Welcome to our quarterly bulletin on insurance issues in the Asia Pacific region. In this bulletin we will cover recent legal developments that may be of interest to insurers and reinsurers operating in the region.
ASIC releases report on insurers' handling of motor vehicle claims
On 10 August 2011, the Australian Securities and Investments Commission (ASIC) released a report on its review of insurers' claims handling and internal dispute resolution (IDR) procedures in relation to motor vehicle insurance claims. The report is entitled Report 245: Review of general insurance claims handling and internal dispute resolution procedures. The report provides a fascinating and detailed snapshot of how motor vehicle insurers handle claims and complaints.
ASIC did not exercise its compulsory information-gathering powers and the review was conducted on a voluntary basis. ASIC invited eight general insurers to participate in a broad industry review of their claims handling and IDR procedures. ASIC selected motor vehicle insurance as a representative product for the review. The eight insurers represented 20 motor vehicle insurance brands and approximately 75 per cent of the direct retail market. The objectives of the review were to test consumer concerns about claims handling and IDR procedures, and to provide ASIC with a better understanding of current practices. ASIC requested statistics and internal documents in relation to motor vehicle insurance policies for claims made during the period 1 January 2009 to 31 December 2009.
ASIC found that as at December 2009, there were more than 8.5 million motor vehicle insurance policies in force, 87 per cent of which were comprehensive policies. The market share of the participating insurers varied significantly. More than 1.2 million claims were made during 2009. Of these, only 3,317 (0.3 per cent) were formally denied. Another seven per cent of claims were withdrawn before the insurer made a decision. There was a relatively low level of claims-related complaints, with only 5,885 of the total 26,500 complaints received by participating insurers in 2009 progressing to the insurer's IDR team.
Internal dispute resolution
The Australian Corporations Act 2001 requires an Australian financial services licensee who provides financial services to retail clients to have a dispute resolution system which meets the following two requirements: (i) the licensee must have an IDR procedure which meets standards made or approved by ASIC; and (ii) the licensee must be a member of an external dispute resolution (EDR) scheme which has been approved by ASIC. For general insurers, the relevant EDR scheme is the Financial Ombudsman Service Limited.
ASIC requires that a licensee's "final response" to a client's complaint informs the client of the final outcome of the complaint or dispute at IDR, the client's right to take their complaint or dispute to EDR and the name and contact details of the relevant EDR scheme to which they can take their complaint or dispute.
ASIC found that in practice, motor vehicle insurers operate "multi-tiered" IDR procedures that typically have the following stages:
- frontline (or initial point of contact);
- Tier 1 — the "complaints" stage, which typically involves a review by an operational area (e.g. claims, underwriting); and
- Tier 2 — the "IDR" stage, which typically involves a review and decision by a centralised IDR team.
Although insurers tend to reserve the term "IDR" to the Tier 2 stage, both the Corporations Act and ASIC's Regulatory Guide 165: Licensing: Internal and external dispute resolution apply the term "IDR" to the entire internal complaints handling process and "complaint" to all types of complaints or disputes, however described by the insurer. ASIC followed this approach in its report.
ASIC has made nine recommendations in its report, as follows:
- Insurers should record information relating to denied and withdrawn claims, and should regularly analyse and review that information.
- Where a withdrawn claim will result in, or is likely to result in, an increase in future premiums, that should be disclosed.
- Insurers should consider providing written confirmation of a decision to withdraw a claim, and provide information to assist policyholders who may have further queries or decide to pursue the claim.
- Decisions by frontline staff that result in a claim being denied should be reviewed before the decision is confirmed.
- Insurers should review current practices for assessments by frontline staff about the possible denial of a claim, and the communication of those assessments to policyholders.
- Insurers should review conditions on uninsured motorist extension claims, and review disclosure material to ensure information about uninsured motorist extension claims is accurate.
- Insurers should review their systems and processes for recording and analysing Tier 1 complaints to align them with systems used at Tier 2, so that they are able to extract useful information to address the underlying causes of complaints.
- Decisions at Tier 1 should be confirmed in writing, and the content of those letters aligned with the final response provided at Tier 2.
- Insurers should review and, where appropriate, improve disclosure and/or make available additional information on excesses and the operation of no-claims discount schemes.
In the report, ASIC said that it would work with the Insurance Council of Australia and insurers to encourage appropriate responses to its findings and the adoption of the recommendations.
