Hong Kong: Regulatory Minefield: Exploring The New Hong Kong Insurance Regulatory Landscape

According to the Legislative Council brief issued on 19 April 2017 by the Financial Services and the Treasury Bureau and the Provisional Insurance Authority, 26 June 2017 is the commencement date for the next phase of changes to Hong Kong's insurance regulatory framework. As with any journey, preparation is crucial, so this bulletin explores some of the key changes and their potential impact on insurers in the Hong Kong market.

Further changes to the Insurance Companies Ordinance (Cap.41) (ICO)

Although the Insurance Companies (Amendment) Ordinance 2015 (Amendment Ordinance) was enacted in July 2015, it was designed to commence in stages, with the first stage coming into force in December 2015. On 26 June, the second phase will commence bringing into operation over 100 amendments to the ICO. Some of the most significant of these are highlighted below.

Enhanced regulatory, investigatory and enforcement powers

The Provisional Insurance Authority, established under the first phase of amendments, will become the independent Insurance Authority (IIA). The IIA will take over the regulatory functions of the Office of the Commissioner of Insurance (OCI) and the OCI will cease to exist. The ICO will be renamed the "Insurance Ordinance" (IO) and provisions that come into operation on 26 June will significantly widen and enhance the scope of the IIA's regulatory, investigatory and enforcement powers.

The IO will empower the IIA to appoint inspectors to conduct inspections to ascertain whether an authorised insurer is complying with the IO or any condition of authorisation to carry on insurance business in Hong Kong. At any reasonable time and without a warrant, an inspector may enter the premises of an authorised insurer and make copies of business records.

Where the IIA has reasonable cause to believe there has been a breach of the IO or a person has carried on insurance business in a manner that is not in the interests of the policyholders or the public, the IIA may appoint an investigator to conduct an investigation. The investigator may require a relevant person to produce any document related to the investigation in the person's possession and require the relevant person to give an explanation in respect of such document or answer a question relating to any matter under investigation.

In the event that the IIA conducts an inspection or investigation on the authorised insurer or its employees, the employees of the insurer should fully cooperate with, and provide all necessary assistance to, the inspector or investigator. A person commits an offence if he, without reasonable excuse, fails to comply with a requirement imposed by an inspector or investigator and may be liable to a maximum fine of HKD200,000 and imprisonment of up to one year.

Additionally, magistrates are empowered to issue a warrant authorising a person (such as an inspector or investigator) to enter the authorised insurer's premises, and to search for, seize and remove a record or document relevant to the inspection or investigation. If the authorised insurer is found guilty of any misconduct, including a breach of the IO, the IIA may revoke or suspend the authorisation of the insurer to carry on insurance business.

It remains to be seen how the IIA will use its regulatory, investigatory and enforcement powers in practice. Further guidance is needed on certain aspects, for example, what constitutes reasonable cause for the IIA to launch an investigation.

Insurers should have sufficient and adequate internal controls in place to ensure that the insurer fully complies with the IO and other relevant rules and regulations in order to minimise the risk of the insurer being the subject of any IIA investigation or disciplinary action.

Insurers should also review their internal manuals in relation to handling regulatory inspections/investigations and provide the appropriate training to employees. This is to ensure that if an inspection or investigation does occur, the insurer and its employees will be ready to provide all necessary assistance and address the IIA's concerns without jeopardising the insurer's interests.

Enhanced corporate governance

Amendments coming into operation on 26 June will also require enhanced corporate governance within authorised insurers. The concept of "control functions" will be introduced: functions that are likely to enable the individual responsible for the performance of the function(s) to exercise a significant influence on the business. Control functions include risk management, financial control, compliance, internal audit and actuarial functions. The Financial Secretary may specify others by notice.

The revised IO will provide that appointments by authorised insurers of certain controllers, directors, key persons in control functions, and appointed actuaries of long term insurers will require the IIA's prior approval, a pre-condition of which is that the IIA has to be satisfied of the proposed appointee's fitness and probity. The IO codifies the 'fit and proper' criteria, which we anticipate will be supplemented by regulatory guidelines.

Under the new Section 14A of the IO, in determining whether a person is fit and proper, the IIA must have regard to the person's education; qualifications; ability to act competently, honestly and fairly; reputation, character, reliability and integrity; financial status; and whether any disciplinary action has been taken against the person by any authority or regulatory organisation in Hong Kong or elsewhere.

