Hong Kong: International: Hong Kong enacts Competition Law

Insurance Update

Introduction

The Competition Ordinance was enacted in June 2012; however, it is not expected to come into force until 2014. This will allow time for the Competition Commission and the Commission Tribunal to be established and implementing guidelines issued.

The Competition Ordinance introduces two broad prohibitions for companies conducting business in Hong Kong. The first conduct rule prohibits anti-competitive agreements and concerted practices among two or more businesses. Examples of serious infringements cited in the new rule include price fixing, market sharing, output limitation and bid-rigging practices.

The second conduct rule prohibits anti-competitive conduct by a single business with market power. It is not clear what market power means in terms of market share, but businesses with a significant market position should not abuse their position by, for example, pricing below cost or bundling products to exclude a competitor. Competition authorities elsewhere have traditionally adopted a narrow view on market definition in the insurance sector, leading them to consider that each separate risk constitutes a separate market.

The new rules will apply to any pre-existing agreements, arrangements and conduct that continue to have effect after the Competition Ordinance comes into force. As a result, entities active in Hong Kong will not only have to ensure that new agreements and practices are compliant, but also that existing agreements and practices are consistent with the new law. Commercial practices that must cease before the law becomes effective would include any ongoing coordination and exchange of information among competitors in respect of pricing, market allocation, production or sales capacity, and bid-rigging. Similarly, trade association activities involving these practices must also come to an end.

Entities found to be infringing these rules could face a fine up to 10 per cent of their group Hong Kong turnover for the duration of the infringement (with a three-year cap). Holding companies and ultimate controllers will most likely be held jointly and severally liable for the behaviour of their subsidiaries. Infringing entities may also be ordered to refund illegal profits to the Government and pay damages to any third parties that suffered loss due to the infringement.

Enforcement trends in the insurance industry in Asia

In the absence of implementing guidelines, it is too early to tell how the new competition law will affect the insurance industry in Hong Kong. However, enforcement trends in the industry elsewhere in Asia may provide some guidance.

Asian competition authorities have so far focused on relationships between competing insurance companies rather than on their relationships with distributors, agents or customers. This focus on competitor-to-competitor (or "horizontal") relationships can also be expected in Hong Kong. The Administration explained during the legislative process that supplier-to-reseller (or "vertical" relationships) would be less likely to raise concern - the only exceptions being when competitors enter into a supply relationship, or when the supplier has a substantial degree of market power.

Given the nature of the industry, there is significant interaction among competing insurers in Asia for many legitimate purposes, for example, re-insurance, mutualisation of risks, common industry standards, statistics and actuarial studies. These activities, however, should not give rise to agreements or common practices in terms of pricing or to market allocation among insurers, as the following situations demonstrate.

In Korea, the competition authority has repeatedly sanctioned insurance companies for price-fixing practices. Last year, it imposed fines in excess of US$300 million on life insurers for conspiring to fix interest rates applied to client deposits – a key factor in determining insurance premiums. The investigations took place between 2001 and 2006 through regular communication and exchange of information. In 2008, twenty five insurance companies were fined collectively more than US$23 million for allegedly fixing the price of certain types of insurance, an activity the defendants said came at the request of the government.

Similar conduct was also challenged under competition laws in Vietnam and China. In 2011, Vietnamese competition authorities fined nineteen insurers, which together account for 99 per cent of the country's motor vehicle insurance sector, for premiums fixing arrangements. In China, a trade association representing local insurers was sued in the civil courts for price fixing in 2009. The association had adopted a decision requiring members to follow its guidance on the level of premiums that should be charged for automobile insurance. Ultimately, the case was settled following the association's decision to stop requiring adherence to its pricing guidance.

The introduction of competition laws has also informed the way insurance regulators exercise their prudential powers. In 2008, for example, eighteen local insurers entered an agreement requiring clients to purchase insurance exclusively through a "New Vehicle Insurance Service Centre", which then allocated the clients among the insurers within Hong Kong. The practice was prohibited by China's Insurance Regulatory Commission as it amounted to an illegal market allocation and a boycott of non-participating insurers.

What steps need to be taken in order to ensure compliance?

There is no one-size-fits-all compliance scheme, therefore, it is always advisable to implement a programme that is suitable for the business and resources of the company concerned.

In general, a four-step compliance approach should be adopted:

  1. Awareness: spread understanding of the basic features of the Competition Ordinance and its relevance to your business through introductory face-to-face or online workshops.
  2. Assessment: conduct internal business audit and risk assessment to identify high-risk areas.
  3. Competence: based on priorities identified during the risk assessment process, and under the leadership of senior management, implement a corporate compliance programme consisting of staff training, internal guidelines and circulars on sensitive topics, with a view to communicating to staff what is expected from them.
  4. Commitment: implement appropriate disciplinary and reporting procedures, and obtain staff commitment to compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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