In releasing the report, ASIC Commissioner Peter Boxall said:
"Most consumers have motor vehicle insurance, and many will make a claim at some time. Because no insurer-specific comparative data exists for claims handling performance of Australian insurers, it is difficult for consumers to shop around on the basis of quality, efficiency or fairness of claims handling. For consumers, the intrinsic value of an insurance product is in the ability to make a successful claim when an insured event occurs. These findings are important in ensuring confident and informed financial consumers."
The Centro Decision – directors as the 'final filter' of corporate financial accounting
In a Federal Court of Australia decision (Australian Securities and Investments Commission v Healey  FCA 717) handed down on Monday 27 June, his Honour Justice Middleton found the CEO, the CFO, the non-executive chairman and five other non-executive directors of the Centro Property Group (made up of Centro Properties Limited, Centro Property Trust and Centro Retail Trust) in breach of their duties under sections 180(1), 601FD and 344(1) of the Australian Corporations Act 2001 in failing to notice multi-billion dollar errors in the group's financial statements.
The 2007 annual reports of two of the Centro companies were in issue - one of which failed to disclose AU$1.5 billion in short-term liabilities and US$1.75 billion in guarantees of short-term liabilities of an associated company, and the other which failed to disclose AU$500 million in short-term liabilities classified as non-current. It was found that the matters that had not been disclosed were, or should have been, well known to the directors and that the directors should not have certified the financial statements and published the annual reports in the absence of the disclosure of these matters, which were of significance to the assessment of the risks facing these companies.
For further information: The Centro Decision – directors as the 'final filter' of corporate financial accounting
The following case summaries have been written by Rob Merkin who is a consultant to the insurance and reinsurance and international arbitration teams.
JSM Management Pty Ltd v QBE Insurance (Australia) Ltd  VSC 339
The assured was insured against physical damage to property. The policy excluded loss "occasioned by or happening through ... wear and tear", and contained a reasonable precautions clause. A hardstand was damaged by the assured's use of a very heavy container forklift over a period of eight months. The insurers relied upon both exclusions. Osborn J held that:
- The word "wear", based on US authority, meant "simply and solely that ordinary and natural deterioration or abrasion which an object experiences by its expected contacts between its component parts and outside objects during the period of its natural life expectancy". Here the damage was not ordinary but extraordinary, and there was coverage.
- The reasonable precautions clause was to be construed as providing cover unless the assured had acted recklessly, which was not the case on the facts.
GIO General Limited v Insurance Australia Ltd  ACTSC 91
This decision confirms that there is in principle double insurance and a right to contribution where the two policies cover the same loss, even if they are completely different in nature. The two policies here were an employers' liability policy and a compulsory road traffic policy. Contribution was refused on the facts because the claim was brought against the former insurers in respect of liability under Workers Compensation legislation, such liability being excluded from compulsory motor insurance. Accordingly, the latter insurers were not liable and there was no contribution.
Mainstream Aquaculture Pty Ltd v Calliden Insurance Ltd  VSC 286
The assured was a commercial fish breeder. The electricity to the assured's property was supplied by Powercor, through a substation situated on the property but owned by Powercor, and was used principally to oxygenise the water in which the fish were kept. Mainstream had purchased a generator in order to provide a supplementary power supply in case of an interruption to the mains supply. On 26 October 2008, there was a loss of electrical supply to the property, caused by a power surge which led to the tripping of a fuse on a Powercor pole located on the property. The generator failed to operate. The assured received payment for property damage, and sought recovery under a separate business interruption policy which responded where financial loss was caused by damage to property on the premises which was insured, and for that purpose damage to the property of a utility supplier was treated as property damage. The policy excluded loss caused by electrical breakdown.
The Supreme Court of Victoria held, on preliminary issues, that the business interruption policy was triggered:
- The fuse was "property" for the purposes of the policy.
- The fuse had sustained "damage" when it had tripped – even though it had done no more than fulfilling its function – because it required replacement. In any event it was probably damaged before the power surge.
- The electrical breakdown exclusion did not apply. The failure of the generator could not be regarded as a cause of the loss, given that Mainstream was not required to operate a secondary generator, and it could not be deprived of cover by the failure of backup equipment which it had voluntarily installed. Further, the fuse could not be regarded as giving rise to electrical breakdown, given that it had sustained damage.
CIRC publishes administrative measures on the management of deposits for capital recognizance by insurance companies
On 7 July 2011, the China Insurance Regulatory Commission (CIRC) published the Administrative Measures on the Management of Deposits for Capital Recognizance by Insurance Companies (the Measures), which took immediate effect. Concurrently, the CIRC's Interim Administrative Measures on the Management of Deposits for Capital Recognizance by Insurance Companies (the Interim Measures), which were issued in August 2007, were repealed.
Under the Insurance Law of the People's Republic of China 2009, insurance companies are required to deposit 20 per cent of their registered total capital into designated bank accounts for capital recognizance purposes. These deposits are to be used to pay the debts of an insurance company in the event of insolvency.
We previously reported on this development in the June 2011 edition of Asia Pacific - focus on insurance (for further information please refer to Asia Pacific - focus on insurance June 2011), when the CIRC published a draft version of the Measures for consultation. The finalised version retains much the same wording. The main changes are set out below:
- The fund must be deposited with two or more Chinese national commercial banks. The threshold capital requirement states that the net assets of the bank must be no less than RMB20 billion at the end of the previous year (article 6).
- Insurance companies are required to open a designated bank account, separate from other accounts, to be reserved for capital recognizance. The restriction which stated that one bank account should be opened for each currency has been removed (article 8).
- Each deposit should be no less than RMB 10 million (or an equivalent amount in foreign currency). Where an insurance company increases its registered capital by an amount below RMB50 million, an extra deposit is required. A specific percentage is no longer prescribed (article 13).
- Deposit agreements which have not been filed with the CIRC or which have been disapproved will not be deemed to be a deposit for capital recognizance purposes. However, the validity of the deposit agreement will not be affected (article 19).
The CIRC has legislated for a transitional period that will apply whilst those existing deposits which are not in compliance with the Measures are still in place. The CIRC Notice (CIRC  No. 39) attached to the Measures, states that existing deposits retained by the bank in accordance with the Interim Measures, can be kept in their existing form until the term of the deposit expires, by which time they should be deposited in accordance with the Measures.
The Measures demonstrate the CIRC's determination to combat the recent malpractice of insurance companies. This is in line with the new objectives of the CIRC, which require it to attempt to foster a healthy and stable insurance market with sufficient capital and good solvency levels. It is too early to predict the impact of the development, but some insurers may need to consider their internal funds management policies and ensure that their existing allocation of capital is compliant with the Measures in due course.
CIRC looks to strengthen the management of controlling shareholders and de facto controllers of insurers
At the end of July 2011, the CIRC issued the Draft Administration Measures on Controlling Shareholders/De Facto Controllers of Insurance Companies (the Draft Measures) for consultation. The Draft Measures impose strict management requirements on controlling shareholders and de facto controllers of Chinese insurers. According to the Draft Measures, a controlling shareholder is any shareholder that (separately or jointly with its controlled persons) holds 50 per cent or more of an insurance company's shares or has a major influence over the operation of an insurance company even though its shareholding is less than 50 per cent. A de facto controller means any controller that has actual controlling rights over an insurance company via an investment or any other arrangement.
Under the Draft Measures, the CIRC prohibits the management personnel and key staff of a controlling shareholder or de facto controller of an insurance company from assuming the position of executive director whilst performing a senior management role within that company (unless that person is acting as chairman of the board). Any directors of an insurance company who are nominated by a controlling shareholder or de facto controller and who make decisions on their behalf will not be exempted from liability if their decisions are in breach of the law of the People's Republic of China.
The Draft Measures state that insurance companies cannot buy bonds issued by their controlling shareholders or de facto controllers, or employ them to conduct investment activity. Furthermore, insurance companies and their subsidiaries are prohibited from investing in the equity of their controlling shareholders or de facto controllers.
The Draft Measures require any controlling shareholders or de facto controllers to submit a letter to the CIRC giving the following commitments:
- In the event of their subsidiary insurers falling insolvent or the CIRC requesting recapitalisation, the controlling shareholder or de facto controller will coordinate with other shareholders in order to adopt effective measures or to arrange for timely recapitalisation.
- the controlling shareholder or de facto controller will submit audited financial reports annually to the CIRC, and will immediately report any material adverse change in their financial, solvency or credit status.
- If any controlling shareholder or de facto controller fails to meet their commitments, the CIRC reserves the right to require them to transfer their equity interests in their subsidiary insurers or to prohibit them from exercising their shareholder rights over such an insurer.
Finally, a controlling shareholder or de facto controller is required to report any changes in their equity investment or development strategy for the insurance company to the CIRC. A controlling shareholder or de facto controller is also required to investigate a transferee when a decision is made to transfer their controlling rights over an insurer.
CIRC to further regulate life insurance business
In June 2011, the CIRC issued the Circular on Regulating Life Insurance Business Operation (the Circular). The Circular regulates the business activities of insurance companies in the life insurance market (it also covers non-life insurers who engage in accident and short-term health insurance business).
The Circular sets down standards under which the insured is eligible to pay commission on the sale of life insurance policies. When a life insurance policy is paid for by a single premium, the Circular states that the sales commission should not exceed four per cent of the total premium amount. When a policy is paid for by an annual premium, the sanctioned commission is increased to five per cent. An additional percentage restriction is imposed in relation to each payment of annual premium.
Where an insured purchases an individual long-term life insurance policy with a cash value, the Circular allows an insurance company to provide policy loan services. The Circular states that: (i) the policy loan should be no more than the cash value of the policy; (ii) the interest rate of such a policy loan should be in accordance with the loan interest rate stipulated by the People's Bank of China for the corresponding period; and (iii) the term of the policy loan should be no longer than six months. In addition, the Circular legislates for a cooling-off period and the protection of clients' data.
CIRC permits Variable Annuity Insurance business
In May 2011, the CIRC published the Interim Administrative Measures on Variable Annuity Products and the Circular on the Pilot of Launching Variable Annuity Insurance Business (collectively, the VAI Measures) which for the first time allowed for the sale of variable annuity insurance products (VAIPs) to the Chinese public. According to the VAI Measures, VAIPs are life insurance products which offer guaranteed minimum benefits to the insured. The CIRC states that VAIPs can only be sold in Shanghai, Beijing, Guangzhou, Shenzhen and Xiamen. An insurer is only permitted to apply to sell one VAIP.
Under the VAI Measures, a qualified insurer launching VAIPs: (i) should have been engaged in investment linked insurance business for no less than three years; (ii) should not have incurred any material administrative penalties from the CIRC in the previous year; (iii) should have a solvency ratio higher than 150 per cent over the last three years; and (iv) should have an established information system capable of supporting the management of VAIPs.
A Chinese insurer planning to launch a VAIP should only adopt CIRC acknowledged management models (i.e. the Internal Dynamic Hedging Model or the Constant Proportation Portfolio Insurance Model). There is an ongoing compliance requirement which compels insurers to comply with statutory obligations under the VAI Measures. Principally, the obligations relate to disclosure and management.
Furthermore, the CIRC states that the term of each VAIP launched by an insurer should be no less than seven years, and that insurance companies should receive a written acknowledgement from their client notifying them of their risk bearing capacity prior to the sale of VAIPs.
The proposed Independent Insurance Authority - what's next?
The financial sector has seen rapid transformations in the wake of the economic downturn. To accommodate these changes, Hong Kong felt it needed to improve its system of insurance regulation and replace the current Office of the Commissioner of Insurance (OCI). The OCI is the last remaining financial services regulator in Hong Kong still functioning as a Government operation but on 12 July 2010, the Financial Services and Treasury Bureau (FSTB) released a consultation paper on the proposed introduction of the Independent Insurance Authority (IIA). It was proposed that the IIA would replace the OCI as the new supervisory body for Hong Kong's insurance industry and would be an organisation independent from Government control and funding.
Intended not only to regulate insurance companies but also intermediaries, it is anticipated that the IIA will be empowered to issue licences, conduct routine inspections and impose disciplinary sanctions against those in breach of their obligations. It will also conduct studies and market research, and perform an educational role to equip prospective policyholders more effectively with the required knowledge to enter the insurance market with confidence. The Government reviewed responses from the public and views from the industry following a three-month consultation period which ended in October 2010 and on 24 June 2011, issued revised proposals for the creation of the IIA.
The current regulatory system
In contrast to independent regulators in financial centres such as the UK and Australia, the OCI is a government department under the FSTB, currently charged with regulating the insurance industry under the Insurance Companies Ordinance. This contradicts the core principles set out by the International Association of Insurance Supervisors (IAIS) and also means the OCI is subject to the procedural requirements of the Administration, thereby causing it to lack the flexibility required to respond to the ever-changing financial sector. Financial statements and business returns are examined alongside the inspection of company premises, and currently the OCI has the authority to take measures to intervene by restricting the underwriting or investment activities of insurers. However, the OCI does not have the explicit power to enter insurers' premises, issue reprimands or prosecute offences.