This is a significant development, since not only are the minimum fitness and probity requirements codified in legislation, authorised insurers will also need to seek the IIA's approval prior to appointing directors, appointed actuaries (of life insurers), key persons in control functions, and additional controllers. Insurers will need to implement procedures and controls in terms of personnel selection for the various roles having regard to these requirements.

However, it is unclear if persons already in the position of key persons in control functions before the commencement of the second phase of amendments will have to be approved by the IIA and, if so, when. The legislation does not contain an express grandfathering provision. We anticipate that the IA will release further guidance on this issue in the future.

(For further details regarding corporate governance of authorised insurers, please see our analysis on the recently-revised Guidance Note on the Corporate Governance of Authorised Insurers (GN10) here.)

What about changes affecting insurance intermediaries?

The second phase of amendments will not effect the overhaul of the way in which insurance intermediaries are licensed and regulated. This will take place in approximately two years' time. According to the Hong Kong Government press release (please click here for further details), this arrangement allows "time for the [IIA] to prepare the necessary tools, such as guidelines on conduct, for regulating insurance intermediaries".

At present, insurance agents and brokers are regulated by self-regulating professional bodies. The Amendment Ordinance will amend this by introducing a statutory insurance intermediary licensing regime, empowering the IIA to directly license and supervise all insurance intermediaries in Hong Kong, and introducing new conduct requirements for them. When the relevant provisions of the Amendment Ordinance come into operation, any person who carries on a regulated activity in the course of the person's business or employment or for reward will require a licence.

The definition of "regulated activity" under the revised IO will be broad and will extend beyond negotiating or arranging a contract of insurance to include, "inviting or inducing, or attempting to invite or induce, a person to make a material decision" or enter into a contract of insurance. A material decision includes the making of an application or proposal for a contract of insurance; the issuance, continuance or renewal of a contract of insurance; the exercise of a right under a contract of insurance; the change in any term or condition of a contract of insurance; and the making or settlement of an insurance claim. A "regulated activity" will also include "the act of giving regulated advice", which is advice in connection with the aforementioned activities.

Although the amendments relating to the regulation of insurance intermediaries and conduct requirements have yet to come into operation, insurance industry stakeholders should carefully consider their implications and make preparations. In particular, insurance industry stakeholders should be aware of any future guidelines issued by the IIA, especially in relation to the definition of "regulated activities" as well as the relevant code(s) of conduct, in order to avoid contravening the provisions of the IO.

Fees

Currently, insurers have to pay an annual authorisation fee to the OCI at a fixed rate. This is HKD227,300 for non-captive, general insurers and long term insurers. The fee for captive insurers is HKD22,600 and the fee for existing composite insurers is HKD454,600.

Pursuant to the new regime, as of 26 June, the annual authorisation fees will comprise two parts: a fixed fee of HKD300,000 (for a captive insurer, HKD30,000; and for a composite insurer, HKD600,000) and a variable fee calculated on the insurer's insurance liabilities. Initially this will be a variable amount of 0.0001% and will be increased incrementally up to 0.0039% from 26 June 2022 onwards. The variable fee will be capped at HKD7 million annually, so the maximum annual authorisation fee (i.e. the aggregate of the fixed and variable fees) payable by a non-captive insurer will be HKD7.3 million. The cap will be reviewed from time to time having regard to factors including overall market situation, the IIA's financial position and the impact on industry.

User fees will also be introduced for 11 frequently used services including: applications for the approval of controllers, directors, key persons in control functions or appointed actuaries; notifications for the appointment of certain controllers, directors, key persons in control functions, auditors or actuaries; updates to the insurer's information on the register of authorised insurers or obtaining a duplicate certificate of authorisation.

Separately, it is proposed to introduce a levy on insurance premiums by way of further subsidiary legislation, which has been indicated will likely commence on 1 January 2018. It is anticipated that the IIA's target levy will be 0.04% in the first year, increasing incrementally to 0.1% in the sixth year, subject to a cap of HKD100 for life policies and HKD5,000 for general insurance policies. It is also proposed that reinsurance contracts will be exempt while certain group life policies with medical protection will be subject to the same cap as applicable to general insurance policies. The levy will be imposed on policyholders and collected by insurers to remit to the IIA.

Concluding comments

Given the uncertain nature of how some of these amendments will be implemented in practice, all insurance industry stakeholders should carefully consider the changes coming into effect in June, pay heed to future guidelines to be issued by the IIA (including supplements and revisions to existing guidance notes), and take steps to comply with the requirements of the new regulatory regime.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions