



� Levy of 0.1% on insurance premiums for all insurance policies

� IIA the primary and lead regulator of all insurance intermediaries, including banks

� Specific powers delegated to HK Monetary Authority (HKMA) for overseeing banks selling insurance products

� IIA to be set up by 2015


Authority (IIA) Authority (IIA) –– industryindustry’’s positions position

� An interactive Focus Group discussion was

organized to gather views of direct insurers,

reinsurers, associations of insurance

intermediaries and the legal profession in

December 2012.


Authority (IIA) Authority (IIA) –– Industry positionIndustry position

� On 5 February 2013, HKFI submitted an industry

position paper to the Financial Services and the

Treasury Bureau (FSTB).

� Presenting detailed comments on individual

clauses of the key legislative proposals.

Full version of submission:

http://www.hkfi.org.hk/en_media_20130205.html


Authority (IIA) Authority (IIA) –– Industry position

� In essence, the HKFI supports the proposal.

� But a number of areas where the policy

objectives are not that clear.

� The related legislative wordings would require further clarity and refinement.



Our major concerns on key areas:

1. Regulatory powers on insurance companies

� Necessary to ensure that insurers understand

their regulatory obligations and that any powers will be exercised by the IIA in

accordance with, and subject to, a proper and transparent framework.

� Proposals do not provide sufficient clarity to

the obligations of insurers



2. Appointment of an Responsible Officer (RO)

� Licensed insurance agents and brokers are required to

appoint a RO who will be responsible for ensuring internal

control and procedures are in place to prevent misconduct

of the insurance intermediaries.

� Every authorized insurer must also appoint a RO and its CEO

will be deemed the RO overseeing the conduct of its

appointed insurance agents.

(our views: too much burden on the CEO to assume the

mandatory duties as RO in an insurance company; suggest

the CEO to delegate and appoint this duty to an

experienced and qualified person as RO for agency

management)



3. Disciplinary sanctions on insurance intermediaries◦ Present Proposal:

Impose a pecuniary penalty upon insurance intermediaries of up to $10,000,000 or three times the amount of any profit gained or loss avoided as a result of misconduct, whichever is the greater.

� The maximum financial penalty for disciplinary offences by accountants, solicitors and barristers - $500,000;

� medical practitioners - no financial penalty;

� under s. 113C of the Criminal Procedure Ordinance for general criminal offences is a fine of Level 6, being $50,001 to $100,000.

(our views: the penalty is grossly excessive)



4. Representation at the Governing Board and Industry Advisory Committees

◦ Present proposal:

� 1-2 non-executive directors on the Board of the IIA (Chairman + CEO+ not fewer than 6 directors) will be persons appointed on the basis of their experience in the industry.

(our views: not sufficient representation)

� There will also be two industry advisory committees to advise the Board on long-term business and general business

� No maximum limit on Board membership

(our views: expose the industry to the risk of being vastly under-represented)



4. Representation at the Governing Board and Industry Advisory Committees (cont’d)

◦ Recommendations

� At least 3 non-executive directors in the Board

of Directors are from the insurance industry (one each from Life, General Insurance and Insurance Intermediary market)

� There should be a representative each from Life and General Insurance industry sector on each committee .



5. Roles and Functions of the IIA

� Focused primarily on regulating the industry? OR

prefer the future regulator assuming a bigger and wider role as a market enabler, providing impetus

to the healthy growth of the market and

promoting Hong Kong as an insurance/reinsurance centre/captive insurance

hub in Asia?

� Should the IIA be tasked to help attract, train,

develop and retain talents instead of being seen to be introducing new sets of penalties to frighten

approximately 74,200 intermediaries off?



6. Transitional Arrangement

� Should the government set up a provisional

body of the IIA to ensure a smooth and

seamless transition?

� To preserve the regulatory expertise and experience accumulated by the industry, should

the IIA consider retaining the services of the professionals serving on the “Insurance

Agents Registration Board” under HKFI?


Authority (IIA) Authority (IIA) –– Way ForwardWay Forward

� Step up dialogue with our stakeholders including the media and lawmakers to

ensure that the final regulatory framework is sensible and practical.

2) Risk2) Risk--Based Capital Based Capital

FrameworkFramework

RiskRisk--based Capital Framework for based Capital Framework for

Insurance Business in HKInsurance Business in HK

� Consultancy study being conducted by KPMG, consultant for the IA

� HKFI has set up Task Forces under its Governing

Committee, GIC and LIC

� Meeting held with KPMG to discuss scope, solvency

capital, measurement of assets and liabilities etc



Our major concerns:

� The time frame and possible approach which the Government may have formulated

� Few questions raised for the OCI’s consideration:

◦ if the Government will quickly execute and implement RBC framework as one of top priority areas to be pursued by the IIA right after its establishment in 2015.

◦ Would such an important regulatory requirement be implemented in phases or at one go with very limited preparatory time for insurers?

◦ What would be the likely impact on the Hong Kong insurance market?

◦ Would the demand for additional capital to meet the new solvency ratio trigger rapid market consolidation, cessation of business among small and medium-sized insurers, exit or withdrawal of international players?



� The HKFI strongly advise against putting detailed requirements for calculating Insurance Reserves and Risk Based Capital requirements in the primary legislation.

� To provide more flexibility to deal with the launch of new products, would it be more advisable to make these requirements part of the subsidiary legislation instead?

The latest news:

� The insurance commissioner has recently disclosed the Government’s plan to the media that RBC will be implemented in 2016.

3) Policyholders3) Policyholders’’ Protection Protection

Fund (PPF)Fund (PPF)

PolicyholdersPolicyholders’’ Protection Fund (PPF)Protection Fund (PPF)

Main objectives:

� Better protecting policyholders’ interest

� Maintaining market stability in the event of

insurer insolvency

� Enhancing public confidence

� Ensuring a fair competitive platform of the

insurance industry


� IA conducted consultation in 2011 and issued Consultation Conclusions on 30 Jan 2012

� Proposed PPF to be legislated and set up in 2014

� Two schemes to be formed - Life Scheme and Non-life Scheme in PPF

� 100% coverage for the first HK$100,000 of any claim and 80% of the balance up to a total of HK$1M any one claim

� 0.07% levy on applicable premiums, to be collected from insurers


� HKFI Task Force formed in April 2008

working in close collaborations with OCI

� The industry has serious concerns on four

major issues in Non-life Scheme:

a) Continuity of cover;

b) Inclusion of SMEs;

c) No cap on levies; &

d) Off-shore risks


Four major concerns in the Non-life Scheme:

1) Continuity of cover for unexpired policies until

policy natural expiry

(our views: violation of liquidation law; all other GI insurers being forced to provide cover of

unexpired policies in an insolvent insurer whereas reinsurance protection is unlikely available;

threat of recurrent natural disaster losses;

domino effect triggering multiple insurer insolvencies, etc.)


2) The provision of cover to SMEs

(our views: the fund size is too small to

cater for SME segment; complex risks

with long-tail liabilities in SME

business, for example, credit insurance,

product liability, professional

indemnity, marine ocean going hull,

aviation, etc.)


3) No cap on levies

(our views: without a cap on levies,

unlimited guarantee will be provided

by insurers for PPF)

4) Off-shore risks

(our views: unlimited geographical

limits; unquantifiable exposures to

international risks; exposures to

fraud)

Q&A

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