Insurance intermediaries in Hong Kong are supervised by three self-regulatory organisations (SROs) - the Insurance Agents Registration Board (IARB), the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association. The three bodies handle complaints against individual intermediaries and are able to impose disciplinary sanctions where necessary. Various issues do exist under the current system of self-regulation, namely potential conflicts of interest (as they receive funding from those they regulate), possible adoption of double-standards when dealing with complaints and disciplinary action and restricted investigatory and sanctioning authority. The OCI can direct the SROs to adjust their codes of practice but otherwise there is no direct regulation of intermediaries by the OCI.
The Hong Kong Monetary Authority (HKMA) regulates the banks and is capable of sending complaints to IARB. 30 per cent of insurance products are sold through roughly 18,000 bank staff, all of whom are registered with IARB, who supervise conduct requirements and deal with such complaints. The HKMA has no disciplinary power over bank employees and there is currently no system in place to deal with the specifically distinct nature of bancassurance.
Powers of the Independent Insurance Authority
The Government acknowledges that these were once effective measures but maintains that the OCI's regulatory powers must be augmented to regulate and further protect policyholders' interests more effectively. It is proposed that increased supervisory powers should be conferred on the IIA modelled on the Securities and Futures Ordinance, allowing the authority to enter into premises of those regulated and conduct inspections, access records and documents, apply to the court for orders to compel compliance with the requirements set by the IIA, impose sanctions (e.g. public reprimands, fines and revocation of authorisation) and to prosecute summary offences.
Under the proposal, self-regulation of intermediaries will be abolished and replaced with direct supervision of intermediaries' conduct by the IIA. At present, the SROs supervise around 70,500 intermediaries in accordance with non-statutory codes approved by the OCI. The IIA will be in charge of the licensing and inspection of intermediaries as well as handling complaints and conducting investigations into misconduct. It will also be possible for the IIA to impose disciplinary sanctions.
An enhanced proposal in the recent publication intends to smooth the transition for intermediaries into the new regime. Those already registered with the SROs will be deemed to be licensed under the new regime for three years upon establishment of the IIA, and will be able to carry on business as usual whilst applying for new a new licence. The three SROs will continue in existence once the new regime is introduced, and these will continue to function as trade bodies performing tasks such as industry promotion and training.
It was initially proposed in July 2010 that the HKMA would regulate insurance products sold through banks on the basis that the HKMA would regulate bank conduct in line with IIA's standards and would be allowed to exercise powers similar to those of the IIA. As the banks' regulator, the HKMA would be more suited to dealing with the more sophisticated clients and sales environment that exist in the bank market compared with the ordinary insurance market. However, numerous respondents raised concerns regarding the potential risk of double-standards and inconsistent disciplinary decisions. The Government has since taken a step back from such plans and introduced a more stable option whereby the IIA, as a fundamental principle, will be primary and lead regulator for all insurance intermediaries and the only regulator to set requirements and standards of conduct. The HKMA will work closely with the IIA who will delegate to it specified powers in order to assist them with the regulation of intermediary activities in banks. Under the new proposed regime, disciplinary powers are to remain vested with the IIA and the HKMA will actively participate in the disciplinary process. It is hoped that this measure will increase the transparency of the whole operation.
Structure and cost of the Independent Insurance Authority
Non-executive directors from a cross-section of the community (including members from relevant professional fields) will make up a Governing Board to ensure the proper exercise of powers by the IIA. The initial proposals also included plans to establish a statutory appeals tribunal to deal with appeals from insurers and intermediaries against relevant IIA decisions, and an independent process review panel appointed by the Chief Executive to monitor the internal procedures of the IIA and HKMA with regards to regulating the sales of insurance products. The latest detailed proposals have seen additions to the checks and balances of the operation - the Government has now proposed to set up at least two Industry Advisory Committees, one for Life and the other for Non-Life Insurance, to utilise the experience of insurance practitioners and provide expert advice to the IIA's Governing Board. The IIA will also be empowered to appoint expert panels to seek advice in disciplinary procedures where necessary.
It is projected that the IIA will cost HK$240 million to run per year with 237 anticipated staff. To help cover these costs, a fee structure has been formulated comprising a fixed licence fee applicable to all insurers and intermediaries, a variable licence fee payable by insurers calculated on the basis of their individual liabilities, user fees for specific services (such as applications for transfers of business) and a levy of 0.1 per cent on insurance premiums for all insurance policies. The Government aims to recover costs during the first five years of the IIA's operation and has agreed to soften the financial blow to the industry by waiving the licence fee for intermediaries, adopting an incremental approach to achieve target levels of variable licence fees and levies on policies and granting a lump sum subsidy of HK$500 million to the IIA. Respondents have commented that the levy may in effect be prejudicial and force high premium policies offshore, and that reinsurance contracts should be exempted from the levy to avoid double-charging. As a result the prospective funding structure was modified and in the recently published detailed proposals provided for a cap to be imposed on the levy for non-life policies with annual premiums at or above HK$5 million, and life policies with single or annualised premiums at or above HK$100,000. Reinsurance contracts will also be exempted from the levy and once the IIA's reserve reaches a level equivalent to 24 months of its operating cost, the levy and fee levels will be reviewed.
According to the FSTB, industry statistics show high premium policies only account for a small portion of the total pool and it is intended that the revised proposals will help minimise the impact on policyholders. Hong Kong, as a member of the IAIS, must strive to have an authority equipped with adequate resources and necessary legal firepower to regulate the industry efficiently and effectively. The standard has been set both locally and internationally; all facts point to the conclusion that a regulatory body operating within the Government structure has insufficient flexibility to deal with the adapting financial sector.
The proposals will undergo another course of fine-tuning as the Government once again engages the views of the industry and stakeholders. It does seem that we are heading in the right direction - it is expected that the key draft legislation will see the light of day in early 2012. Hopefully with the establishment of the IIA, Hong Kong will reach the required international standard and be in a position to reclaim consumer confidence throughout the insurance market.
Legislative Council passes the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance
On 29 June 2011, following two periods of public consultation, the Legislative Council passed the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (the Ordinance). The Ordinance was gazetted on 8 July 2011 and will come into force on 1 April 2012.
The Ordinance aims to develop a legislative framework which implements the requirements set down by the Financial Action Task Force, the international anti-money laundering standard setter. Schedule 2 of the Ordinance codifies customer due diligence and record keeping requirements that financial institutions will need to adopt. Financial institutions are required to carry out customer due diligence in certain specified circumstances. For example, a financial institution should complete due diligence before establishing a business relationship with a customer or entering into a transaction involving an amount equal to or above HK$120,000 (or HK$8,000 in the case of a wire transfer). Additionally, a financial institution should always carry out due diligence when it suspects that a customer or its accountant is involved in money laundering or terrorist financing.
The provisions of the Ordinance which discuss the due diligence measures to be applied to beneficiaries of an insurance policy are the same as those that were set out in the proposed Bill. Again, these are contained in Schedule 2 of the Ordinance. A financial institution must record the name of the beneficiary if he or she is identified by name. If the beneficiary is designated by description or other means, a financial institution must obtain sufficient information about the beneficiary to satisfy itself that it will be able to establish its identity at the time the beneficiary exercises a right under the insurance policy or at the time of payout.
Sections 2(1) (a), (c) and (d) of Schedule 2 of the Ordinance lists circumstances in which a financial institution may carry out simplified due diligence measures. These measures include:
- identifying and verifying the customer's identity on the basis of documents, data or information provided by a governmental body, relevant authority and/or other reliable and independent source recognised by the relevant authority;
- if a business relationship is to be established, obtaining information on the purpose and intended nature of the business relationship with the financial institution, unless the purpose and intended nature is obvious;
- if a person purports to act on behalf of the customer, identifying the person and taking reasonable measures to verify the person's identity on the basis of documents, data or information provided by the sources stated in (1) above.
If a financial institution fails to comply with the provisions on customer due diligence and record keeping, the financial institution commits an offence and is liable on conviction on indictment to a fine of HK$1 million and to imprisonment for two years. If an employee of a financial institution or a person who is concerned with the management of a financial institution, knowingly causes or permits the financial institution to contravene a specified provision, he also commits an offence and is liable on conviction on indictment to a fine of HK$1,000,000 and to imprisonment for two years. Furthermore, the relevant authorities are empowered to take disciplinary action against a financial institution that has contravened customer due diligence and record-keeping requirements. They can require the financial institution to take remedial action and to pay a pecuniary penalty not exceeding HK$10 million or three times the amount of the profit gained or costs avoided as a result of the contravention.
Guidelines for financial institutions on the legislative requirements are currently being developed and industry consultation will be conducted later this year.
Market performance of the Hong Kong insurance industry for the first quarter of 2011
The first published statistics on the performance of the insurance market in Hong Kong in 2011 provide a divided picture, with rising premiums contrasting with falling underwriting profit.
The OCI's provisional figures detailing the performance of Hong Kong's insurance industry in the first quarter of 2011 reveal that total gross premiums have increased by 13.3 per cent, when compared to the same period in 2010, and now total HK$56.3 billion.
General insurance business stood at HK$10.3 billion in gross premiums, a rise of 11.2 per cent compared to the first quarter of 2010, while net premiums rose by 8.4 per cent over the same period to HK$7 billion. However, the overall underwriting profit of general business fell by 13.8 per cent from HK$559 million in the first quarter of last year to $482 million this year.
The growth in premiums in the general insurance business was driven by an increase in accident and health business (with net premiums up 11.1 per cent compared with the first quarter of 2010 to HK$2.4 billion), good growth in general liability business (up 16.1 per cent to HK$13. billion) and a increase in motor vehicle premiums (growing 6.4 per cent to HK$650 million).
Meanwhile, the underwriting profit of direct insurance business decreased slightly this year, falling from HK$383 million in the first quarter of 2010 to HK$370 million. While the employees' compensation business turned 2010's first quarter loss of HK$50 million into an underwriting profit of HK$4 million, the OCI reported that a deterioration in claims experience led to a fall in the underwriting profit of motor vehicle business from HK$61 million to HK$2 million.
The new office premiums business (excluding retirement scheme business) performed particularly strongly in the first quarter of the year with premium growth of almost a third (32.1 per cent) in comparison with the same period in 2010, taking total new office premiums to HK$16.9 billion. This overall figure includes an increase in new office premiums in the individual life and annuity (linked) business of 28.7 per cent to HK$11.2 billion and an even more impressive 40.4 per cent growth in individual life and annuity (linked) business to HK$5.6 billion.
Of the total new office premiums issued in the first quarter of 2011, 9.9 per cent (amounting to HK$1.7 billion) were issued to Mainland visitors.
Within reinsurance inward business, the increase in net premiums from HK$1.3 billion to HK$1.4 billion was primarily attributable to the strong growth in the property damage business. But this area also suffered from a drop in underwriting profit from HK$175 million to HK$113 million which the OCI attributes to adverse claims experience.
The figures illustrate a good start to 2011, particularly in terms of premium growth, whilst emphasizing the need to concentrate on underwriting profit going forward.
The following case summaries have been written by Professor Rob Merkin who is a consultant to the insurance and reinsurance and international arbitration teams.
Lim Keenly Builders Pte Ltd v Tokio Marine Insurance Singapore Ltd  SGCA 31
Lim Keenly Builders (LKB), a contractor, was insured by Tokio Marine Insurance (Tokio) under a workmen's compensation policy and under a contractors' all risks policy. The insuring clause of the workmen's compensation policy provided cover "if any workman in the Insured's employment shall sustain personal injury by accident or disease caused during the Period of Insurance and arising out of and in the course of his employment by the Insured in the Business". The term "Insured" was defined as including LKB and all its sub-contractors. LKB was sued by an employee of a sub-contractor who was injured on site, and the question was whether LKB's liability to the employee was covered by the workmen's compensation policy. It was common ground that if the employee had sued the sub-contractor the policy would have responded.
The Singapore Court of Appeal held that the phrase "in the Insured's employment" extended to a person employed by a sub-contractor, and that the contractor and sub-contractor were to be treated as a single entity for the purposes of the policy: this was not a case of joint or composite insurance at all, but the insurance of a single entity, and in any event it was necessary to look at the respective insurable interests of the parties to determine whether the policy was joint or composite (as in New India Assurance Company Ltd v Dewi Estates Ltd  HKCU 1403). The coverage of the policy could not depend upon the technical question of which party the injured employee chose to sue.
Yong Sheng Goldsmith Pte Ltd v Liberty Insurance Pte Ltd  SGHC 156
The claimant was insured by Liberty under a jeweller's block policy in respect of various risks, including armed robbery, to a policy limit of S$3 million. There was an armed robbery, but Liberty sought to avoid the policy on the ground that the claimant had failed to disclose that the premises had been the subject of loan shark harassment on a number of occasions prior to the inception of the policy. The claimant asserted that the information had been disclosed to Liberty's agent, J, who had negotiated the policy and handled renewals. The court found that J was indeed the agent of Liberty, even though he had acted for other insurers and was not identified in the policy as the broker. J was a registered Liberty agent and had been issued with a name card by Liberty. Given that finding, J's knowledge was to be imputed to Liberty, following Ayrey v British Legal and United Provident Assurance Co Ltd  1 KB 137. However, the court refused summary judgment to the claimant given that there were issues to be tried on discrepancies in the various proposal forms.
Stansfield Group Pte Ltd v Consumers' Association of Singapore  SGHC 122
Stansfield Group Pte Ltd (SGP) was the owner of two private educational organisations in Singapore. The Consumers' Association of Singapore (CASE) was a registered society whose principal aim was to protect consumers, and it administered an accreditation scheme for establishments that wished to admit foreign students. One of the requirements was the adoption of a scheme which protected student fees, and SGP met this requirement by taking out two insurance policies which provided each student with coverage for 70 per cent of the fees paid. The policies obtained by SGP provided for repayment of student fees either when SGP was unable to carry on business or upon death or total permanent disability of the student. The policies were in declaration form. SGP had to submit an online application for each individual student to be covered, setting out all relevant particulars. There was a maximum insurable limit (eventually totalling S$6 million), which could be varied by the insurers with immediate effect on written notice. The insurers also had the right, without giving reasons, to accept or reject an application for any one student to be covered by the policy, in particular where the maximum insurable limit had been reached. Each party had the right to cancel coverage on 30 days notice. By an administrative error, 23 students were not declared to the policies, and CASE commenced an investigation into SGP. Amid suggestions that SGP was insolvent, on 20 October 2006 the insurers changed SGP's passwords so that it could no longer apply for cover for new students. SGP was informed of this on 20 November. On the same day SGP's membership of CASE was suspended. SGP commenced proceedings against both CASE and the insurers. Judith Prakash J held as follows:
- CASE had no liability. CASE was not in breach of any implied term to act reasonably or to observe and comply with the rules of natural justice and there was no liability in tort. On the latter point, CASE had not intended to procure the cancellation of the insurance even if, which was not decided, its conduct was a causative factor. The Court also rejected any suggestion of a duty of care being owed by CASE to SGP: while there was a contractual relationship between them that did not create the necessary proximity for a duty of care.
- The insurers were in breach of the policy terms. They had the right to refuse individual applications without giving reasons, but they only had the right to terminate the policy by giving notice to SGP. There was accordingly a breach between 20 October and 20 November 2006. However, SGP had not shown that it had suffered any loss, and would thus be awarded S$100 nominal damages. The insurers were not in breach of the continuing duty of utmost good faith, nor was there a more specific duty of utmost good faith under the policy which required the insurers to act so as not to cause loss to SGP: the insurers had a complete discretion as to whether or not coverage could be cancelled. Finally, there was no duty of care owed to SGP by the insurers.
Taiwan insurance regulator set to impose criminal sanctions on the illegal sale of offshore insurance products
On 14 June 2011, the Taiwan Financial Supervisory Commission (FSC) announced that new amendments to the Insurance Act have been passed by the legislative organ in Taiwan, the Legislative Yuan. Under the amendments, the sale or soliciting of unregistered offshore insurance products will become a criminal act. Sanctions for this offence may be up to three years imprisonment and a maximum fine of NT$20 million (approx. US$690,000).
Under the current Insurance Act, any insurance policy distributed or sold in Taiwan can only be issued by licensed insurers and the law prohibits insurance agents and brokers from soliciting insurance on behalf of an unregistered insurer (including those from offshore). Prior to the amendments, any breach only resulted in an administrative fine (as opposed to a fine upon a criminal conviction) of up to NT$4.5 million (approx. US$155,300).
The FSC says that the amendment is designed to maintain the financial market order and protect the interests of consumers in Taiwan. The authority noted that a number of Taiwanese insurance brokers and agents have been sourcing offshore insurance products to complement their existing portfolios. However, not all of them have FSC approval to sell offshore insurance products. Some Taiwanese policyholders have complained that they do not have sufficient administrative protection, or that they are unable to seek legal remedies against foreign insurers. The FSC hopes to deter the illegal marketing and distribution of offshore insurance products by imposing tougher sanctions, which is consistent with the punishment for the illegal distribution of unregistered offshore financial products in general.
Another important change to the Insurance Act is that insurers, insurance intermediaries, and other entities engaging in insurance business in Taiwan will be prohibited from collecting, processing, or using information detailing customers' medical history, treatment or medical examinations, without the policyholders' prior consent in writing. The FSC says that the change was made to echo the imminent implementation of the Personal Data Protection Act in 2012.
The new amendments to the Insurance Act are expected to take effect in a few months, although the exact implementation date is still unknown.
In the wake of the global financial crisis, the FSC is noted to have been making efforts to improve its consumer safeguards and regulation of the Taiwan insurance market. The authority has also recently amended the Regulations Governing Insurance Agents, the Regulations Governing Insurance Brokers and the Regulations Governing Insurance Surveyors.
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